Many traders and investors have faced difficulties as a result of the current bear market for cryptocurrencies. In this article, we talk about some best practice ways to handle your cryptocurrency affairs accordingly.
Current state of crypto
With the crypto market following more traditional markets that are impacted by external macroeconomics and other factors, the bear market is in full swing. In light of global inflation, international conflicts, the Terra Luna collapse and Celsius debacle we are seeing the price of BTC, and altcoins follow traditional factors that influence the market capitalization (“cap”).
With the increase in institutional investment and the amount of cryptocurrency investors, the market capitalization is projected to grow, despite the recent market downturn. What this can mean from an economical perspective is that crypto assets follow the same steady patterns of traditional securities. The current market environment for crypto has seen a dramatic downturn from approximately $3.2 trillion ($AUD) at the beginning of the calendar year to a current (8th July 2022) $1.4 trillion ($AUD) market ‘cap’. Comparatively we saw an opening market cap of approximately $1.1 trillion ($AUD) to a $2.1 trillion ($AUD) for the same periods (beginning of the 2021 calendar year and 8th July 2021).
All data extracted from CoinMarketCap.com/chartshttps://coinmarketcap.com/charts/
Realizing a capital loss on your crypto
Current holders of crypto have sought to realize some of their losses to offset their success in the first half of the financial year. This presents a few tax implications to be aware of to ensure that your losses are being used as intended and offsetting your current and future capital gains.
The ATO has warned the crypto community of ‘wash-sale’ arrangements according to Taxation Ruling (“TR”) 2008/01. A wash-sale arrangement is essentially a capital gains event where the asset disposed of, triggering a capital loss, which results in no change in economic exposure or interest in the crypto coin or token. This ultimately means that a crypto asset is sold and then bought back in a short period of time (typically done immediately), where the taxpayer is still exposed to the same market conditions for holding the asset and holds an immediate interest in it. This can be a harmless transaction as crypto may be acquired to transact on a network and furthermore acquire other coins or tokens. Therefore, it is paramount to seek professional advice if in this situation where clear documentation of your affairs can save you being denied the capital loss from being applied against your capital gains.
Utilizing the correct structure for your affairs
As always, a diligent review of your current crypto tax affairs warrants a consultation with a crypto tax specialist to evaluate your current strategy in navigating the bear market can lead to a highly optimized tax outcome when the market cycle changes. A general rule of thumb to consider is utilizing atrustfor your investment activities. A trust can be utilized effectively to secure the CGT 50% discount on holdings held for a period of 12 months or longer, with the added benefit of distributing the capital gain to eligible beneficiaries and potentially reducing your overall tax liability on the capital gain.
Companies are better utilized where your taxable income is more than $150,000 and when you are conducting your affairs as a crypto trader.Crypto tradersare typically higher in transactional volume and conduct their affairs in a more business-like manner. There are significant tax implications to the change in how your affairs are reported for tax purposes such as the activity being treated on revenue account and the imposition of the trading stock provisions. It is important to note that companies are not eligible for the CGT 50% discount and therefore is less advisable in most scenarios to conduct investing activities in this manner.
ATO crypto audits are in full swing
The ATO has advised repeatedly to the community that crypto tax will be a focus for the 2022 financial year and ongoing. The ATO has advised that a 64% increase in the cryptocurrency trade with over 500,000 Australian’s engaged, in some extent, in investing and trading in crypto assets.
The ATO has also reported that they have data matching capabilities that go as far back as 2014 and collects data on crypto transactions for the previous and ongoing financial years. The ATO has emphasised cryptocurrency activity on taxpayers ‘Prefill’ reports, which can be accessed via your ATO linked app in MyGov. For tax practitioners this can be assessable via the Tax Agent Portal (“TAP”) for respective clients. If the ATO has flagged crypto activity and goes unreported there may be dire consequences.
We are witnessing firsthand the ATO’s relentless ambition to ensure that taxpayers remain compliant with their crypto affairs. We have witnessed the extent of the ATO’s data matching capabilities which detail sale transactions that may trigger a reportable capital gains event and detailing the quantity of the coin or token sold, the coin or token, the date of the sale and the amount in Australian dollars ($AUD). It is paramount that your affairs are reported correctly and is being emphasized in the ATO’s recent audits being undertaken.
What an ATO crypto audit can mean for your unreported crypto activities
An ATO audit conducted on your crypto affairs will likely assume a zero-cost base, meaning the entire sale proceeds will be assessed as the capital gain (or overall profit). The ATO may assume that the asset is a discountable capital gain if the sale has resulted after a lengthy holding period. The ATO is also likely to impose fees and penalties that can be up to 200% of the tax liability as well as backdating general interest charges (“GIC”) and any other civil penalties depending on the extent of the situation.
Whilst some taxpayers may have genuinely ‘forgotten’ to report on all their crypto affairs, the ATO is illustrating that it will not accept sheer ignorance instead will assume negligence in understanding your reporting obligations.
Ensuring that you remain compliant is more important than ever, do not roll the dice in not report (or under reporting) your affairs as the consequences may heavily outweigh any benefit in not doing so.
Reach out to the FullstackCrypto TaxTeam to ensure:
Your affairs remain compliant
Reduce the potential of an ATO audit
Conduct your affairs in the most tax effect manner
Fullstack has a team of seasoned crypto tax specialists, accountants, and bookkeepers to help support you. We offer record-keeping solutions, cryptocurrency tax advice and more. Schedule an appointmenthereto discuss your matter and how we can take it further.