There is a notable surge in cryptocurrency investment, with the value of cryptocurrencies experiencing exponential growth since its inception a few years ago. Presently, Bitcoin stands at an impressive value of approximately $70,000 per unit. In light of this remarkable increase, understanding the intricacies of cryptocurrency tax becomes imperative to ensure that your investment journey also aligns with the regulatory requirements, thereby keeping the Taxman content.
There are two myths about cryptocurrency trading. The first fallacy is that many people believe that you only need to pay the tax when you dispose of the cryptocurrency for cash, and the money hit their bank account. The second fallacy is that you are entitled to the 50% CGT discount if you dispose of the cryptocurrency.
Well, today, EndureGo Tax will explain the two fallacies. As a leading professional and experienced accountant and tax agent in Inner West Sydney and Adelaide, we helped many clients with cryptocurrency taxation. We highlighted to the clients that the greatest difficulty with the taxation of cryptocurrency is record keeping.
Many investors would often buy one format of cryptocurrency and then sell that to buy another digital currency and then repeatedly do the same thing. Buying and selling would create a huge complexity in the taxation of cryptocurrency. At the time of disposal of one digital currency, it makes a capital gain event, which will lead to potential capital gains tax. For example, if the investor purchases dogecoin for $100 per unit, buy 10 unit, sell that, and buy bitcoin on 30 June 2021 for ten units at $500 per unit, then in FY2021, he has a capital gain of $4000. He needs to pay that tax, even though he did not crystalize to the cash. If he did not report it, and later on, the ATO audits him, then there is a potential shortfall tax penalty of 25%, 50% or 75%, and interest.
The other fallacy would be with the automatic entitlement of the 50% Capital Gain Discount if you held the asset for more than 12 months. However, the investor would buy and sell the coins many times. It is hard then to perceive it as capital gain but more trading gain, and if that is the case, you need to have an ABN number, and you can not enjoy the 50% capital gain discount then.
In addition, if you are a non-tax resident, and you purchased these asset post 2 May 2012, you can not enjoy the 50% CGT discount on the disposal of the Australian Taxable Property.
With the rampage of COVID-19, the difference between tax residents and non-tax residents becomes very blurred. Many ex-pats who lived and worked overseas for many years before COVID-19 had returned to Australia due to COVID-19. They had decided to come back to Australia to live and work. The ATO can issue an audit letter to them to challenge them on their tax resident status and ask them to pay back the many years of tax they incurred while working overseas.