Smart individuals and businesses need to be alert to the ATO’s recently announced cryptocurrency-specific data-matching program, which boosts the ATO’s ability to identify taxpayers which have not complied with their crypto tax obligations.
There are major risks because many cryptocurrency users are often vague on their tax obligations, and significant penalties apply to those who haven’t paid the right amount of tax and haven’t made reasonable attempts to comply.
Penalties can range from 25-75% of the unpaid tax bill, and be even higher where the taxpayer’s behaviour or compliance approach is considered fraudulent, plus interest on the unpaid tax.
The more reckless or dishonest the behaviour, the higher the potential penalties.
Data matching shows the ATO means business
The ATO can now obtain data from service providers which facilitate the buying, selling and transfer of cryptocurrency, including Australian-based exchanges and over-the-counter providers, via its data-matching program.
The ATO is also likely to access information from foreign-based financial institutions involved with cryptocurrency, via automatic exchange of information rules such as the Common Reporting Standard, which requires organisations to collect information about users’ identities and share the information with the relevant tax revenue authority.
The ATO is able to cross-check what is reported in a tax return with what the data says to identify where taxpayers are not reporting their cryptocurrency gains and losses correctly (either by mistake, recklessness, fraud or dishonesty).
While the ATO’s data-matching protocol only relates to the 2015-2019 income years, there is nothing stopping the ATO reviewing or auditing a taxpayer’s affairs for earlier income years where appropriate.
Will business owners and startups be affected?
Firstly, business owners, entrepreneurs and startups must remember transactions on a blockchain are not anonymous, but pseudonymous. This means the ATO may identify taxpayers through forensic techniques and by using their information access powers, say with a bank, to identify corresponding value flows connecting a cryptocurrency transaction to you.
Businesses accepting cryptocurrency as payment for goods and services, or paying staff in cryptocurrency, need to ensure they understand the ATO’s guidance about the tax treatment of cryptocurrency used in business and understand how the tax law applies to their circumstances. Note the ATO has just updated its web guidance.
Cryptocurrency-trading businesses will need to ensure they are applying the trading stock rules correctly. In large part, many individuals would be viewed as carrying on a cryptocurrency-trading business as a sole trader.
Just because a business of cryptocurrency trading is going on, it does not necessarily mean all of the cryptocurrency is held as trading stock. In some cases, cryptocurrency holdings are better characterised as held like cash at a bank, or held as an investment (and subject to the capital gains tax rules). Note the ATO’s current view (per public rulings issued in 2014) is cryptocurrency should not be treated as currency or foreign currency for tax purposes.
Entrepreneurs who are funding their ventures or other investments from wealth made out of cryptocurrency gains should ensure the tax treatment of any gains is accurate to avoid a surprise tax bill that could hurt the progress of their venture or the ability to continue holding investments.
Blockchain-based startups should seek tax advice, particularly if they have issued tokens (publicly through an ICO or IEO, or privately to investors, advisors and staff) or have issued instruments such as Loan Agreements for Future Tokens (LAFTs) or Simple Agreement for Future Tokens (SAFTs).
If you are engaging with online games using cryptocurrency, your gaming activity could also interest the ATO.
Operating a cryptocurrency exchange in Australia
Under the ATO’s data-matching program, the ATO must comply with privacy laws when collecting data from other agencies and organisations. If you are asked to be a data provider to the ATO and feel you may be in breach of privacy or other laws or obligations to your customer base, seeking legal advice is recommended.
Cryptocurrency exchanges should ensure their terms and conditions and privacy collection statement are adequately drafted so clients are aware of the exchange’s obligation to provide information to relevant authorities when requested, including the ATO and AUSTRAC.
How smart individuals and businesses can protect themselves
The ATO has said they will contact people to clarify information that has been obtained. We recommend seeking tax advice and speaking to your tax adviser or agent before responding to the ATO.
Taxpayers should consider the merits of voluntary disclosure regarding their crypto gains as this could reduce the risk of significant penalties.
Now, more than ever, it is important to get the right advice before lodging your FY19 tax return and before you receive contact from the ATO.