More than 600,000 Australians have purchased cryptocurrency assets in recent years, and undeniably many of them need some advice as we head towards tax time.

While the Australian Taxation Office (ATO) has been watching cryptocurrency for years, their data analysis shows a dramatic increase in trading since the beginning of 2020, so it will be a key focus in scrutinising this year’s income tax returns.

The ATO is planning to directly contact about 100,000 taxpayers with cryptocurrency assets explaining their tax obligations and urging them to review their previously lodged returns.

Many taxpayers mistakenly believe their gains from cryptocurrencies like Bitcoin and Ethereum are tax-free or only taxable when the holdings are cashed back into Australian dollars, but they are in fact treated similarly to gains from other investments such as shares.

Movements within a digital wallet also count, so it’s wrong to think tax is only payable once all of your cryptocurrency holdings have been sold.

Generally, if a taxpayer buys, sells, swaps, or exchanges one cryptocurrency for another, it will be subject to capital gains tax (CGT) and must be reported in your tax return.

It’s a big mistake to think that because cryptocurrency seems to operate in an anonymous digital world, your transactions won’t be seen by the ATO.

Cryptocurrency transactions are being closely tracked by the ATO, which matches data from cryptocurrency designated service providers, banks, and other financial institutions to an individual’s tax return.

The best tip to nail your cryptocurrency gains and losses is to keep accurate records, including dates of transactions, the value in Australian dollars at the time of the transactions, what the transactions were for, and who the other party was, even if it’s just their wallet address.

For businesses (sole traders, partnerships, companies, and trusts) that are paid cryptocurrency for goods or services, these payments will be taxed as income based on the value of the cryptocurrency in Australian dollars at the time of the transaction.

Failure to report on cryptocurrency assets and not taking action when reminded will prompt penalties and potentially an audit.

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