Grey areas surrounding the tax treatment of cryptocurrency assets is causing major headaches for both accountants and taxpayers dealing with these types of assets, says a specialist accounting firm.
Cryptocurrency space in desperate need of further tax guidance
Accountants specialising in the cryptocurrency space are facing significant challenges in navigating the tax framework due to a severe lack of regulatory guidance in this area, according to accounting firm Tax on Chain.
Tax on Chain director Oliver Woodbridge said while there has been some progress in this area, the ATO has been moving relatively slowly in relation to its tax guidance for crypto assets.
“There isn’t any productive guidance as to how taxpayers should be considering complex crypto transactions and taxpayers are left to try and wrap their heads around how everything works,” said Mr Woodbridge.
Mr Woodbridge said it is likely to be years before accountants and taxpayers see more comprehensive guidance relating to cryptocurrency transactions.
“Until then we’re doing our best to apply the existing framework as best we can. That creates difficulties in itself, however, as you’re trying to apply a decades old framework to a brand new technology and asset class,” he said.
“Often it just doesn’t make sense or it’s completely impractical to do so. Further guidance is definitely needed from the ATO.”
Mr Woodbridge said in many ways the whole crypto tax landscape remains one big grey area but there are some particular areas causing more confusion than others.
“One of the biggest areas where we need more clarity from the ATO is in regards to staking rewards,” he said.
“One of the most common things clients will do with their assets is use them to generate a yield. That yield is often paid out in some highly volatile cryptocurrency.”
This is an area where many cryptocurrency investors are falling into a tax trap due the way the rules currently operate.
“Taxpayers will earn this yield and as the current rules stand, the staking reward that they earn, that income will be recognised at the time it’s earned at that market value. The market value at that time will form the cost base of those assets,” said Mr Woodbridge.
“The main issue with this is that a taxpayer might recognise $50,000 grand worth of staking rewards and they might hold onto these tokens. So they’re booking $50,000 in income and then six months later when they go to sell them they may have dropped 70 per cent in value.
“So they might only be worth $10,000 or $15,000 now, but unfortunately in the current tax environment they still have to recognise the $50,000 as income. They will still be able to claim a capital loss when they sell the $15,000 in tokens but they can’t apply their capital loss against the initial income because that’s considered ordinary income in the eyes of the ATO.”
This means that some taxpayers may end up with large tax bills that are actually larger than the value of the tokens that they’re actually paying tax on.
“That’s a nightmare scenario and probably the worst thing we’re seeing at the moment,” he said.
Another area where there is a lack of specific guidance from the ATO is with the tax treatment of margin trading in crypto, according to software firm Crypto Tax Calculator.
Margin trading is a type of trade where borrowed funds are used to complete the transaction.
The existing guidance on contracts for difference where an investor is betting on the price movement of an asset while not owning the asset offers some idea of how it should be treated, said Crypto Tax Calculator chief executive Shane Brunette.
“That would be the most likely categorisation type for these sorts of transactions.”
SMSF technical specialist Tim Miller has also previously highlighted the need for further guidance in areas such as non-fungible tokens (NFTs), particularly in regard to their treatment in relation to super.
“I think the ATO still has a number of hurdles to jump through in terms of determining where exactly NFTs sit within the SMSF space,” said Mr Miller speaking at an SMSF Adviser event.
Mr Miller said there still are a number of questions around what can be done with these types of assets where they’re owned by a super fund and whether they can be considered a collectable or personal use asset.