Think what you will about cryptocurrency because it will be here to stay. Sure, it’s had some bumpy points along the way. The media has certainly expressed its opinion on the matter.
Maybe your friends have chimed in as well. And now, you’ve pulled the trigger and joined in the frenzy.
But what about cryptocurrency tax reporting?
What changes in your tax income statements?
How do you report losses and gains?
Do you even have to pay tax on your cryptocurrency?
Although your coworker might be in your ear about how to think about your Bitcoin wins and Ethereum losses, what really matters is what the tax office is going to say. Because you know they’re keeping a very close eye on what the cryptocurrency market is doing and what it means for them.
Compared to some, I know that I have some pretty radical beliefs about how cryptocurrency tax reporting should be done to keep more of your money in your pocket. But will get to that soon enough.
A few years ago, I started to pay attention to how the cryptocurrency markets were shifting and changing. But I’ll be honest with you when I say that I didn’t think much of it at first. In fact, I was even a little skeptical of how it could easily be used for nefarious purposes. Is this a scam? Is it a front for illegal use? I wasn’t sure.
I was convinced it was not worth my time. But then I had several of my clients start to tell me that they needed help on their tax reporting for cryptocurrency gains.
What really blew me away was that I was seeing my clients make millions in Bitcoin, Ethereum, and several smaller coins. And these millions were happening in months, a timeframe that I simply could not ignore.
And that’s when I started my own cryptocurrency investing journey. I started early. I’ve seen some pretty exciting events transform the way the world thinks about these e-coins, cryptocurrency exchanges, and blockchain systems. Now, I’ve got a healthy portfolio of several currencies as well as my staff getting involved in their own crypto investments.
Basically, I saw what cryptocurrency could mean for my clients, and I knew that I was about to see a global shift in how the tax office would think about your gains in these volatile markets.
I even made some predictions several years ago that have now come true. I saw that the Australian Tax Office would eventually pay much closer attention to your digital wallets and how they could tax your gains.
Which is exactly what’s happening now.
Look, I’ve always been a rabid opposer to excessive tax. It’s been a part of who I am for the last 35 years, and I’m passionate about solving what I believe is a major injustice in the tax System.
The problem that I continually come across is that most people’s solution to cryptocurrency tax reporting is pretty much their tax strategy across the board – they don’t have one!
If you’re going to put your head in the sand, the ATO will use that to their advantage.
And what an advantage that would be. Did you know that Aussies have to suffer one of the
highest tax rates in the world? For high-income earners, you can expect to see exorbitant rates of over 45%! That’s just cruel.
Think of it this way. You probably have no problem paying 10% tax on your meal or throwing down a 15% tip afterwards. I’ve noticed that for most people, that’s a pretty acceptable range. But once you start to go over 20%, that’s the tipping point when people start to grumble. So, you can imagine why I’m so passionate when I see that my clients are being asked to hand up to 48.5% of their hard-earned income to a less-than-stellar tax office.
So, when it comes to cryptocurrency gains and losses, it pays to have a plan. It’s worth your while to think ahead to when it’s time to fill in your tax return. Because, by spending the time at the start, it’s going to pay massive dividends down the road.
Let’s just lay down some (very) basic guidelines for reporting your cryptocurrency to the ATO.
This is just basic, essential, Tax 101-type advice. You can’t ignore those crypto gains you made throughout the year. The tax office certainty isn’t going to let it slide.
Every year, make sure that you’ve accounted for your cryptocurrency trades throughout the year, even short-term ones. If you’re still holding some Dogecoin, hoping that it’ll recover again, you need to report it. Keep detailed records of your wallets and the incomings/outgoings throughout the year.
This brings me to point 2…
When clients ask me about their crypto profits, I know that they’re surprised by my knowledge in this field. And that’s because there are relatively few accountants like me who’ve taken the time to adequately research and understand this evolving industry.
For most accountants, talking about the intricacies of crypto fields is like trying to explain hieroglyphics. I mean, would you buy a new Ford car off someone who only drives Mazdas?
Would you buy a laptop from someone who still uses a Nokia 3310 mobile? So why discuss how to protect your crypto gains with someone who’s never touched them before?
No. You need to work with an accountant who has the right bookkeeping software designed for keeping the kinds of records the ATO will require from your crypto wallets.
For most people, the default would be to simply include crypto profits as additional income and think nothing of it when the ATO snatches off over 40%. But it doesn’t have to be that way.
I’ve been known to have some pretty radical thoughts in this field because I’m not convinced that all cryptocurrency gains should be considered equal in the taxman’s eyes.
For example, if you’re simply moving currency around from Australian dollars to Bitcoin, that’s not going to be taxable income. That’s just a currency exchange that’s not going to be reportable income for you.
But if you’ve held on to Ethereum for a few months and decided to sell to buy that nice vacation you’ve been planning, that might be income once you transfer it back into Aussie dollars. But not always. The ATO does make it very clear that cryptocurrency is an asset, at
least according to their rulings and court cases, but there are some clauses that are worth exploring with your accountant. For instance, the ATO does state that if your personal use is less than $10,000, there are no capital gains taxes to be applied.
And speaking of capital gains and losses…
We all know that cryptocurrency is volatile. It’s a high-risk investment, but you already knew that. That’s why you’re here because high risk can translate to high reward,
But you’re not immune from taking some scrapes along the way. But you don’t have to be penalized twice if you incur some losses.
If you’re serious about cryptocurrency trading, your tax reporting will look different. You can actually take the losses from your crypto wallets and use that to offset it against the taxes from other income sources.
For instance, if you’ve taken a hit of $20,000 because of Bitcoin’s crash, and you can offset that $20,000 against the income you’ve made from selling a house, your wages, or any other income sources you’re reporting.
But there are some clauses. It depends on whether you’re just dabbling in crypto or if you’re a serious trader. For the ATO’s purposes, being a trader is all about intent and practice. If you can show that you’re seriously committed to consistently trading cryptocurrency, such as making consistent trades, demonstrating that you have a regular system, whether this is a full-time occupation…then you would be considered a trader and your results would be assessed as capital gains and losses.
But if you can’t back up your trades with adequate record-keeping, I’m afraid that you’re going to get stung.
It’s always been the practice of the Australian Tax office to monitor a new financial product for 3-5 years before they start to get heavily involved. Well, that grace period has certainly passed us by. I’m now seeing more and more audits because of crypto gains and profits.
It’s now reached the stage the ATO is confident that its auditing process will be profitable if they focus on cryptocurrency wallets.
That means that if you own crypto, the ATO sees you as their own personal piggy bank.
And while the ATO might be keeping a close on your digital wallet, don’t let that scare you. I’m not trying to advocate tax evasion. That’s illegal and just not worth the risk, in my opinion.
Instead, I’m simply pointing out that with cryptocurrency, just as in any other income source, there are ways of minimizing your tax burden, legally slashing your tax bill as much as possible.
So, in conclusion, make a plan. Speak to someone who knows about cryptocurrency and wants to work for your benefit, not the taxman. And legally keep more of your own money in your own wallet. Digital or otherwise.