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Cryptocurrency – Thinking Outside the Blockchain

Blockchain technology is by no means a new concept, but its recent explosion in the mainstream consciousness (particularly around DeFi, NFTs and the price of Bitcoin) makes it worthy of further consideration – especially from a cryptocurrency tax and compliance point of view. The scope of blockchain-based activity is incredibly complex – it’s not as simple as buying & selling and keeping an eye on a potential bubble burst. Many crypto investors and speculators fail to understand the importance of things like effective structuring, the potential imposition of penalties by the ATO if compliance requirements aren’t met, protective measures, data-matching, and much more!

Cryptocurrency – Staying off the ATO’s Radar

Unfortunately, many crypto holders simply aren’t aware of cryptocurrency tax and compliance obligations. Ahead of June 30, the ATO are sending around 100,000 letters to those known to be holding cryptocurrency, advising them of their obligations. This is indicative of the growing power and reach of their data-matching program, where they can better identify and stamp out any activity that intentionally or unknowingly result in you failing to satisfy your tax obligations.

For those who have not yet voluntarily disclosed their cryptocurrency income or profits, shortfall penalties of up to 90% could apply in the most extreme circumstances. Also note the possibility exists that 75% of any tax shortfall may be applied where the ATO issued a ‘default assessment’ where it uncovers cryptocurrency transactions that have not previously been disclosed.

You don’t need us to tell you that these are significant figures – ones which can completely derail any profit you may derive from crypto and ruin the investment you’ve made. That being said, these penalties can be totally avoidable (or significantly reduced) by doing the right thing from the outset or making a voluntary disclosure if you have fallen behind with your obligations in the past.

The most important thing is to make a voluntary disclosure to the ATO, enjoy the peace of mind it will bring, and reduce the potential imposition of non-disclosure penalties. Not only is this the most honest way to approach things, the ATO’s crackdown on cryptocurrency tax compliance, and their allocation of resources to catching those who don’t comply, means the chances of getting away with anything is not worth the risk.

Cryptocurrency – Working Within the Rules

As blockchain, cryptocurrency and everything else in that realm evolve and become more sophisticated, so do the rules and regulations about profits derived from their use. Tax compliance is of paramount importance, so understanding the rules around that can help you minimise your obligations and maximise your deductions (and importantly, stay off the ATO’s radar).

Those in the know are also seeking proactive advice and structuring that works towards their long-term objectives. Family trusts, Companies or Superannuation Funds are becoming more common amongst savvy cryptocurrency investors, given the asset protection, succession, and flexibility such structures offer. However, it is prudent to ensure that such vehicles are appropriate for your circumstances and thus it is important to obtain professional advice prior to implementation.

Often many crypto-currency enthusiasts do not contemplate what will happen to their ‘digital assets’ in the event of certain life events (i.e. loss of capacity, death or relationship breakdowns). We can assist with best practice strategies to ensure that these unfortunate events are manageable if you have accumulated a portfolio of ‘digital assets’. Proactive planning is essential to ensure that things are not left to chance or until its too late to do anything.

The Bottom Line

In such an uncertain and complex world like cryptocurrency tax and structuring, it is critical to partner with an adviser and accountant to keep everything in order. Especially as legislation changes, which no doubt it will over time, you can rest easy knowing you won’t get any nasty surprises down the track. Get in touch with the MP+ tax team today – we can provide tailored advice, customised tax structures, restructure advice, trust setups and much more. Visit our website’s contact page, or call us on 08 9301 2200 (Joondalup) or 08 9361 330 (Victoria Park).

written by:

Tax Manager Steven Lisle has been part of the McKinley Plowman team since 2007, and in that time has built his repertoire upon delivering industry leading, up-to-date international and Australian tax strategies and consulting services. Steve's clients enjoy the optimised tax outcomes he provides them, especially where complex structures could otherwise lead to significant tax obligations.

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