The Australian Taxation Office (“ATO”) has once again placed significant emphasis on cryptocurrency related activity. Deputy Commissioner Tim Loh states “We know crypto assets and their tax implications can seem complicated. That’s why our focus is on helping people get it right.”
The ATO has also advised in a recent Public Service Announcement (“PSA”) that “The ATO can track money trails back to taxpayers through data from banks, financial institutions and crypto asset online exchanges.”
Fortunately for most crypto taxpayers, the ATO has revised (once again) their guidance on cryptocurrency and has illustrated its commitment in creating a clear tax regulatory environment for crypto in Australia.
Investing or Trading Determinations
One of the main changes from the revised guidance issued by the ATO is the clarification between investing and trading activities. The ATO has now revised its determination of investors as being anyone who is not specifically carrying on a business in crypto. The definition of carrying on a business is derived by the usual sense and is not specific to crypto. It includes:
- Carry on your activity for commercial reasons and in a commercially viable way,
- Intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term,
- Undertake activities in a planned, organised and business-like manner – this may include keeping business records, preparing a business plan, and acquiring capital assets or inventory in line with your business plan,
- Repeat similar types of activities for your business on a regular basis.
Source – Crypto assets used in business ATO QC 69963 29th June 2022
This means that regardless of the overall size of your transactions, the volume of activity or the level of sophistication has no influence as to whether a taxpayer is determined to be investing or trading.
Previously, these factors would influence the determination as to whether a taxpayer is investing or trading in crypto. As a chartered accounting firm with a dedicated crypto team of crypto bookkeepers, accountants, and advisors, we often came across clients in this exact situation. This is welcoming news as previous determinations may look incorrect due to ambiguities with how the crypto activity was being conducted.
So why does it matter?
The tax implications differ depending on whether you are investing or trading crypto.
Investors are subjected to the capital gains provisions of the Income Tax Assessment Act 1997 where capital gains or losses are calculated when a Capital Gains Tax (“CGT”) event has occurred. In crypto, this will typically be when the owner of the asset changes. This can arise by selling to fiat, swapping for another crypto coin/token, and can be via gifts, etc.
Traders, on the other hand, are subjected to the trading stock provisions and are treated as a business activity, this means that disposal of crypto coins/tokens are treated as Sales and Purchases. In addition to this, the trading stock provisions require a valuation of the closing stock of the portfolio at either the cost or market value. Closing stock is treated as assessable income and is therefore added to the crypto activities’ overall net profit or will reduce the overall net loss.
Whilst the differences above are significant, the main difference is the 50% CGT discount rewarded to crypto investors who hold their assets for a period of 12 months or longer.
The ATO has provided clarification regarding airdrops and now defines airdrops distinctively between initial allocation airdrops, and traditional airdrops.
The ATO advises that initial allocation airdrops are defined as being the “first distribution of a token where there has been no previous trading being conducted on the projects token”. As the token was not previously traded there is a market value of $0.00 and therefore no ordinary income is reported upon receipt of the token.
The ATO has also advised that airdrops which were acquired and subsequently received will not be treated as ordinary income. Instead, the regular capital gains treatment will apply where the cost base will be recorded as the purchase price or consideration for the acquired airdropped token.
These changes are significantly different to the previous tax treatment of airdrops whereby any token received as an airdrop is treated as ordinary income when received at the market price when received.
Although the initial tax treatment of airdrops may differ now, it is important to clarify that the capital gains treatment does not differ (except for some situations and the respective cost base of the token). Once the token is disposed, you will be required to report this in your Income Tax Return by reporting either a capital gain or a capital loss.
The changes to how airdrops are treated for tax purposes place significant emphasis on crypto taxpayers to maintain an adequate record-keeping system. If you happen to receive an airdrop it is important that it is clearly documented so that the distinction between an initial allocation airdrop can be made, or if the airdrop was purchased via fiat currency or another crypto token. Providing this information to your accountant in an orderly manner is essential to correctly reporting your crypto tax affairs.
Loss or theft of crypto assets
The ATO has also revised guidance on the matter of crypto that has become lost or stolen. The ATO prescribes that crypto assets will be lost or stolen if the following as occurred:
- The crypto asset is lost,
- You have lost evidence of your ownership,
- You have lost access to the crypto asset.
Source – Loss or theft of crypto assets ATO QC 69951 29th June 2022
If your crypto has become lost, then you will be able to claim a capital loss.
For the capital loss to be allowed, the ATO prescribes that the following evidence must be kept proving your ownership:
- The date you acquired the private key,
- The date you lost the private key,
- The digital wallet address for the private key,
- The cost to acquire the crypto assets in the digital wallet,
- The value of the crypto assets in the digital wallet at the time the private key was lost,
- That the digital wallet was in your control,
- That the hardware that stores the digital wallet is in your possession,
- The transactions from a digital currency exchange where you have a verified account or is linked to your identity.
The value of the capital loss that you will report on your Income Tax Return will depend on the instance that it has become lost or stolen. For example, if you have lost access to your wallet then the capital loss will equal the market value of the tokens contained within the wallet. The logic behind this is that the value of the crypto at the point you lost access to your wallet will equal the current market value and therefore the capital loss value.
The reoccurring theme here is keeping adequate records, without having the appropriate supporting documentation your claim will be disallowed, ruining your opportunity to gain tax relief from an otherwise very unfortunate event.
Further guidance is still required
While the recent changes to the ATO’s guidance create more clarity with the various tax implications for crypto tax affairs, there is still further guidance required for transactions in Decentralized Finance (“DeFi”), Liquidity Pools, and the likes of. A major shortcoming in DeFi transactions is when income is earnt. According to the ATO’s current limited guidance, rewards, interest, and other payments for providing liquidity must be declared when earnt. This is not necessarily the same point in time that the token payments received enter the blockchain ledger and therefore are untraceable with current software solutions. This is due to the earning mechanisms require goers to ‘claim’ on the respective protocol’s platform. This creates a disconnect between when income should be declared as earnt and when it enters the blockchain and subsequently into your wallet.
We understand that crypto tax affairs may be complicated and so can your situation, that is why Fullstack Advisory offers complimentary consultations to the community to hear, understand and advise you on the associated tax implications. We also offer a full suite of compliance and advisory services to aid you in your crypto tax affairs. Please do not hesitate to reach out to our friendly and experienced team of crypto tax experts who are dedicated in seeing you thrive.