Lodging Your Crypto Tax

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By Danny Talwar

Last month, the Australian treasurer reaffirmed the existing Australian Taxation Office (ATO) position that ‘Crypto is not taxed as foreign currency,’ rings in at the right time.
On the back of the recent falls in the price of bitcoin and cryptocurrency more generally, the newly elected Labor government has sought to “clarify” its position on the matter.
Perhaps clarity is sought as many investors are nursing capital losses and wondering if they can be used to offset ordinary income.
In one of the first crypto-related statements since the Australian Labor Party came into power, it was great to hear that the government will continue to take a pragmatic and timely approach to its role in the rapidly-evolving digital currency landscape.
Taxpayers and accountants will look forward to seeing what more clarification the new government can provide in the rapidly evolving digital asset space.

What the latest announcement means for investors

First up, as previously stated the announcement provides many a welcome clarity as many investors are nursing capital losses and wondering if they can be used to offset them against their earnings. As an investor, losses on capital assets can only be used to offset gains on other capital assets such as shares.
The Treasurer’s comments are crystal clear – Bitcoin is not taxable as a ‘foreign currency’ which reaffirms the ATO position that crypto assets are treated like shares and other financial investments, (i.e a Capital Gains Tax asset).

Predictions and insight on further “clarifications” the new government can provide

Whilst the recent announcement provided some ‘clarification’, further guidance is sought on more complex crypto-asset transactions. ATO guidance has specifically addressed cryptocurrency guidance in the context of bitcoin, however, more clarification is needed on technical areas, particularly as the pace of innovation in the sector has led to a change in ways people are interacting with crypto assets (for example GameFi and DeFi).
Whilst investors will be paying capital gains tax when they sell crypto assets, there are also a variety of ways in which investors can ‘earn’ crypto where it can be treated as ordinary income. For example, staking rewards are seen as income in the eyes of the ATO. However, complex DeFi protocols exist where staking rewards may be locked, investors are also providing liquidity and this currently means they are likely to have multiple taxable disposal events – these complex transactions have not yet been considered by the ATO.

How investors can take steps to recover losses experienced in the crash

It is important to remember that if you sell your crypto assets at a loss, it is possible to offset these losses against any capital gains which you have made. If you do claim any losses, it’s important to keep proper records of all your crypto transactions so that you can provide evidence to the ATO if requested.
However, beware of the ‘wash sale’ rules! The ATO Assistant Commissioner has released a statement warning those who sell and reacquire a capital asset in a short space of time. A wash sale is considered to be a form of tax avoidance whereby investors sell and repurchase the same asset to “artificially increase their losses and reduce gains or expected gains”. Many investors will be nursing capital losses following the recent interest rate rises and global economic instability rattling financial markets.  Crypto markets, in particular, have taken a hit, reaching record highs of nearly $3trillion in November 2021 to dipping below $1trillion.
It is important to remember the ATO will be tracking crypto transactions and have access to data through crypto-asset exchanges. The Assistant Commissioners’ announcement went on to explain that the ATO will use “sophisticated data analytics” to identify wash sale transactions. Investors should ensure they keep proper records to support any claims made at tax time.

About the author: Danny Talwar (pictured above) is the Head of Tax at Koinly. This is an opinion column. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of this publication.

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