Expert warns tax agents can no longer turn a blind eye to cryptocurrency

The ATO’s growing interest in cryptocurrency is forcing taxpayers and their advisors to get up to scratch on their obligations.

“There are many tax agents who simply aren’t aware of cryptocurrency, and they don’t know the details of how it should be reported,” said Mark Chapman, director of tax communications at H&R Block.

“Taxpayers need to disclose whether they have traded or invested in cryptocurrency to their tax agent, so it is essential that the tax agent is aware that they do need to ask taxpayers if they have been dabbling in this field.”

Last month, the ATO announced that it would collect information on crypto trades reaching back to the 2014–15 financial year to ensure taxpayers were not skirting their tax and super obligations.

On Wednesday, Reuters reported that the Tax Office will obtain the financial and personal information of 1.2 million accounts from cryptocurrency exchanges.

It will collect financial data on the cryptocurrency accounts, including linked bank accounts, transaction details, account balances, as well as personal information of account holders including their names, dates of birth, email addresses, social media accounts, and business numbers.

“My message to taxpayers would be to simply seek out an accountant who is experienced, who does have exposure to cryptocurrency with some frequency, who potentially uses a specific cryptocurrency software provider,” said Chapman.

Rafael Franco, director of Tax On Chain, said that all Australian cryptocurrency exchanges will be required to hand the information over to the ATO, though it gets trickier when dealing with foreign exchanges.

“There are hundreds of international exchanges for crypto. Those ones are probably not required to voluntarily provide information to the ATO about client details,” he said.

Franco added, however, that this will likely capture most Australian traders given the difficulty of linking local bank accounts to international exchange platforms.

That said, the ATO can provide a notice to produce to foreign cryptocurrency providers where suspected issues may arise.

An ATO spokesperson said, "The ATO collects data from crypto exchanges under our information gathering powers which are contained in section 353-10 of Schedule 1 to the Taxation Administration Act 1953. This is a coercive power, and the data provider is obligated to provide the information requested. We use the data for tax and super compliance purposes."

Chapman the ATO’s data matching program is nothing new, having been around for nearly a decade. The ATO has simply extended the program to continue collecting data across the current tax year.

“[Crypto trading] is potentially a minefield of tax non-compliance. Lots of people trade cryptocurrency, but the perception is that only a percentage of those people actually declare any capital gains or trading profits on their tax returns,” he said.

“Therefore, if the ATO can get a third-party source of data, it can use that as leverage to encourage taxpayers to declare their income or gains from cryptocurrency. In addition, it can use it to match it with the data that comes through in people’s tax returns and highlight instances of non-compliance.”

An ATO spokesperson said the majority of non-compliance is accidental, most commonly arising from "a lack of awareness, a lack of understanding, and poor record keeping."

Both Franco and Chapman said the main confusion among taxpayers in relation to their tax obligations concerns not the kind of tax they should be paying on their crypto trades, but the circumstances in which those obligations are triggered.

“Most people are aware that CGT applies to cryptocurrency, but they’re not necessarily aware of the circumstances in which it applies,” said Chapman.

For example, most traders are aware that they are liable to pay tax when exchanging their digital currencies for Australian dollars, but comparatively few know that exchanging between cryptocurrencies also triggers CGT.

Cryptocurrency is among the ATO’s hit list areas this year, meaning that an increased level of enforcement actions could be triggered. Some estimates put it that 5 per cent of Australians hold some form of cryptocurrency, while others suggest the share might be even greater.

Digital finance is still a risky proposition, made more so by the relatively limited regulatory guidance provided under Australian legislation.

While some maintain that a hands-off approach will allow the space to develop into its full potential as an alternative investment stream, others believe that more substantive regulatory guidance would promote further investment.

“The reality is for the last few years a lot of taxpayers don’t even know that they have to pay tax on their cryptocurrency,” said Franco.

“There’s a lot of ATO guidance out there, but that can just cause more misinformation because it is not legally binding. There isn’t any sort of crypto tax legislation that tax practitioners can refer to, so there’s a lot of grey area.”

Chapman said that regardless of any legislative or regulatory guidance, cryptocurrency is “inherently risky.”

“It goes up and down frequently, and it goes up and down by huge amounts … It’s kind of the wild west and is potentially fairly lawless,” he said.

“Irrespective of what the ATO does, I think cryptocurrency is going to be risky and potentially off-putting, particularly for people who have a fairly conservative attitude to risk.”