Date posted: 21/09/2018 9 min read

Bitcoin bonanza – or tax-time headache?

Investing in cryptocurrencies, even by SMSFs, is now more common, with up to half a million taxpayers actively in the market last year. But tax authorities are warning they will track down crypto profits.

In Brief

  • There are now more than 2000 cryptocurrencies on the market, but Bitcoin is probably the best known.
  • Accountants need to warn taxpayers they must keep careful records of investments to calculate capital gains tax liabilities.
  • The Australian Taxation Office has warned it has extensive data-matching powers to track any crypto profits.

It may be a giant step into the unknown, but that’s not stopping large numbers of taxpayers venturing into risky new territory. Up to half a million investors will lodge tax returns this year declaring cryptocurrency activity, many for the first time, according to the Australian Taxation Office (ATO).

As the value of Bitcoin skyrocketed last year from $US1000 to more than $US19,000, then fell back to about $US6000 by August this year, many investors and self-managed super fund (SMSF) trustees are now liable to pay capital gains tax (CGT) if crypto assets were sold at a profit. Crypto investors have also been warned that the ATO will take strong action to combat tax evaders. So what do accountants and their clients need to know?

1.    Tax offices in Australia and New Zealand treat cryptocurrencies as an asset subject to the same tax rules that apply to shares.

2.    If individual investors keep crypto investments for more than one year, they may qualify for a 50% discount (33.33% discount for SMSF investors) on CGT in Australia. However, no discounts apply in New Zealand.

3.    In Australia, valuations must be included in tax returns and reported at tax time.

4. A specialist platform or fund can track paperwork and deliver reports for investors. 

5.    Tax applies when one cryptocurrency is swapped for another. You don’t need to cash out to dollars to create a tax debt.

6.    Records need to kept for at least five years after transactions. In New Zealand it’s seven years.

Bitcoin, Ethereum, Ripple and Litecoin are some of the well-known cryptocurrencies. The digital currency is usually encrypted using blockchain technology and fund transfers can be done without going through a bank.

Entrepreneur Gary Ng, the founder of Surge, one of Australia’s fastest-growing crypto investment funds, says there are now more than 2000 cryptocurrencies on the market. Bitcoin, which has been around for nearly 10 years, is the most popular, with the Winklevoss twins in the United States now famously the world’s first Bitcoin billionaires.

While cryptocurrencies are a high-risk gamble, Ng says investors in Australia have made money, though mostly those who entered the market long before the boom late last year. “Investors who got in early and bought A$500 worth of cryptocurrencies in 2013, investing in the top five currencies, could have made A$1.5 million by now,” Ng told Acuity. His personal investments have tripled since June 2017. 

“Over-investing in this area is not a smart decision, because it is high risk. But I stayed at my comfort level and that’s how I started putting A$100 in here and there, which grew to a few thousand dollars. By taking a defensive strategy across different cryptocurrencies and diversifying my investments, my return has outperformed the Bitcoin-only returns.”

Pictured: Gary Ng

Investors can use reports and valuations on the buying and selling of cryptocurrencies using tracking software from operators such as Cointracking, he says. Longer-term investing can be beneficial in terms of capital gains tax in Australia, Ng adds. If individuals keep the assets for more than a year, they may qualify for a 50% CGT discount when sold. In New Zealand, no discounts apply.

Accountants need to know how to report crypto returns and capital gains, so they can deal with increasing client activity, he says. Bitcoin was used last year to buy real estate for the first time and the digital currency can now be used to buy items ranging from gold to flights.

Common crypto tax errors

Between 300,000 and 500,000 Australians were active in cryptocurrency markets by the end of the 2017 calendar year, according to research by Accenture and the Australian Digital Currency Association. So, what does the ATO say are mistakes to avoid with cryptocurrencies and tax? 

* Failing to declare gains by incorrectly treating cryptocurrency trading as a personal use asset or “hobby”. Cryptocurrency does not provide anonymity. 

* Failing to keep the correct records. Many people ventured into crypto for the first time in 2017-18 without understanding what records they needed to keep.

* Businesses accepting crypto but not treating it as ordinary income. 

* If taxpayers hold cryptocurrency for sale or exchange, trading stock rules apply rather than CGT rules. 

* If they acquire and keep or use cryptocurrency to buy items for personal use, it may be treated as a personal use asset. 

In New Zealand, cryptocurrencies are subject to normal tax rules for personal property. New Zealand Inland Revenue says that if the coin doesn’t include an income stream (such as Bitcoin), it’s likely that you have purchased it to sell or exchange. 

SMSF investors

SMSF investors are among those betting on cryptocurrencies, but the ATO says it has no figures yet on how many are active, despite evidence that it is occurring. Tim Miller, head of Miller Super Solutions, offers these tips for Australian SMSFs:

1.    Clients must separate private crypto investments from those stored in an SMSF.

2.    They need to ensure their SMSF deed allows for this type of investment as part of a considered investment strategy. 

3.    If the assets are held in a complying SMSF for more than a year before disposal, they may qualify for a 33.33% CGT discount.

“The first inquiry I had about Bitcoin was back in 2011,” says Miller. “I think most accountants are getting a lot more inquiries now about cryptocurrencies from SMSF trustees.” Technology has advanced and records can be easily obtained from digital currency exchanges, online platforms or from the virtual wallets clients use to make transactions. 

Pictured: Tim Miller

More online platforms now also make it easier to obtain valuations and invest in the names of the SMSF trustees, rather than in personal names. SMSF auditors, however, may treat cryptocurrency investment with skepticism. “It would not surprise me if you have auditors questioning or raising issues with regard to crypto.”

If Kiwisaver funds in New Zealand have invested in cryptocurrencies, they will have to pay tax on any realised gains in the same way as individuals have to.    

Advice for clients

So, what do accountants need to know and tell their clients? With some analysts predicting the value of Bitcoin may rise again to $US20,000 or even as high as $US50,000 in calendar year 2018, undeclared capital gains may trigger a tax office audit. The ATO may “take strong action, in particular using a range of existing powers that are designed to address unexplained wealth and conspicuous consumption that may arise through profits derived from cryptocurrency,” an ATO spokeswoman told Acuity.

So it’s good practice for accountants to ask all of their clients whether they have had any cryptocurrency transactions and to keep records, with dates of transactions, Australian or NZ dollar amounts (from a reputable online exchange), what the transaction was for and who the other party was (even if it’s just their wallet address). 

There is nothing to suggest you can’t, as part of your investment strategy, consider crypto, but you must contemplate the risk associated with it and be willing to take some hits along the way.
Tim Miller head of Miller Super Solutions

“We have sophisticated systems that allow us to match data from banks, financial institutions and online exchanges, to follow the money back to the taxpayer,” the ATO spokeswoman told Acuity. Inland Revenue in New Zealand has not published its audit methodology, but it’s likely it has access to the same technology. Agencies such as the Australian Transaction Reports and Analysis Centre (AUSTRAC) and recent changes to anti-money laundering laws also provide greater transparency through “know your client” rules. 

Tim Miller urges SMSF advisers to be cautious with clients. “There is nothing to suggest you can’t, as part of your investment strategy, consider crypto, but you must contemplate the risk associated with it and be willing to take some hits along the way.” He has not invested in cryptocurrencies, as he takes a conservative approach. “I read a lot about bitcoin millionaires in the press, but I have never met any of them.”

New Zealand Tax Conference Auckland

October 18 and 19, 2018

Find out more

Available from CA Library: The evolving tax treatment of cryptocurrencies

Examines some of the challenges in applying the current Australian taxation system to cryptocurrencies

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