Life after the crypto crash
With crypto markets down around 50% in the past month, and over 70% from their highs in late 2021, many crypto investors may now be searching for answers after their profits from the last few years have evaporated into the ether.
Recent announcements of layoffs have come from several major crypto exchanges, including Coinbase, Gemini, BlockFi, and Crypto.com, as investors and companies brace themselves for a “crypto winter”.
Here are five top tax tips to consider after the recent crypto crash.
Loss harvesting allows investors to claim their capital losses by recognising and selling their assets at a capital loss. These capital losses may be carried forward against future capital gains over multiple financial years.
This means if you have an unrealised loss, and you do not crystallise it by selling before the end of the current financial year (30 June), you won’t be able to take advantage of this capital loss until next year’s tax return.
With less than two weeks until the end of the financial year, deciding what may be right for you is an important consideration. However, be careful of wash sales which involve selling assets at a loss to claim a capital loss this financial year, then immediately repurchasing them.
When it comes to crypto taxes, be careful to understand if you are a crypto investor or trader in the eyes of the ATO. If you’re a crypto investor, you’ll usually be making casual buys and sells over time, with gains mostly seen as capital gains. If you’re a crypto trader, you’ll likely be transacting on a daily basis and in a business manner, trying to outperform the broader crypto market performance. In this instance, you may need to pay income tax rather than capital gains tax. If you are unsure, it is important to seek proper advice from a qualified accountant.
Ahead of this tax season, the ATO highlighted four key priorities, one of which is record keeping. The ATO recommends keeping records for at least five years and allows the use of 'third-party software to help meet record-keeping obligations and working out your tax' (this may also be tax-deductible).
With many crypto investors looking to keep track of their digital assets across dozens of different wallets, and hundreds of blockchains and exchanges, it can be a headache come tax time. Crypto tax calculators can help connect wallets, apps and exchanges all in one place.
Be aware of taxable events
The second of the four priorities for the ATO this tax season is capital gains tax on crypto and NFTs. It’s crucial for crypto investors to remember that most crypto transactions are taxable, even swaps between tokens and stablecoins, such as exchanging ETH for USDC. The ATO views this as a taxable disposal of ETH and the purchase of another capital gains tax asset, USDC.
Every time one of these taxable events is triggered, you’ll need to know the cost basis of each token (the cost you bought it at plus any associated fees). On disposal of the asset, you’ll need to work out your gain or loss. This may mean trades from last year result in capital gains, while more recent trades could result in capital losses.
The ATO has issued guidance on their view on simple crypto transactions, and there is not yet formal guidance for the tax treatment of Decentralised Finance or DeFi transactions. The DeFi space is moving fast, and it can be tricky for investors to understand their tax obligations when filing a tax return, so don’t assume that your DeFi transactions aren’t taxable.
The ATO can track your crypto gains
Don’t fall into the trap of holding crypto and thinking you can hide from the ATO. Blockchains are transparent and traceable, and ATO now has data matching programs with most major Australian exchanges, including transaction history, buys and sells, deposits and withdrawals.
What can the ATO find out?
Your data is likely already on file with the ATO if your exchange is a designated service provider (DSP). The ATO can obtain the ‘know your customer (KYC) information you provided when signing up for an Australian exchange, meaning they can obtain access to personal information and transaction data such as:
- Phone numbers
- Bank account details
- Transaction dates
- Asset types
- Transaction values
Keep up with the latest guidelines
The crypto space may seem to be moving at a rapid pace, and regulators are attempting to maintain pace. Everything from staking, DeFi and DAOs - the ATO’s guidance can be limited across some areas, while the complexity and level of innovation in crypto can be enormous. It may be worthwhile consulting with an accountant to ensure you have the proper interpretation.
*Danny Talwar, Head of Tax at Koinly, is a chartered accountant and taxation advisor with experience across both European and Australian markets. Danny has experience working with multinational companies in the digital asset and blockchain industry, and is a thought leader on the taxation issues faced by companies and individuals, particularly in light of recent ATO guidance on cryptocurrency. In his role at Koinly Australia, Danny guides the team, liaises with key government bodies, and acts as a spokesperson for upcoming legislation changes.