Cryptocurrency trading has increased dramatically in the recent past but many taxpayers believe their gains are tax free or only taxable when the holdings are cashed back into Australian dollars, according to the Australian Taxation Office (ATO).

There are over 600,000 taxpayers that have invested in crypto-assets in recent years, according to ATO estimates.

“This year, we will be writing to around 100,000 taxpayers with cryptocurrency assets explaining their tax obligations and urging them to review their previously lodged returns. We also expect to prompt almost 300,000 taxpayers as they lodge their 2021 tax return to report their cryptocurrency capital gains or losses,” said Assistant Commissioner Tim Loh said. 

Last year, the ATO directly contacted around 100,000 taxpayers who had traded in cryptocurrency and prompted 140,000 taxpayers at lodgement.

Generally, as an investor, if you buy, sell, swap for fiat currency, or exchange one cryptocurrency for another, it will be subject to capital gains tax (CGT) and must be reported.

CGT also applies to the disposal of non-fungible tokens (NFTs).

“We are alarmed that some taxpayers think that the anonymity of cryptocurrencies provides a licence to ignore their tax obligations,” Loh said.

“While it appears that cryptocurrency operates in an anonymous digital world, we closely track where it interacts with the real world through data from banks, financial institutions, and cryptocurrency online exchanges to follow the money back to the taxpayer.”

The ATO matches data from cryptocurrency designated service providers to individuals’ tax returns, helping them ensure investors are paying the right amount of tax.

“The best tip to nail your cryptocurrency gains and losses is to keep accurate records including dates of transactions, the value in Australian dollars at the time of the transactions, what the transactions were for, and who the other party was, even if it’s just their wallet address,” Loh said.

Businesses or sole traders that are paid cryptocurrency for goods or services, will have these payments taxed as income based on the value of the cryptocurrency in Australian dollars.

Holding a cryptocurrency for at least 12 months as an investment may mean you are entitled to a CGT discount if you have made a capital gain. In limited circumstances cryptocurrency may be a personal use asset.

“If you realise you’ve made a mistake and correct your return, we will significantly reduce penalties. However, failing to report on crypto-assets and not taking action when reminded will prompt penalties and potentially an audit.”

The ATO has created a cryptocurrency factsheet with tips and information on how capital gains tax applies to cryptocurrency.