Cryptocurrency and tax: Can you pay the ATO more than you earn? | cryptocurrencies

As tax time approaches in Australia, cryptocurrency investors have been warned to start paying off their debts.

Some lessons can be drawn from the recent US tax season, where some enthusiasts found themselves with a tax bill that exceeded their earnings after the recent crypto market crash.

H&R Block tax communications director Mark Chapman told Guardian Australia that the company expects thousands of clients seeking help with crypto investments this year, and they tend to have at least some knowledge of their tax obligations.

But it worries those who are unaware of what they owe before they find themselves in the eyes of the Australian Taxation Office.

“There are quite a few people who are not tax agents and have no understanding of the tax implications,” he said. “They get into the cryptocurrency business and don’t think at all about the tax consequences and don’t think they need to disclose anything on their tax returns.

“Or there’s an even smaller group that takes that into account but still decides not to include it.”

Cryptocurrency is not taxed in the same way as interest earned on money in a bank account. For example, if you bought $100 worth of Bitcoin and its value rose to $500, you wouldn’t pay taxes unless you withdraw cash, use it for a purchase, or exchange your Bitcoin for another cryptocurrency.

While the ATO states that it will be very careful with crypto assets this tax season, here is what you need to know.

What tax do you have to pay for cryptocurrency earnings?

If you send your cryptocurrency back to your regular bank account, you must pay capital gains tax (CGT) on the money you earn. Any capital gains you make will be added to your taxable income and taxed at your individual income tax rate.

You will also have to pay taxes when you exchange one cryptocurrency for another, use it to purchase goods or services that are not for personal use, and give it as a gift.

You can use cryptocurrency to pay for the use of personal goods or services up to $10,000, such as a vacation or a car. However, Chapman warned that the ATO will closely examine such transactions to determine if the final purchase is the sole reason for purchasing the cryptocurrency.

Cryptocurrency transfers are taxed the moment they occur, so even if the currency has lost value, you will still owe taxes on the amount exchanged or cashed.

If you are a cryptocurrency trader and not an investor, there is a 50% discount on capital gains tax if you have held the investment for a year or more.

How do you find out what you have to pay?

There is a capital gains tax record keeping tool that the ATO recommends people use. You will need to keep a record of how much you spend investing in cryptocurrencies and then what you earn when you sell them.

What about NFTs?

If you’ve bought a hype about non-tradable tokens, whether it’s a “bored monkey” or the Australian Open quirk with NFTs, they’re also considered investments and any profits are treated the same as cryptocurrency profits.

What if I don’t declare?

If you don’t declare your cryptocurrency earnings, you could be in trouble with the tax office. The ATO has been collecting data on cryptocurrency transactions and account information from designated service providers since the 2014-15 tax year, and data matching continues this year.

According to the ATO website, “The data obtained will be used to identify buyers and sellers of crypto assets and measure related transactions. We will match data provided by designated service providers with ATO records to identify individuals who fail to meet their registration, notification, payment and/or payment obligations.”

Isn’t there an easier way to do this?

Chapman said that one issue the federal government should consider as part of its Treasury review of the cryptocurrency legal framework is whether the tax treatment is correct.

“We are currently trying to bring the treatment of cryptocurrency into an existing framework designed for other forms of assets,” he said.

“People who invest in cryptocurrency buy and sell very often.”

Chapman said some clients will come up with statements containing hundreds of lines documenting the buying and selling of crypto assets, and capital gains must be calculated on each transaction.

“I think our tax law regarding cryptocurrency really needs to be looked at and maybe just fine-tuned.”

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