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INTRODUCTION
Cryptocurrency is a digital currency that, similar to physical cash, serves as a means of buying goods and services. It also presents an opportunity for investment, with people acquiring it for the aim of gaining financial returns. ⁠Cryptocurrencies and crypto assets comprise a range of digital assets utilising cryptographic techniques for digital security, coupled with distributed ledger technology for the permanent recording of transactions. These assets can be present on a blockchain, a digital ledger that archives details of every crypto transaction. Numerous blockchains, including prominent ones like Ethereum, Bitcoin, Cardano, and Polkadot, exist, with ongoing development of new ones. The advantages of trading Cryptocurrency include: diversity⁠, accessibility⁠, security & privacy⁠, transparency⁠ & ease of use⁠. Crypto is that it’s notoriously volatile. It can also be subject to cyber attacks & the potential of hacking.
COMMON TERMS
Two phrases you may come across quite often are cryptocurrency and crypto assets. While inherently similar as they both exist on the blockchain, there are some differences. It is important to note that currently, from an accounting perspective, both have the same implications. A cryptocurrency tends to be a form of digital currency, whereas a crypto asset includes things such as non-fungible token (NFTs), utility tokens, security tokens and more.

The cornerstone of blockchains such as Ethereum are smart contracts. Smart contracts are agreements in the form of computer code that is programmatically designed to execute when certain requirements are met. Blockchains are made up of smart contracts, which is how they remove the need for a financial intermediary. It also means they are indelible and cannot be changed.

Typically, cryptocurrencies and crypto assets are stored on either a hot wallet or cold storage. Both have benefits, but people choose to alternate between the two depending on the level of security they require. A hot wallet is a crypto wallet that is connected to the internet, for example, a MetaMask wallet. Cold storage however, is stored in an offline environment. This may be in the form of a USB device or similar.

Security is key in the crypto world. In an industry that’s built on complex coding, there is always the opportunity for bad actors. As a crypto trader, there are several measures you can take to protect your assets:

• Use two-factor authentication for accounts.
• Back up your seed phrase (the group of random words generated by your crypto wallet when you first set it up).
• Use a strong password.
• If dealing with large amounts of value, consider using cold storage.
• Check the URL of the website you’re interacting with.
• Never share your private key (a string of random characters that will grant you access to your funds) with anyone.

The ATO has released its Crypto glossary which provides further information on current terminology.

CAN THE ATO TRACK YOUR CRYPTO?
Yes! The ATO has the capability to track the movements of your crypto investments, thanks to databases that store crypto-related information dating back to 2014. If you hold an account with an Australian exchange or use an Australian wallet, it’s highly likely that the government is informed about your crypto transactions. Furthermore, the ATO employs a data matching program in collaboration with Australian exchanges⁠.

COMMON CRYPTO CGT EVENTS
As cryptocurrency and assets are considered property, capital gains tax events occur when a disposal is actioned. A disposal is considered to occur when the beneficial owner of an asset changes.
Disposal events include:

• Selling crypto for fiat currency
• Swapping one crypto asset for another crypto asset
• Using cryptocurrency for goods and services
• Gifting crypto

The 50 % discount for assets held longer than 12 months also applies to crypto assets. The ATO has also provided guidance on what constitutes a personal use asset in relation to cryptocurrency.

COMMON CRYPTO INCOME TAX EVENTS
While cryptocurrency transactions typically attract Capital Gains Tax (CGT), there is also the potential for income tax obligations based on the specific nature of the activity. Some instances of crypto-related activities where rewards and profits are subject to ordinary income tax include:

• Receiving all or part of your salary in cryptocurrency
• Selling NFTs as a creator
• Earning interest through yield farming
• Receiving rewards from participating in liquidity pools
• Earning rewards from engaging in play-to-earn games
• Utilising crypto lending platforms to generate interest
• Receiving airdrops & earning staking rewards.

