A 2022 study by Roy Morgan found that approximately 1 million Australians aged 18 and over now own at least one form of cryptocurrency – so the prominence of bitcoin and other cryptocurrencies is still relevant. With the turbulence in the crypto market in 2022, and the collapse of FTX in late 2022, there are very real tax issues facing many Australian taxpayers with respect to crypto activities. Accordingly, it is important for taxpayers to understand the following key factors when seeking to claim losses related to their crypto activities:
- Losses must be realized: Only realized losses must be reported in the tax return. You must have actually disposed of the asset to realize a loss. Losses from market fluctuations that are not realized cannot be reported. For example, in March 2023 you bought 1 Bitcoin for $63,150. In March 2024, Bitcoin was worth $40,600. Despite a decline in value, you have not realized a loss until the Bitcoin is sold or otherwise disposed of. If sold, the $22,500 loss would be offset against any other realized gains or income depending on the nature of the holding and whether it is on a capital or income account.
- Loss realization schemes will expose you to penalties: Related party sales to crystallize a loss can be scrutinized by the ATO under the anti-avoidance tax provisions. The Commissioner of Federal Taxation may postulate that such steps are taken for the dominant purpose of obtaining a tax benefit – being the reduction in tax payable. When the Commissioner makes such a finding, the deduction will be denied and fines likely to be imposed.
- Compensation of losses: Exchange rate losses can be offset against exchange rate gains. They cannot be offset against income gains such as wages and salaries. Those who report on income accounts (for example, crypto traders) can offset losses against other income such as wages and salaries. It is crucial to ensure that you apply the correct tax treatment, and incorrect applications can lead to the Commissioner imposing fines as a result of non-payment of tax.
- Valuation of trading shares: For traders of cryptoassets, consideration should be given to the appropriate valuation method applied to cryptoassets to ensure that their closing balances appropriately reflect the value of assets held.
- Provisions for reversal of losses: Where the trade takes place via a company and losses occur, account should be taken of the provisions for the reversal of losses and whether these can apply to reduce previous years’ tax bills;
- Record keeping and full and honest disclosures are essential: The ATO has vast data collection resources. Therefore, it is important to maintain appropriate records of your acquisitions and losses. Furthermore, providing full and honest disclosures will reduce the risk of potential litigation in the future. If you are concerned about disclosures, please contact us to discuss potential voluntary disclosures that can be made to reduce penalties.
Tax loss rules are complex and become increasingly complex when assets are held by companies and trusts. It is essential to ensure that the correct tax treatment is applied and that appropriate losses are claimed to avoid penalties imposed by the Commissioner for Audit.
