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ATO fires warning shots on cryptocurrency cost base, record-keeping

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By John Buckley / 15th Sep 2021

The ATO has warned advisers new to cryptocurrencies to be aware of the components that comprise a crypto asset’s cost base, and to encourage their clients to keep immaculate records.

Speaking at a cryptocurrency forum hosted by the Knowledge Shop on Tuesday, ATO assistant commissioner Adam O'Grady stressed the importance of “getting the cost base right,” which he said has emerged as a leading pain point in the tax treatment of cryptocurrencies.

One often-overlooked element of a crypto asset’s cost base, Mr O'Grady said, are instances where an investor has borrowed money to invest in cryptocurrency.

“Generally, that is actually part of the cost base,” he said. “Unlike shares that are earning dividends on the way, those interest expenses may be claimable immediately as a deduction in the cryptocurrency space,” Mr O'Grady said.
“Because they’re generally not earning income alone, it does actually form part of the cost base.

“But a lot of other cost base elements such as your brokerage fees, or transfer costs, all those sorts of things are ones that you’d be familiar with.”

Beyond clarifying cost base elements, Mr O’Grady said another common trend emerging among new cryptocurrency investors is the tax treatment of gifting cryptocurrency.

He said that recipients of gifted cryptocurrencies won’t face tax consequences until they either sell or “use” the cryptocurrency in some way.

“So if they’ve made a gain, based on market value at the time, they will have to pay CGT on that gifting of cryptocurrency,” Mr O'Grady said.

“This is very similar to the tax consequences of inheriting cryptocurrency,” he said. “When you inherit cryptocurrency itself, again, there’s no tax consequences of that. But when you dispose of that you will have gains for the deceased estate that is distributing that cryptocurrency.

“Again, there can be capital gains consequences of that. But it’s important to remember when dealing with the estate; that distribution of funds and how that works, to keep records of the market value at the time the cryptocurrency is transferred.”

Mr O'Grady’s latest advice follows warnings from his office to advisers earlier in the year that were sounded in an effort to ensure advisers were across the broader tax treatment of crypto assets. Namely, under the capital gains tax framework.

Speaking at a tax-time tips seminar in May, Mr O'Grady warned tax agents and taxpayers that his office will be closely watching all capital events related to cryptocurrency come tax time.

“It is really important for all capital assets; we will be looking to ensure that the people have reported the capital gains events – and this is for both gains and losses,” Mr O'Grady said.

Mr O'Grady urged tax agents to make use of data pre-filled by the ATO. He said that in addition to using pre-filled data to assist agents to submit accurate returns, it will also be using data supplied by Australian cryptocurrency exchanges to cross-reference returns.

“We get information and data on property sales from all the state and territory revenue offices.

“We have very good shares data as well and it’s available as a pre-filled service [where] you can download different shares transactions for your clients.

“We are also getting cryptocurrency information from Australian scientists as well. So we’ll be using that information to look at returns as they come in.

“And when people have had significant capital gains events according to that data, if it’s not reported in the return, we’ll be looking to hold those returns and again enquire with you and with your clients as to where those transactions are.”

Mr O'Grady stressed the importance of reporting all capital gains events – whether they be losses or earnings – to avoid unwanted attention from the Tax Office.

“One of the emerging themes we are seeing in the capital gains space is losses not being reported through the tax return. It’s really important to still report those losses through the return,” he said.

“Not only does it avoid us having to follow up as to why you haven’t done that for the year, and while it may not be a financial impact to you, or the clients this year, because those losses are quarantined. It applies for future years.”

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