Decentralised finance (DeFi) has introduced a range of potential tax implications, removing intermediaries from financial processes to reduce costs and increase consumer returns. With control over assets on the blockchain, users can lend, borrow, or trade without involving traditional financial institutions. This decentralisation allows individuals to lend out crypto assets and borrow them, with opportunities to participate in activities like staking protocols, earning Annual Percentage Yield (APY) at rates distinct from traditional avenues. As of now, the Australian Taxation Office (ATO) has not provided formal advice on DeFi beyond information available on the ATO Community Board.

Another emerging process is the use of wrapped tokens. In Australia, there is a widely accepted view that wrapping a token constitutes a disposal event through a crypto-to-crypto swap. However, the ATO has not issued formal guidance on wrapped tokens, with information primarily available through the ATO Community Board, aligning with the general consensus regarding disposals.

TAX TREATMENT OF CRYPTO
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In Australia, a crucial distinction between cryptocurrency and fiat money, such as the Australian dollar, lies in the categorisation by the ATO. Cryptocurrency and/or crypto assets are regarded as property rather than currency, resulting in taxation rules aligning with general asset guidelines. The specific tax implications will vary based on the nature of the interaction with the crypto asset in question. To assess whether a taxable event has occurred, consideration must be given to the client’s purpose for holding the asset.

Are you:
• Engaged in a crypto asset business?
• Investing in crypto assets?
• Holding the crypto purely for personal use?

This determination significantly influences the tax treatment of their activities. Different types of transactions may trigger taxable events, and it’s important to note that the scale of transactions, level of activity, or trading sophistication doesn’t automatically classify someone as conducting a business. The ATO offers a comprehensive list outlining the tax implications for businesses using crypto.

The tax treatment of cryptocurrency and/or crypto assets for personal use or consumption may be exempt if it’s evident that the asset was not employed as an investment, for profit-making purposes, or in the course of conducting a business. The ATO has provided a video covering the tax treatment of cryptocurrencies and assets.

LOSS & THEFT OF CRYPTO ASSETS
Evidence is required to prove where a crypto asset is lost or stolen to claim a loss. The ATO guidelines sets out that proof of ownership is required, as well as proof of the loss or theft. Where a crypto exchange or platform is in administration, no loss is available until the administration is complete. Loss or theft of a crypto asset in this way could give rise to a capital loss but this is quarantined to be offset against capital gains.

RECORD KEEPING
It is important that you retain ALL your crypto transaction records. Monitoring the transactions of crypto assets can be difficult.  It is important that you retain CLEAR evidence of every transaction. The ATO has guidance on keeping crypto records. You’ll need to keep records for each transaction such that each income and/or CGT event can be calculated.  This record keeping can be undertaken in a variety of ways, including specialist crypto asset software which will assist in the tracking of:

• Transaction dates
• The value of the cryptocurrency and/or crypto asset in Australian dollars at the time of the transaction
• Details of the transaction and the identity of who you traded with
• Receipts when you buy or transfer cryptocurrency and/or crypto assets
• Exchange records (which can be downloaded directly from the exchange in question)
• Records of agent, accountant, and legal costs
• Digital wallet records and keys
• Software costs that relate to managing your tax affairs.

The ATO recommends where possible to keep tangible items that prove your assertions in case of an audit. For example, copies of your transaction history (e.g. a downloaded comma separated values (CSV) file from an exchange such as Binance and bank statements that show the transfer of funds).

The more tangible records, the better!!!

Some exchanges provide their users with CSV formatted documents that aggregate the details of their trading activity. While this is convenient, you will still need to collect details across all platforms you’ve interacted with and confirm that all the necessary data is present. If you do not want to use a crypto tax software provider, you can maintain a manually updated list of your transactions. This would exist in a spreadsheet and would need to have all the aforementioned details on what the ATO considers necessary for record-keeping purposes.

Should you have any queries about the tax implications around your crypto or should you need help with how these impact your tax return, don’t hesitate to get in touch our team.

Our team are here to help you navigate the complex world of Cryptocurrecy.