Australia’s love for digital assets

Cryptocurrencies were once more of a taboo than an investable asset class - however, in recent years, the adoption of virtual currencies hit the mainstream. With the prominence of Bitcoin being held on corporate balance sheets, NFTs (Non-Fungible Tokens) being sold for tens of millions of dollars, and DeFi (Decentralised Finance) paving the way for on-chain borrowing and lending with no third party, the crypto space matured into more than just cryptocurrencies.

Roy Morgan conducted a survey in early 2022 which found that over one million Australians own at least one type of cryptocurrency. This is also consistent with the ATO’s own estimate, as outlined in a recent treasury statement. A statistic that may be unsurprising for some, although possibly more interesting, was that the average investment value came in at just over $20,000.

The bulk of crypto investments are held by 18-34-year-olds; however, older Australians aged 50-plus hold the largest average investment by value, with average holdings exceeding $56,000.

The past financial year saw crypto assets reach a market capitalisation of nearly US$3 trillion, while it now sits around US$1 trillion on the back of a global economic downturn. Regardless of if the bubble has burst or has more yet to come, accountants and tax professionals are being increasingly pushed into the crypto taxation space rather than actively seeking to address crypto-related matters. Perhaps this is unsurprising given the technicalities associated with understanding crypto, let alone the taxation implications.

Retail investors are seeking guidance, and many are unaware of tax obligations pertaining to their crypto investments. So what is the ATO guidance, and what tools can tax professionals arm themselves with in order to meet the increasing needs of their clients?

Crypto’s tax and regulatory landscape in Australia

Whilst crypto assets have been largely unregulated, Australian regulators have taken note of digital assets and recognised they are here to stay. Most recently, the Albanese Government announced in late August that it would undertake a “token mapping” exercise in an effort to identify and distinguish digital assets that are covered by existing financial services law and determine other non-financial products that may require new legislation. ASIC has also included crypto assets within its ‘core strategic projects’ for 2022-2023, highlighting the need for consumer protection.

Treasury and the ATO have clarified that crypto would continue to be treated as a Capital Gains Tax (CGT) asset for taxation purposes for ordinary investors. However, there are also instances where individuals can earn income through activities including airdrops, interest from staking, and yield-farming, where taxpayers are guided to treat such activities on revenue account, notwithstanding the underlying asset will be treated on capital account when sold. ATO guidance has recently been updated to refer to the term ‘Crypto Assets’ rather than use Bitcoin as the basis of its guidance which recognises the broader utility and diversity of the crypto ecosystem. 

There remains a significant level of uncertainty as to the tax treatment of Crypto Assets for tax professionals. There are an increasing number of Australians who engage with complex protocols in the Decentralised Finance (DeFi) or gaming (GameFi) space who are seemingly unaware of the tax implications of engaging with the protocol. 

Current ATO guidance is limited in this regard, and clarity is sought by the industry. In August, the Board of Taxation released a consultation guide seeking public input on their review of the tax treatment of digital assets. The Board is due to report its findings to the Government at the end of 2022.

How crypto tax tools can help this tax season

Following the influx of crypto investors adding everything from NFTs to DeFi tokens through to receiving airdrops and staking rewards - trying to consolidate potentially thousands of individual crypto transactions into one report can be immensely time-consuming. It is common for crypto holders to have their assets held across multiple applications, wallets and exchanges - with the preferred approach to often enable “self custody” of crypto assets through cold storage wallets such as Trezor or Ledger devices.

Crypto tax tools like Koinly allow investors and their accountants to quickly and easily import transactions and generate tax reports from the past financial year, streamlining the countless hours this may take if done manually.

With over 700+ integrations across the most popular cryptocurrency exchanges (such as Binance, Swyftx, CoinJar and CoinSpot), wallets and blockchains, Koinly is one of the most trusted crypto tax tools for Australian accountants and tax professionals.

This financial year, aside from their focus on crypto asset gains, the ATO stressed the importance of keeping proper records of disclosures made in tax returns. This extends to the crypto space, where investors may have transactions split across dozens of wallets, exchanges and blockchains. 

Crypto tax resources and guides

The crypto space is constantly evolving, with regulators striving to keep up. In addition to the Accountant Platform for crypto portfolio tracking and generating crypto tax reports, Koinly also maintains an Australian Crypto Tax Guide for Accountants, which is updated based on the most recent guidance and regulatory changes. 

Danny Talwar, Koinly’s Head of Tax, stated, “With the adoption of digital assets on the rise for individuals and businesses, there is an increased demand for taxation professionals across the board.”

Look out for Danny at The Tax Summit at the Sydney ICC between 19–21 October 2022. He will be facilitating discussions as part of The Tax Summit’s dedicated digital and tax technology topics.

Danny will share his breadth of experience across the burgeoning digital asset space, in conjunction with insights from crypto tax software Koinly. These sessions will be insightful for anyone interested in expanding their offering or just learning more about digital assets and the crypto space.