The Australian Tax Office (ATO) plans to engage around 100,000 taxpayers ahead of tax time to inform them about their required tax obligations as it moves to strengthen its stance on accounting for cryptocurrency.
On Friday 28th May, the ATO warned taxpayers that they will likely be contacted as there are growing concerns that many taxpayers incorrectly believe their cryptocurrency gains are tax-free or only taxable when their holdings are cashed into Australian dollars.
Data from the ATO illustrates that there are over 600,000 taxpayers across Australia who have invested in crypto assets following a surging interest in the currency over the duration of the covid-19 pandemic.
Furthermore, the ATO anticipates that their proactive engagement will result in at least 300,000 taxpayers to make note of cryptocurrency in their 2021 tax returns.
The ATO’s tough crackdown is followed by a softer educative approach adopted through the 2020 income year. Last year, the Tax Office contacted 100,000 taxpayers who had traded crypto assets and provoked 140,000 taxpayers to lodge returns.
The ATO is concerned that the anonymous nature of trading crypto assets led taxpayers to believe their investments were untraceable. ATO will head into tax time with access to more data and the ability to track those investing in crypto assets more closely.
The ATO is alarmed that a number of taxpayers think that the anonymity of cryptocurrencies provides a licence to ignore their tax obligations.
Although it appears that cryptocurrency operates in an anonymous digital world, the ATO has the power to closely track where it interacts with the real world through data from banks, financial institutions and cryptocurrency online exchanges to follow the money back to the taxpayer.
The ATO will use data-matching methods to link transactions from cryptocurrency-designated service providers to individuals’ tax returns, to ensure investors are paying the correct amount of tax.
What is cryptocurrency and how to get it?
Cryptocurrencies also known as digital currencies are created and held electronically. Unlike traditional money, cryptocurrencies aren’t printed and no one controls them. Cryptocurrencies are produced by people and in more recent times by businesses who are running computers all over the world, by using software that attempts to solve mathematical problems.
There are estimated to be over 4,000 cryptocurrencies in the world. Bitcoin is the most well-known type of cryptocurrency. Other well-known kinds include; Ethereum, Ripple XRP, Litecoin and NEO.
There are three ways to obtain cryptocurrencies. You can get them by mining them, buying them or providing goods and services in order to earn them.
Mining is the process by which cryptocurrency is created. A computer will crunch through a number of difficult mathematical problems and by succeeding with the right answers the person who uses the computer is rewarded with a unit of the currency.
A person can also create an ‘online wall’ or acquire the digital currency by visiting a ‘cryptocurrency exchange system’ that aims to put sellers in touch with people who are interested in buying. The buyers will pay for the cryptocurrency they purchased by transfer money via their online banking account.
As a result of cryptocurrency becoming a more accepted virtual currency by businesses and individuals around the world, the third and final way to obtain the digital currency which is providing goods and services has become an increasingly common occurrence. Most commonly it is done in restaurants and cafes that accept bitcoin as a form of payment. This is sometimes done by completing online surveys or undertaking some form of affiliative marketing.
What is ATO doing to tax cryptocurrency?
The ATO has estimated that somewhere between 500,000 and one million Australians have currently invested in crypto related assets. Many of these individuals have failed, or will fail, to properly report the profits they have made for tax purposes.
In response to this common occurrence, the ATO is gathering bulk records from Australian cryptocurrency designated service providers (DSPs) as part of a data matching program which aims to ensure that people trading in cryptocurrency are paying the amount of tax that is required for them to pay.
The data that has been provided to the ATO consists of cryptocurrency sales and purchase information. The data will identify Australian taxpayers who have failed to disclose their income details correctly.
A number of Australian taxpayers may find themselves being contacted by the ATO as a result of the data matching exercise. Those who are contacted will be given an opportunity to amend their tax returns to include any information highlighted by the ATO.
Individuals will have a timeframe of 28 days to clarify any information that has been obtained via the data provider. Thousands of letters have already been issued to taxpayers across the country and more will continue to be sent.
Recipients of the letters who fail to modify their tax return to include the missing transactions will be met with more forceful compliance action which could include a full tax audit.
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