Cryptocurrency in the news … and in the ATO’s sights!!

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[Author’s note : This article in no way endorses or recommends investing in Bitcoin or any other cryptocurrency; nor does it endorse any software packages that may be mentioned therein}

On 8 February 2021 it was announced by Elon Musk’s Tesla company that it had bought $1.5 billion worth of Bitcoin in order to give it “more flexibility to further diversify and maximize returns on our cash.”  The company also stated that it will start accepting payments in bitcoin in exchange for its products.  This announcement, together with previous tweets by Musk, has been credited with raising the prices of cryptocurrencies by as much as 20%. 

News like this is having the effect of ‘legitimising’ investments in Bitcoin and other cryptocurrencies.  At least three ASX shares have direct exposures to bitcoin, such as RAIZ Invest Ltd which offers a higher risk investment option which includes ‘a 5% target allocation to Bitcoin’.  With the price of bitcoin increasing by almost 400 per cent in the past 12months it is attracting ever-increasing interest from investors.

So what is cryptocurrency?  It is a virtual, decentralised means of exchange, in the form of digital tokens created from a code using an encrypted string of data blocks (known as blockchain).  There are many different types of cryptocurrency with the best known being Bitcoin.  Others include Ethereum, Litecoin, Ripple, Stablecoin and Dogecoin.  Bitcoin was invented by a person or group in 2008 using the name Satoshi Nakamoto.  Bitcoins are created as a reward for a process known as mining (using computer processing power to solve complex mathematical problems).  They can be exchanged for other currencies, products or services on a peer-to-peer exchange network without the need for intermediaries, such as a bank.  Owners of cryptocurrency have a wallet which basically contains cryptographic keys to be able to store and use it.  It is often criticised as an investment for being highly speculative with few safeguards and a vulnerability to theft and scams.

With the rise in investing in and value of cryptocurrency, it is no surprise that the Australian Taxation Office (ATO) is also taking great interest in this area, wanting to ensure that taxpayers are declaring any income or gains they make correctly.  In June 2020, the ATO sent letters to some 350,000 cryptocurrency investors reminding them of their capital gains tax obligations on disposing of cryptocurrency after they have matched data obtained from crypto exchanges.

The latest ATO information can be obtained from their website at:

https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/

Here the ATO sets out how cryptocurrency is treated for tax purposes, which could include capital gains on disposals, ordinary income (from things like mining, staking rewards and airdrops) or as a personal use asset.

With the numerous different types of cryptocurrency and the new, often complicated types of transactions, such as ‘mining’, it may be worthwhile also subscribing to crypto-specific tracking and tax reporting software, such as Koinly, if you chose to undertake this type of investment.  Such software, together with good advice from our experienced team of tax professionals, will help ensure you record your crypto transactions correctly and keep the ATO ‘on side’.

Contributed by Peter Wheeldon, Senior Accountant, Strategem

[Author’s note : This article in no way endorses or recommends investing in Bitcoin or any other cryptocurrency; nor does it endorse any software packages that may be mentioned therein}

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