Here they come
The first wave of letters has been issued from the ATO to unwary investors and traders of cryptocurrency. “Did you dispose of your cryptocurrency?” – the letter starts with some smart psychology, a simple question, but one specially designed to trigger taxpayers; did you have any tax events with cryptocurrency? The ATO has been preparing for this moment since the data matching program was announced back in April 2019.
Did you answer yes…
“We're giving you the chance to fix any mistakes now" – the ATO’s letter states.
Some say this statement is almost friendly while others may feel intimidated by the language used. One thing is for sure, this statement has been carefully crafted to elicit actionable responses from taxpayers. The ATO is a well-funded government body and they have a well-practiced approach for getting back unpaid taxes. The letter drop is a commonly employed technique by the ATO due to it being a very cost-effective way to get back a large amount of unpaid taxes. For some, the idea of the ATO knocking down their door is too much. Those who remember that they had some gains to declare should get their tax sorted ASAP and they likely won’t have to worry about a potential audit.
Crypto nomads beware
Your letter may never arrive. If you are constantly on the move and do not have a tax accountant or permanent post address, then it’s time to check and update your address details. You can login to myGov to inform the ATO of your new address and check your digital inbox. If you don’t, then your letter may never arrive. That might sound like a good thing, but really this just leads to an even more difficult situation. A great accountant might be able to negotiate your way out, but it’s better not to put yourself in the situation to begin with.
What to do now?
It’s important to take action, but not to react out of fear. If it is all a bit overwhelming or your case is complicated, then it’s time to talk to a professional. A tax accountant specialised in cryptocurrency will be able to explain the tax treatment of your activity and the records that you will need to collect to process your calculations and substantiate your tax outcomes. They will be able to help you get everything in order and simplify your compliance requirements for future years. A specialised tax accountant in cryptocurrency will be able to significantly reduce the time and effort you spend putting everything together – No, your accountant should not be asking you to perform your own cost base calculations and market valuations for your trades, although we have been hearing some unsettling cases where this has been occurring.
Being strategic and on time gives better tax outcomes when it comes to your tax affairs, and cryptocurrency is no exception. You will be in a much better position and experience way less stress, if you plan ahead and get your cryptocurrency tax sorted.
After you receive the ATO’s letter, you will have 28 calendar days to sort out your cryptocurrency tax calculations and amend your tax return. In many cases this is not enough time to enquire with a specialised tax accountant, collect your records and actually process and lodge any amendments. This is especially so, if you have to track down significant amounts of lost data from now insolvent exchanges or scams. The short time frame of only 28 days can pressure you into taking a worse tax outcome just to get it all done in time. Our recommendation is to get started now, even if you are still waiting for your letter to come, it doesn’t hurt to be prepared.
If you already have a letter, then our tax accountants will be in a good position to negotiate an extension with the ATO for you. If you have a good tax record, then there is a good opportunity to also negotiate for reduced or nill penalty interest charges on any late payments due to unpaid tax.
If you had a significant amount of crypto-to-crypto trades, then advice from a specialised tax accountant experienced with cryptocurrency is highly recommended. We have seen on many occasions where a taxpayer has managed to calculate a worse result for themselves, it’s impressive. You don’t actually have to be a victim of your own calculations.
If you have a net loss, then it is also beneficial for you to claim the loss rather than just ignoring it – yes this means you may actually get tax back in some cases.
Some individuals executed a lot of crypto-to-crypto trades during the peak of the market and held through the crypto winter. As a result, you may have realised large amounts of gains during the peak, but if you didn’t cash out, you may be left holding a very low value portfolio. Unfortunately, the gains are assessable income, and you may have a larger tax bill then what you have left in your portfolio. Although, you will get to declare the loss, it can’t be applied back-in-time to a previous financial year. Our tax legislation doesn’t allow for time-travel in this case.
What may ignorance cost? – let’s consider a scenario
Taking no action to the ATO’s letter is effectively a statement that you are confident that you correctly reported your tax and no amendment is required. In this case, the ATO may initiate audit proceedings, if they consider there is significant unpaid tax that can be collected. Obviously, the ATO already has some of your data available, otherwise you would not be receiving a letter.
Let’s consider an expensive but realistic scenario and what that might mean. This is how the ATO's data-matching could work.
John buys 10 bitcoin from an exchange platform or service that the ATO has not gathered data from. The transaction is unknown to the ATO and as such there is no record or estimate of what the cost base (purchase) is. The ATO's data-matching program is blind to this transaction. However, we know that John’s initial purchase cost for the Bitcoin was $100,000.
