On the Record: Substantiating Cryptocurrency Taxation Events

For the purpose of this article “cryptocurrency” refers to all digital currency assets including, but not limited to, Bitcoin (BTC) and altcoins including Bitcoin Cash (BTH), Ripple (XRP), NEM, Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Dash (DASH), Monero (XMR) and Z Cash (ZEC).

The decentralized nature of cryptocurrency has historically led many to believe transactions in the space were outside the scope of government involvement. However, with new anti-money laundering laws introduced earlier this year, AUSTRAC, Australia’s financial intelligence agency, has been given extended powers to police digital currency exchanges.

With increased scrutiny on cryptocurrency transactions it is crucial that taxpayers ensure they keep accurate records to substantiate cryptocurrency transactions. However, in an area where records are usually minimal, how can this be reconciled with normal record keeping requirements for taxation purposes?

Whether you are a hobbyist or serious investor, the disposal of cryptocurrency will likely be a capital gains tax (CGT) event. The CGT record-keeping rules require taxpayers keep all records that can be reasonably expected to be relevant in calculating whether the taxpayer has made a capital gain or loss from a CGT event.

The Commissioner of Federal Taxation (Commissioner) has stated that the following records in relation to cryptocurrency transactions are required:

  • the date of the transactions;
  • the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange); and
  • what the transaction was for and who the other party was (even if it’s just their cryptocurrency address).

For many taxpayers who have mined, purchased and/or traded cryptocurrencies such as Bitcoin, the platforms for undertaking these transactions do not generate records in line with what the Commissioner requests. Record keeping then becomes more problematic as blockchain data is replicated or becomes difficult to obtain, where wallets are hacked and where taxpayers do not retain their own records.

Therefore, practical issues arise in relation to the CGT record-keeping requirements.

The Commissioner recently recognized this and subsequently consulted with industry experts and relevant stakeholders on this issue. Specifically the Commissioner requested input on the following questions:

  • Are there any practical issues that arise in relation to the CGT record-keeping rules, so far as cryptocurrency transactions are concerned?
  • Are there any practical issues in relation to complying with the taxation obligations that arise for each cryptocurrency to cryptocurrency transaction?
  • Are there any specific factors that you think we should take into account when developing further public advice and guidance about CGT record-keeping for cryptocurrency and cryptocurrency to cryptocurrency transactions?

Subsequent to the consultation process the Commissioner has advised that the following records should be kept:

  • receipts of purchases or transfers of cryptocurrency;
  • exchange records;
  • records of agent, accountant and legal costs;
  • digital wallet records and keys; and
  • software costs related to managing your tax affairs.

For taxpayers looking to invest in cryptocurrency it is recommended that individuals be mindful of the specific records the Commissioner notes in order to avoid potential issues, including the imposition of penalties, in the future. This may require keeping offline records secure which outline all disposals, including exchanges between cryptocurrencies.

For those who have recently sold cryptocurrency it is recommended that records if not on hand, are tracked down. Where taxpayers find themselves with insufficient records, advice should be sought to ensure that the most appropriate tax treatment is taken, and potential penalties are minimized.

For more information on cryptocurrency transactions and taxation or for general business law advice, please contact:

Laura Spencer
Sladen Legal
T +61 3 9611 0110
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia  

Daniel Smedley
Principal | Accredited Specialist in Tax Law
Sladen Legal
M +61 411 319 327 |  T +61 3 9611 0105
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia