As cryptocurrencies become more and more entrenched in the mainstream, one of the biggest challenges in accounting for them has been that some investors may not be aware that it is a requirement for them to disclose crypto assets to their accountants.

It is super important for financial advisers to educate themselves in relation to cryptocurrency. Advisers need to make sure that when they’re dealing with their clients, they’re asking the question such as; “have you been involved in buying and selling, or investing in cryptocurrencies over the course of the past year?’”

On top of encouraging their clients to disclose their crypto assets, advisors should see this current period as a “warning flag” and familiarise themselves with how cryptocurrencies work before the ATO moves forward and introduces compliance action.

When looking at the big picture, the basic tax rules apply for cryptocurrency as the rules applied for other forms of investments. It is important for advisers to understand how to treat cryptocurrency transactions, and compare how other kinds of transactions are treated, and get a handle of the kind of records that people have in relation to cryptocurrencies.

H&R Block director of tax communications Mark Chapman has said that now is a crucial time for people involved in cryptocurrencies to pay attention to the “tax side of things”, as it becomes increasingly likely that the ATO will soon be ramping up enforcement of undeclared crypto assets.

Within the past couple of years, the ATO has started gathering data from cryptocurrency exchanges. As a result of this, the ATO now has a much clearer understanding of who is involved in the cryptocurrency market.

Despite the ATO having been expected to ramp up auditing around cryptocurrencies for the last three years, and hasn’t, its “light touch” isn’t expected to last very much longer. 

In March 2020, the ATO began to show signs of cracking down on compliance when an undisclosed number of letters were delivered to taxpayers, warning them to come clean with their capital gains or losses in relation to cryptocurrency.

Many of the taxpayers who received letters from the ATO, have been informed that there’s a mismatch in their data. This has resulted in a lot of people arranging to see their tax agent, and in many cases to see a tax agent for the first time in their life as they have previously been doing it themselves.

As more data comes in, the ATO will gain a greater understanding of how many people are involved with cryptocurrency, consequently they will begin to a slightly firmer line. It is highly unlikely that the ATO’s light-touch approach will last forever.

Upon the commencement of collecting data from cryptocurrency-designated service providers, the ATO outlined that the purpose for the crackdown was to “identify individuals or businesses who have or may be engaged in buying, selling or transferring cryptocurrency during the 2014–15 to 2019–20 financial years”

The Tax Office previously estimated that records relating to between 500,000 and 1 million individuals were obtained via the data-matching program.

The program gives the ATO greater visibility in regards to whether taxpayers are correctly meeting their taxation and superannuation obligations when related to cryptocurrency transactions and ownership. These obligations may include registration, reporting, lodgement and payment responsibilities.

The ATO gives taxpayers 28 days period to clarify any information that has been obtained from the data provider, prior to any compliance action being taken.

The ATO prides itself on try to help taxpayers to get it right and ensure they are paying the correct amount of tax.

Whenever someone finds that they have made an omission or error in their tax return, they should contact the ATO as quickly as possible. Penalties may be significantly reduced in cases where the ATO is contacted prior to an audit.