With tax time nearing, Australian cryptocurrency investors are on the ATO’s hit list for 2021-22. With around 16 million taxpayers, the Australian Tax Office (ATO) is using sophisticated data analytics and fact checking to verify the numbers on peoples’ tax returns or identify any omissions, such as profits made from cryptocurrency trading.

The ATO says it will also target undeclared profits on non-fungible tokens (NFTs), using data obtained from third parties such coin trading platforms to detect inconsistencies between individuals' tax returns and its own information.

“Crypto is a popular type of asset, and we expect to see more capital gains or capital losses reported in tax returns this year,” said Assistant Commissioner Tim Loh last month. “Through our data collection processes, we know that many Aussies are buying, selling or exchanging digital coins and assets, so it’s important people understand what this means for their tax obligations.”

So, before completing your tax return, here are five factors to consider if you have made gains or losses on cryptocurrencies.

Keep records

Investors buying or selling cryptocurrency need to keep accurate records of their cryptocurrency transactions. ATO data analysis shows a dramatic increase in cryptocurrency trading since the beginning of 2020, with an estimated 600,000-plus taxpayers having invested in crypto assets in recent years.

If you have traded and sold coins for gains, you need to declare these capital gains, and keep records of them. Use the market value of the cryptocurrency in Australian Dollars at the time of sale to calculate gains or losses. Trading platforms will keep data on this, for example BTC Market users can download a transaction statement in their account settings.

Be accurate with your numbers, the tax office is watching

The ATO’s cryptocurrency data-matching program is extensive; the ATO has collected data on cryptocurrency transactions from the 2014-15 financial year through to the present. The includes data relating to cryptocurrency transactions and account information from designated service providers (DSPs), which can be used to identify buyers and sellers of crypto-assets and quantify the related transactions. The ATO will match the data provided by DSPs against ATO records to identify individuals who may not be meeting their disclosure obligations.

“Ensure that you have correctly identified and recorded all of your crypto gains, as well as any crypto losses, to head off any future ATO data-matching of unreported transactions,” says Peter Bembrick, tax partner at HLB Mann Judd in Sydney.

“Cryptocurrency exchanges have had specific obligations to report transaction data to the ATO and other authorities since April 2018, and as in many other areas, the ATO’s information gathering processes are becoming more and more sophisticated so there is nowhere to hide and gains must be disclosed.”

If you have not exchanged your cryptocurrency for fiat currency yet, don’t think the ATO isn’t aware of your crypto finances. This is not the case, says Beau Mulder, OTC Manager with digital coin trading platform Swyftx.

“All registered digital currency exchange providers in Australia are required to comply with requests from the ATO for access to certain transaction and account details – this could include, but isn’t limited to linked bank accounts, associated wallets, assets including fiat on account, and so on,” he says.

“With the exception of cryptocurrency gain for personal use, where you’re purchasing items for personal use or consumption with cryptocurrency, the majority of gains and losses in relation to cryptocurrency will have tax implications. Your best bet is to contact a qualified accounting professional, preferably with experience or specialising in crypto tax to prepare your tax return.”

Use losses to offset gains, not income

Capital losses on digital coins can’t be used to offset income from employment or business activities, according to a recent warning from the ATO.

Noting the recent downturn in crypto markets that has seen Bitcoin and Ethereum prices more than halve from their November 2021 highs, Assistant Commissioner Tim Loh said: “Remember, you can’t offset your crypto losses against your salary and wages.”

Crypto trading losses can be used to offset capital gains. “If you have made capital gains from selling crypto, see if you have any unrealised capital losses on cryptocurrencies or other investments that could be realised before 30 June to offset the capital gains,” says Bembrick.

The ATO has a handy tool for those looking to track and calculate capital gains tax events

NFTs gains and income are taxable too

The ATO has made it clear that the income tax and capital gains tax (CGT) treatment of non-fungible tokens (NFTs) follows the same general principles as cryptocurrencies. That means that you will need to pay income tax on income derived from selling NFTs you create. Capital gains tax applies to any gains from profitably trading NFTs.

Don’t forget the 12-month rule

If you hold an asset for longer than 12-months, it may be eligible to apply the 50 per cent capital gains tax (CGT) discount.

So, if, for example, you are an Australian taxpayer and bought 1 Ethereum for $1,000 and you sell it for $2,500 two years later, then you’ve made a taxable capital gain of $1,500. However, your net capital gain will be discounted to $750 because you’ve held the asset for longer than 12 months.

If your cryptocurrency asset is worth less than what you originally bought it for, this is referred to as a capital loss. For instance, if you purchased 1 Ethereum at $1,000 and then sold it 6 months later for $500, your capital loss is $500. Capital losses can be used to offset capital gains.