A 2022 study by Roy Morgan found that approximately 1 million Australians aged 18 and above now own at least one form of cryptocurrency – the prominence of bitcoin and other cryptocurrencies therefore remains relevant. With the turbulence of the crypto market in 2022, and the collapse of FTX in late 2022, there are very real tax issues facing many Australian taxpayers with regard 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 realised: Only realised losses are to be reported in your tax return. You must have actually disposed of the asset in order to realise a loss. Losses from market fluctuations that have not been realised cannot be reported. For example, in March 2023 you acquired 1 Bitcoin for $63,150. In March 2024 that Bitcoin is worth at $40,600. Despite a decrease in value, you have not realised a loss until the Bitcoin is sold or otherwise disposed of. If sold, the loss of $22,500 would be able to offset against any other realised gains or earnings subject to the nature of your holding and whether it is on capital or revenue account.
- Schemes to realise losses will expose you to penalties: Sales to related parties to crystalise a loss may be scrutinised 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 attaining a tax benefit – being the reduction in tax payable. Where the Commissioner makes such a finding, the deduction will be denied and penalties likely applied.
- Offsetting losses: Capital losses can be offset against capital gains. They may not be offset against revenue gains such as salary and wages. Those reporting on revenue account (for example crypto traders) may offset losses against other income such as salary and wages. Ensuring you apply the appropriate tax treatment is crucial and incorrect applications may lead to penalties being applied by the Commissioner as a result of shortfalls in tax payments.
- Valuing trading stock: For traders of crypto assets, consideration should be given to the appropriate valuation method applied to crypto assets to ensure their closing stock appropriately reflects the value of assets held.
- Loss Carry Back Provisions: Where the trading occurs via a company and losses arise, consideration should be given to the loss carry back provisions and whether these can apply to reduce prior year tax bills;
- Record keeping and full and frank disclosures are vital: The ATO has vast data collecting resources. Therefore, maintaining appropriate records of your acquisitions and losses is important. Further, making full and frank 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 which may be made to reduce penalties.
Tax loss rules are complex and become increasingly more complex when assets are held by companies and trusts. Ensuring the correct tax treatment is applied, and appropriate losses claimed, is critical to avoid penalties being imposed by the Commissioner on audit.
If you have questions about your tax position, please contact our Tax & Structuring team.
This is an article in our Blockchain Byte series by KHQ’s Tax & Structuring team. The series provides ‘byte-sized’ articles outlining key tax and structuring associated crypto assets as well as updates in the Blockchain space which regularly occur. To register for the latest byte and other tax and structuring news, click here to subscribe.
