Cryptocurrency and digital assets – practical issues for accountants and advisors

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Taxation of cryptocurrency and digital assets is no longer an area that can be overlooked by accountants and advisors. According to the ATO, trades in cryptocurrency leapt by 64% in 2021 with more than half a million Australians buying, selling or exchanging digital coins. The ATO has been using data matching on cryptocurrency since 2019 using transactions going back to 2014.

Potential issues relating to cryptocurrency

The tax issues relating to cryptocurrency are not in themselves complicated – the capital vs revenue distinction of assets are well established tax concepts and apply to cryptocurrency and digital assets in a similar manner to investments in shares. Instead, the complexities in dealing with these assets are practical in nature.

Before the tax issues in relation to cryptocurrency can be resolved, it is firstly necessary to understand the transactions that may give rise to such tax issues. Consider, for example a fairly standard cryptocurrency transaction involving trading or exchanging coins from one digital currency to another, say from Bitcoin to Ethereum. In this transaction, the owner of the currency has realised a gain or loss into AUD.

For tax purposes, the trading or exchange of a currency triggers a taxing event – whether this is on capital or revenue account, as there is effectively a disposal of an asset. Clients may not be aware of this and for accountants reviewing cryptocurrency trading for clients, it may not be obvious that the transaction has occurred.

Further complications 

To further complicate the matter, there are likely foreign exchange (forex) issues to consider upon clients trading in cryptocurrency. The initial entry into a trading platform often requires a deposit of AUD into e.g. USD. Subsequent cryptocurrency trades on these platforms then potentially trigger forex events. Upon funds being transferred back from the platforms, there will also be forex conversions back to AUD.

Looking ahead

It is important that clients understand the difficulties involved in working out the practical issues for cryptocurrency trading. Clients may not be aware of the time and effort required to determine the various taxing points when trading such assets and may therefore not be expecting a rise in their accounting fees.

If you have any queries in relation to the above, please contact Gaurav Chitnis.

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