An Australian crypto enthusiast paid five times the value of his coins in tax – and some Ethereum holders are also facing a huge bill under our crazy tax laws.
Experts have called for reform of Australia’s “unfair” and unclear Bitcoin and crypto tax laws.
Adrian Forza, the director of Crypto Tax Australia, said one of his clients had paid $100,000 in tax on coins worth just $20,000.
The shock bill came about because the Australian Taxation Office (ATO) rules require the value of the coins to be declared at the time they are received.
Forza explained his client had been paid in cryptocurrency for development work he’d performed for an overseas company.
He had to declare the $250,000 value of the coins when he was given them in January 2018 near the all-time high – but they were worth just $20,000 by the time his $100,000 tax bill rolled in.
“It was a disaster,” said Forza who has specialised in crypto tax law for two years now.
“That’s a really unfair outcome because he’s basically received cryptocurrency and the value has dropped significantly and now he has to pay tax on money he doesn’t have.
“This is something they will have to change as it is unfair.”
Ethereum isn’t original under crypto tax ruling
Forza said the tax office had also made some interesting crypto tax private rulings that many investors would be unaware of.
For example, the tax office considers Ethereum Classic to be the “original” coin and that anyone who held Ethereum during the fork and later sold it will be considered to have purchased the Eth for $0.
That means they will need to pay capital gains tax on 100% of the amount they received when they sold that Ethereum.
“In the crypto space people think of Ethereum as the original, but the ATO has said that Eth is the one that changed and ETC kept all of its original properties,” he explained.
Anyone who received Bitcoin Cash or Bitcoin SV in the forks will face a similar situation.
“Any coins you received as a hard fork that will have a cost base of zero,” he said.
If you’ve held the coins more than a year, you are entitled to a tax discount, however.
Greater crypto tax law clarity around masternodes and mining
Forza called for greater clarity over the crypto tax rules around profits made through investing in masternodes or mining crypto and the definition of trading versus investing.
Carley, who worked in the auditing division of accounting firm BDO for seven years, said that unlike in the overseas example above, Australian companies who paid their employees, or for services, in crypto were liable for the Fringe Benefits Tax.
“It makes it really unattractive because the company gets whacked by paying FBT,” he said. “The company will wear the costs of around 47 cents in the dollar.
“You might pay people in a stablecoin but the ATO’s interpretation is that it is not a currency, it’s a cryptocurrency, and it attracts FBT.”
He said the ATO needed better definitions around different types of crypto – stablecoins, cyrptocurrencies at security tokens.
He also called for a mechanism that would enable crypto holders to carry back losses from one financial year and offset them against gains made in a previous year.
“During the crypto boom some people crystallized some serious capital gains which they have put into another coin which is now 75% down,” he said
Carley said they should be allowed to offset those losses against the tax they have already paid.
Crypto tax laws around investing and payments
He added there needed to be better definitions around the cryptocurrencies people use for investment and crypto people use to pay for goods or services. “They guidance at the moment is that it is on you as a holder and if you get it wrong, we will penalize you,” he said.
Neither Forza or Carley believed it was likely the ATO will ever shift to taxing cryptocurrencies on a ‘fiat in, fiat out’ basis, which is a popular suggestion for crypto tax laws on social media.
“I think that would be the preferred method for a lot of people but I don’t see the ATO moving in that direction,” Carley said.
Lack of understanding of crypto tax laws
Forza said the biggest issue with cryptocurrency taxation wasn’t due to the laws themselves, but with the lack of understanding of the laws among crypto enthusiasts
“The demographic is 25- to 40-year-old males and a lot of them probably haven’t invested in shares or even seen an accountant before,” he said.
He encouraged investors to keep detailed records and to take advantage of online services such as CoinTracking, Independent Reserve’s tax calculator, and TaxToken.
While none of the services are “100% accurate”, due to differences in where they source the exchange rates from, Forza said they were accurate enough for most investors in the eyes of the ATO.
“The ATO only expects you to make a reasonable effort,” he said.
He added that investors should also periodically download their transaction histories from exchanges, as sometimes exchanges such as Cryptopia shut unexpectedly.
The founder of Facebook group Australian Crypto Tax Chat (who in true crypto style did not want to be named) agreed that a lack of understanding of tax laws was a big issue.
“They don’t understand the difference between trading and investing and they don’t understand that if they haven’t pulled it out (of crypto into fiat), how there is a taxable gain – they don’t understand they’ve made a profit by trading one coin to another,” he said.