Finance Finance News Why the Tax Office is trying to scare crypto investors into declarations
Updated:

Why the Tax Office is trying to scare crypto investors into declarations

Bitcoin
The ATO is trying to keep its finger on cryptocurrency money flows. Photo:Getty
Share
Twitter Facebook Reddit Pinterest Email

The Australian Taxation Office issued a warning to the approximately 600,000 Australians using Bitcoin or other cryptocurrencies, asking them to fess up about dealings the taxman fears it won’t find.

“We are alarmed some taxpayers think the anonymity of cryptocurrencies provides a licence to ignore their tax obligations,” assistant commissioner Tim Loh said in a statement on Friday.

To wake people up the ATO plans to send 100,000 letters to those it thinks are crypto trading and prompt another 300,000 to own up when they lodge returns.

The reason for the ATO’s concern is that crypto usage is exploding and the tax man is worried he won’t get his hands on a share.

Those concerns are very well founded.

Hiding the deals

“The ATO is conscious of the fact that people will be able to conceal transactions, and I think they would,” said Canstar group executive Steve Mickenbecker.

They are trying to frighten people by, “saying you won’t be able to hide your dealings so don’t put us through the pain of having to chase you up and all the rest of it,” he said.

To a point the ATO is right in that it will be able to trace sales of crypto.

“They can go into your banking records and if they see some big transactions they can trace them back,” Mr Mickenbecker said.

“If they come from a cryptocurrency exchange then they’ll know that,” Mr Mickenbecker said.

But it’s not as simple as all that. If you buy and sell shares, the broker will issue you with transaction records showing how many shares were traded, at what price and what the trade costs were.

It’s not like that with crypto. “You’re dealing in a segment that is largely unregulated,” said Alex Jamieson, principal of AJ Financial Planning.

“The exchange commissions aren’t regulated and you can’t necessarily see things like buy and sell spreads that you can see with shares.”

Crypto deals don’t necessarily leave a money trail. Photo: Getty

Because crypto operates in its own world it doesn’t have the transparency the ATO needs to follow all dealings.

A money flow from a crypto exchange won’t tell it how many coins you sold or how many you bought or when you bought them.

“The difficulty the ATO will face is actually determining what your ongoing holdings are,” Mr Mickenbecker said.

“It won’t know what you paid for the ones you sold or how many you still hold.”

How much did you sell?

“One of the attractions of cryptocurrency is the lack of transparency to tax authorities and the transactional nature of its workings,” Mr Mickenbecker said.

“You could buy a crypto coin for $100,000 this week and sell half of it for $100,000 in two weeks time, but the ATO couldn’t see that you only sold half.”

They also can’t see if you transferred from one bitcoin wallet to another without using a recognised currency in between.

While authorities could trace all your cash movements back over time, they would have no idea how much coin you bought and sold, so they are unable to determine what tax liabilities might be.

It can be expensive and difficult to do all the necessary tracing, and if it eventually ends up in court the outcome is unknown.

Authorities might rein it in over time but the market is not waiting and crypto is increasingly something serious investors can’t ignore.

“Our view is it’s becoming a sector in its own right but the rags-to-riches story is becoming ingrained in people [who] don’t necessarily understand the volatility. You’ve got to be comfortable with it moving up and down by 70 per cent and it might do that in a week,” Mr Jamieson said.

While at one point you might feel like you’re in the riches category, it could quickly go back to rags.

“Ultimately you have to be comfortable with the fact that you might lose 100 per cent of your money,” Mr Jamieson said.

While the crypto world might be opaque, the key ingredients are pretty clear.

“The ATO view is that cryptocurrencies are CGT [capital gains tax] assets and, if that is correct, then transacting in cryptocurrencies would trigger a CGT event and be taxable,” said Prath Balasubramaniam, a principal solicitor with KHQ Lawyers.

But the crypto world is different because of its volatility and the fact that it is based on no underlying economic asset, only confidence.

That might lead someone to take on the ATO in the courts.

“This would help shed a lot of light on their nature, where they get their value from and whether there is sufficient stability in the market to deem them an investment asset. The ATO wants to move to collect tax but this is all new and unknown territory,” Mr Balasubramaniam said.

If you were thinking of trying to hide crypto gains, don’t. If you suddenly become the owner of a fancy apartment with no explaining cash trail the ATO will want to know why.