Almost a decade ago, one of Lisa Greig’s clients told her that he had invested cryptocurrency within his self-managed super fund (SMSF).
At the time, crypto was still relatively new and unregulated. The fact that the client had integrated it into such a highly regulated vehicle as an SMSF made her realise it was time for her to develop a deeper understanding of the compliance implications.
This encouraged her into a long and fascinating educational journey through the world of crypto taxation, including the completion of an RMIT certification on blockchain, the technology behind decentralised, digital currencies.
“I have delved right in so that I understand the technology, but it’s always changing,” says Greig, a Fellow of the Institute of Public Accountants and founder and Principal of Perigee Advisers.
“There is a lot to understand. But probably most important is for an accountant to realise when they have reached the limit of their knowledge. Then it’s time to hand it over to an expert.”
What happens with crypto at tax time?
For tax purposes and at their most basic, crypto investments are treated by the Australian Tax Office (ATO) the same as shares, Greig says. But that is only at their most basic.
“With a share, you can hold it for investment purposes, or you can be a day trader. We’re all comfortable with those terms,” Greig says. “With crypto, you can also hold it for investment, or work as a day trader.”
“So, it’s the same principle. If it’s held as an investment, it’s on capital, which means we have to deal with it under the capital gains tax regime. If it’s day trading and that day trading is being run like a business, we’re going to treat it under the revenue regime. We’re going to basically bring in the profits and claim any losses against any other income like salary and wages.”
How does an accountant determine the difference between an investor and a day trader?
If crypto trading is frequent, is of a considerable amount, is systematic using significant skills and knowledge with lots of time spent, and it is operated as a business and can be proven to be so, income or losses could be classified as revenue.
If the crypto is held long term by an individual, it is treated as a CGT asset, including the 50% CGT discount if held for over 12 months.
Importantly, Greig says, the ATO is more likely to look more deeply into the individual’s or business’s accounts if they have claimed the crypto trading as business, as any losses can offset other types of income, similar to the way negative gearing of investment property works.
What about crypto mining?
There are various other activities around cryptocurrencies, including mining, staking and wrapping, each of which an accountant handling more detailed crypto tax treatments must be aware of.
- Mining is a process of validating and finalising transactions on blockchain networks, adding them to a public ledger, which also releases new coins into circulation.
- Staking is similar to putting a fiat currency into a term-deposit account, where rewards are earned by locking tokens, for a period, in place on a blockchain network to help the network run smoothly.
- Wrapping creates a representation of a cryptocurrency that can be used on a different blockchain.
“Blockchains are like motorways where you need a specific type of car to drive along them,” Greig says. “So, you might need different tyres on your car to drive on a different motorway. That is what wrapping is all about.”
“These practices all require highly specialised crypto knowledge to apply the correct tax treatment. When you’ve wrapped a token, have you disposed of it, or not? Are you going to get the same token back? The ATO says you’ve disposed of it, but other crypto experts might say you have not.”
There is no simple answer to tax queries around such matters. But the deeper an accountant’s understanding of crypto, and of the technologies that drive each currency, the better a discussion they can have with clients and the ATO.
Can software help crypto accounting?
Two pieces of software have been designed to help automate the management and reporting of crypto data for the purpose of tax reporting.
Koinly is a global crypto tax solution that claims to be Australia‘s number one crypto tax tool.
The other, Crypto Tax Calculator, was developed in Australia and follows ATO tax guidelines.
Both are useful, Greig says. However, each might provide different results based on various settings, so the accountant must fully understand what is going on.
Most important, for the sake of their clients, is that accountants understand where their own knowledge runs out and when it’s time to recommend expert tax treatment.
“It can be a good idea to separate your clients into categories, depending on how invested they are in crypto assets,” she says. “If you have someone holding on to a few tokens, most accountants can treat that for CGT and that will likely be fine and easy to reconcile.”
“But anything more sophisticated than that – just like working on SMSFs, R&D offsets or international tax and cross-border transactions – you have to use your professional judgement and ask if you have the skills, experience or knowledge to understand how the tax treatment should be shaped. If not, they need to go to an expert.”
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