Cryptocurrency and tax: What you need to know

Like every investment type, cryptocurrency offers both benefits and drawbacks that you will need to consider before putting your hard-earned money into it. Get it right and there are potential gains to acquire, but get it wrong and there may be severe consequences – especially in terms of your tax obligations and of course the general high risk profile for this investment class.

Before you explore the world of crypto, here’s what you need to know.

*CharterNet does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.

Getting your records in order

From meme coins to NFTs, a subculture of investing has emerged from the shadows and quickly taken hold as one of the most intriguing ways for people to generate wealth. But, wisely, many people are approaching cryptocurrency with caution. After all, it’s an incredibly speculative market – and for every individual who sees a massive return on their investment, there are others who experience the crushing realities of failing to do your due diligence.

So when it comes to crypto, there are two considerations you will want to manage from the outset: security and record-keeping. Before you talk to any consultant accounting, you will need to avail yourself of the intricacies of crypto, such as where you keep your wallet to store your private keys and keep your crypto investments secure. It’s only with a wallet and your key – which if you lose, then you lose your entire investment – that you can send, receive and spend cryptocurrencies.

But beyond the wallet and storage of your private keys, having a robust security and record-keeping policy relies on more. You might be thinking about a Web3 ‘bridge’ like MetaMask – but this is simply an extension. We – and every investment professional who wants you to protect your crypto – will tell you to link your wallet to a crypto custody tool that captures your ledger so that you can more easily manage your tax obligations. From Koinly to Crypto Tax Australia and countless more, these secure your crypto while recording all the essential transactions that you can then pass directly to your accountant.

Tax implications

First and foremost, what type of crypto investor are you? For the vast majority of Australians, you will be defined as a ‘passive holder’. This simply means you aren’t actively making trades every day, but instead spending time to choose specific cryptos with the hope of realising gains over the short or long term. For passive holders of crypto, the ATO will distinguish you as such for tax purposes, which means you are subject to the same capital gains tax (CGT) as other investors, including those who dabble in the share market or invest in real estate, for example.

The other type of crypto user is what’s known as an active trader. This is an important distinction because the ATO applies trading stock rules to your circumstances, which is where tax can become more complicated.

For businesses who regularly transact with cryptocurrency, the trading stock rules will apply here too – essentially, the ATO recognises you as an ‘active trader’ of crypto. As the Office puts it: “To be carrying on business, you will usually:

  • carry on your activity for commercial reasons and in a commercially viable way
  • undertake activities in a business-like manner – this would typically include preparing a business plan and acquiring capital assets or inventory in line with the business plan
  • prepare accounting records and market a business name or product
  • 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.”

Whether you are a passive holder or an active trader, it’s essential that you avail yourself of your tax requirements and speak to an expert like CharterNet to ensure you are meeting your obligations every financial year. Failure to do so can lead to fines or worse.

Consequences of poor crypto record-keeping

Crypto might be the new kid on the investment block, but the ATO treats it similarly to other investment types, especially in terms of how you pay tax on any gains. Most importantly, it’s up to you to keep adequate records on every crypto transaction you make.

Ensuring your hardware wallets and ledgers are properly linked and capture all the key transactional data means it’s much easier to manage your tax obligations throughout the year. These tools will house data on crypto that you’ve bought and sold, as well as any purchases you’ve made with your cryptocurrencies.

The consequences of not collecting this data can be severe. If, for example, you can’t substantiate any of your crypto purchases or sales, then the ATO may hold you liable for falsifying information. This opens you up to further fines and damages from the ATO depending on how poorly you’ve been keeping records of your crypto investments.

Bottom line? It pays to get things right from the very start – so speak to the experts at CharterNet to help us light the way forward on your crypto journey.

CharterNet can help you understand all the complexities of managing crypto and tax. If you would like to know more about how you can integrate crypto into your wealth-generation strategy into your tax compliance – or if you need tax support for your existing crypto investments – then don’t hesitate to get in touch on (02) 8999 1199 or contact us online.