Cryptocurrency and Taxes: Could You End Up Paying More ATO Than You Earned? † cryptocurrencies

With tax season approaching in Australia, cryptocurrency investors have been warned to start calculating what they owe.

Some lessons can be learned from the recent tax season in the US, where some enthusiasts received a tax bill that exceeded their income after the recent crypto market crash.

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

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But he is concerned for those who may not be aware of what they owe before they end up in the crosshairs of the Australian tax authorities.

“There are a lot of people who don’t have tax advisors, who don’t understand the tax implications at all,” he said. “They’re starting cryptocurrency trading and they’re not thinking about the tax implications, and they just don’t think they need to disclose anything about tax returns.

“Or there’s an even smaller group that’s considering it, but decides not to include it anyway.”

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 has increased to $500, you will not pay tax unless you cash it out, use it for a purchase, or exchange your Bitcoin for another cryptocurrency.

With the ATO indicating that it will pay a lot of attention to cryptocurrency assets this fiscal season, here’s what you need to know.

What Tax Do You Have to Pay on Cryptocurrency Profits?

If you withdraw your cryptocurrency into your regular bank account, you will have to pay capital gains tax (CGT) on the money you have earned. Any capital gains you realize are added to your taxable income and taxed at the rate of your personal income tax.

You 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 them away as gifts.

You can use cryptocurrency to pay for personal use of goods or services up to $10,000, such as for vacations or a car. But Chapman warned that the ATO would scrutinize these types of transactions to determine if the final purchase was the sole reason to buy cryptocurrency.

Cryptocurrency transfers are taxed as they occur, so even if the currency has lost value, you will still have to pay tax on the amount exchanged or received.

If you are a cryptocurrency trader rather than an investor, there is a 50% capital gains tax reduction if you hold the investment for a year or more.

The ATO has a capital gains tax tracking tool that advises people to use. You need to keep track of how much you invested in cryptocurrencies and then what you earned when you sold it.

What about NFTs?

If you’ve bought into the hype surrounding non-fungible tokens, whether it’s a ‘bored monkey’ or the Australian Open’s alliance with NFTs, those too are considered investments and all profits are treated the same as cryptocurrency. profits.

What if I don’t report it?

Failure to report your cryptocurrency winnings could put you in trouble with the tax authorities. The ATO has been collecting cryptocurrency transaction data and account information from designated service providers since tax year 2014-15 and the data matching will continue this year.

According to the ATO site, “The data obtained will be used to identify buyers and sellers of crypto assets and to quantify the associated transactions. We will match data provided by Designated Service Providers with ATO records to identify individuals who may fail to meet their registration, reporting, archiving and/or payment obligations.

Isn’t there an easier way to do this?

Chapman said one question the federal government should consider as part of the Treasury’s review of the cryptocurrency legal framework is whether its tax treatment is the right thing to do.

“Right now we are trying to fit cryptocurrency processing into an existing framework designed for other forms of assets,” he said.

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

Chapman said some clients would come up with statements containing hundreds of lines documenting the buying and selling of crypto assets, and the capital gain has to be calculated on every transaction.

“I really think our cryptocurrency tax laws should probably be looked at and maybe fine-tuned.”

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