John sends the 10 bitcoin to an exchange that the ATO is gathering data from. The ATO has eyes on all transactions that have occurred at this exchange.
John sells the 10 bitcoin for a total of $110,000. It is most likely, that the ATO’s data-matching program would identify this sale as assessable income, in this case $110,000 of income. The data-matching program does not know of the initial purchase cost of $100,000, so it is not used to offset the income. The system has now estimated that John has $110,000 of understated income.
Conclusion: ATO considers that John should report $110,000 in assessable income from disposals of cryptocurrency. The actual reality is that John would only have $10,000 to declare. In this scenario, John is in a much better position, if he has kept all of his records, lodged his tax return correctly and has documentation prepared for any potential follow up from the ATO. The burden is on John to maintain these records, and he may end up with a hefty tax bill if he simply relies on what the ATO tells him he owes.
The real cost
The ATO has a range of penalties, fines and interest charges that they can apply in addition to the unpaid tax.
A penalty of up to 75% of the unpaid amount.
A penalty of $4,200 for failing to keep and/ or retain records as required.
A general interest charge, which fluctuates through the year and has been approximately 7-10% in recent years.
If you have not reported your tax yet and you have an outstanding tax return, you are in the hardest position. The ATO may not bother to audit you at all, and instead they will just issue a default assessment with what they think you owe. As in our earlier example, the ATO may overestimate your cryptoccurrency gains, and you can be liable for significantly more tax than if you had declared yourself. You are left with two options. You can pay whatever the ATO estimated for you along with any penalties and move on, or, you must prove that the ATO has got it wrong and prove what is the correct assessment.
How does the ATO know about my crypto?
The ATO announced last year that it was spending $1 billion to tackle the black economy and hunt down those who are evading their taxes. Overall, the ATO is expected to enjoy a threefold return on their investment.
Tax officials from Australia, the US, Britain, the Netherlands, and Canada have formed a collaborative group, the Joint Chiefs of Global Tax Enforcement (J5). The J5 was formed because of growing concern that tax avoidance, cybercrime and cryptocurrency abuse were escalating as criminals exploited differences between national tax laws.
In addition to the group’s work on cryptocurrency, the J5 also focused on platforms that enable each country to share information in a more organised manner. FCInet is one such platform that each country has invested in to further that goal. FCInet is a decentralised virtual computer network that enables agencies to compare, analyse and exchange data anonymously.
Domestically, the ATO has been obtaining data relating to cryptocurrency transactions from cryptocurrency designated service providers (DSPs). The data obtained has been used to identify the buyers and sellers of crypto assets and quantify the related transactions. The ATO has undoubtedly been using the results from its data-matching program to direct the targeted letters we are now seeing. The data collected dates back to the 2014/15 financial year till now and has been obtained from DSPs including brokerage services, pay facilitators, exchange services and other cryptocurrency service providers.
Analyse your case and stay strategic
Personal use assets - If you lived on bitcoin as a personal use asset, you will be flagged as the ATO has no idea about the personal use nature of your disposals. You need to have everything ready to prove that the disposals were for personal use. Collect your tax invoices for those personal use purchases.
Crypto tax losses - If you didn’t bother to declare or your accountant did not think it would be important, now is a good time to get it done. The ATO can still decide you have a gain and it is in your best interest, in any case, to claim the loss.
Crypto-to-crypto trading - If you were an active trader it can be hard to do the calculations yourself and you still may not get the best tax outcome. We recommend you start getting your transaction history together now; export your transaction data from all locations. Engage with a professional to assist in doing the valuations and tax calculations or use a reputable crypto tax calculator.
ICO investments - It can be hard to reconcile the quantity and variety of ICO investments that some investors have made. Although it may have been exciting making those investments at the time, it may be not as exciting now with all tax related questions you have. Even though on-chain transactions are publically accessible, you still need to put all of your data together – a good starting point would be to create a spreadsheet with all ICO investments and links to the actual on-chain transactions for substantiation.
Self-assessment - In Australia's tax system, DIY is ok. Although any taxpayer is entitled to perform the calculations themselves, you may find it difficult and at the very least time-consuming. You can use a crypto tax-tool to help you in the process, but in most cases they are designed for foreign jurisdictions and the gains and losses are not correctly calculated. Be careful that all of your portfolio balances reconcile, and all transactions have been accounted for.
If you decide you need some tax advice and assistance from a professional, please get in touch. Our tax accountants at Kova Tax are specialised in cryptocurrency and are experienced in reconciling and advising on cryptocurrency investment and trading activity.