Tue 11 2018
Cryptocurrency and tax – the ATO’s expectations in relation to record keeping
For many who are investing or trading in cryptocurrencies, one of the biggest headaches is recording and accounting for all of your transactions.
In an attempt to provide some guidance, the second article in this series discusses recently-released guidance that outlines the ATO’s expectations in relation to record keeping. This article also discusses new rules which apply to digital currency exchange providers.
The important message to take away is that cryptocurrency is firmly on the ATO’s radar, and it is clear that the ATO expects people who trade in cryptocurrency to keep complete records of their transactions that support the tax position they have taken despite the difficulty that this may present.
The first article in this series, which discussed the tax implications of cryptocurrency to cryptocurrency transactions, can be found here.
Stay tuned for the next articles in this series, which will discuss:
- determining the ‘market value’ of cryptocurrency; and
- hard forks.
The ATO’s record keeping requirements
On 31 August 2018, in response to its public consultation, the ATO updated its website guidance on record keeping for cryptocurrency transactions.
A number of taxpayers made the point that some cryptocurrency transactions are not able to be reasonably accounted for and that it is difficult to access the data required for proper record keeping. In response, the ATO’s website states that:
- the normal record keeping rules under the tax laws apply to cryptocurrency transactions as with any other transactions involving the disposal of property; and
- it has discovered low cost software solutions that would be able to both record each cryptocurrency transaction (including cryptocurrency to cryptocurrency transactions) and convert the value of the proceeds into Australian dollars.
In relation to crypto tax software solutions, the ATO states that
‘[t]his type of software may be suitable for record keeping in cryptocurrency.’
This ATO statement appears to suggest that while offering a ‘solution’ to the record keeping problem, the ATO may not always accept this solution (ie software records of cryptocurrency transactions) as true and correct.
In any event, it is clear that the ATO expects complete records of cryptocurrency transactions. This expectation is not likely to be practical in all circumstances and instead, in our view, a reasonable attempt at complete records should be made. A reasonable attempt at complete records would include documenting the methods used to obtain the data, why those methods were unsuccessful, and an explanation supporting the method and/or data used.
New requirements for digital currency exchange providers
As highlighted in a recent article from our financial services team, since 3 April 2018 digital currency exchange providers have been required to register with AUSTRAC and maintain a compliant Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Program. This will also include an obligation to report to AUSTRAC (within prescribed timeframes) suspicious matters and threshold transactions when relevant.
Practically, this means that, since 3 April 2018, the ATO has had the capacity to use its existing information gathering powers to obtain records of cryptocurrency transactions which must be collected by the exchange as part of its ongoing compliance with its AML/CTF program. If, and most likely when, the ATO uses its powers to obtain such information, the ATO would be able to compare that information to what is disclosed on a person’s tax return to identify taxable gains that have not been reported. If the ATO believes you have not reported correctly, you will either:
- be notified by the ATO to provide further information; or
- receive an amended assessment setting out the tax shortfall and any penalties and interest payable.
Upon receiving either form of contact, we strongly recommend that you discuss your circumstances with a lawyer or your tax agent before responding.
What do I do if my earlier tax return may be wrong?
In the past, a lot of taxpayers may not have disclosed their gains as taxable in their tax returns or even lodged a tax return. In many cases, this may have occurred due to the mistaken belief that the gains weren’t taxable, for a variety of reasons (because, for example, they were considered to be speculative gains, like gambling winnings or made in the course of a hobby).
The prevailing ATO view seems to be that crypto gains are taxable, regardless of whether you knew this or not at the time you bought and sold your crypto.
With the ATO’s broad data gathering and matching powers, it is quite conceivable that the ATO will become aware of your gains at some point.
The tax law allows the ATO to go back either 2 or 4 years to re-open your tax returns (or longer if they think the non-disclosure is because of fraud or evasion). The ATO can go back indefinitely if you haven’t lodged a tax return for the year in which you made the gain. Penalties of up to 75% and interest can be charged in addition to the unpaid tax.
In these cases, it is better to get on the front foot and consider:
- getting some advice from a lawyer or your tax agent who can advise you regarding the tax treatment of the gains you have made in the past. It is possible that some gains are entitled to the CGT discount or may even be exempt from tax;
- making a request for a private ruling from the ATO regarding the treatment of your gains; or
- if your gains are taxable, consider lodging an amended tax return under a voluntary disclosure letter. While you will pay tax on the gain, by making the voluntary disclosure before the ATO investigates your situation, you may be eligible for a reduction in penalties.
Cryptocurrency is firmly on the ATO’s radar, and making sure that you understand your tax position, record keeping, and lodgment obligations is vital.
The excuse that ‘it’s too hard to keep track of things’ won’t be accepted!
Anthony is a highly regarded tax practitioner with over 20 years’ experience. He has particular expertise in taxation planning and structuring for corporate clients, including advising on capital raisings, business structuring, mergers and acquisitions, and disputes with Federal and state taxation authorities.More about Anthony
Adam is an experienced tax lawyer, and advises clients on a range of matters including tax planning and structuring, Division 7A, the small business CGT concessions, corporate restructuring, professional firm structures, trust taxation, the taxation of settlements and cryptocurrency taxation.More about Adam
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