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‘Costly’ Tax Mistake Catching Australian Cryptocurrency Investors Unaware

“If Bitcoin goes to zero tomorrow, everyone’s still gonna have to pay tax.”

Along with Tarocash suits, gilet vests, road bikes, electric scooters and takeaway Piccolos, cryptocurrency has been one of the most harshly mocked phenomenons of the last five years.

Whether it stems from jealousy, tall poppy syndrome, suspicion of new things, disdain for Reddit, the social awkwardness of Elon Musk or legitimate concerns about the industry’s unregulated nature the fact remains – ‘crypto’ is still low key shameful to bring up at most social events.

When prices are low people think you’re lame for caring or getting involved. When it’s going well people quote Warren Buffet and dismiss it all as a volatile pyramid scheme.

Or so it was the first (and second) time The Bit boomed. This last cycle, however, it felt like half of Australia’s young professionals were scrambling to jump on the pyramid at its peak, furtively asking their accountants and IT mates: “What’s the go?”

As Tim Brunette, co-founder of Crypto Tax Calculator, an Australian startup that has leapt up in the crypto-adjacent space, recently told DMARGE, ‘crypto’ is gaining greater cultural purchase and becoming less fringe.

“I was in the surf the other day and there were Grommies talking about trading on Uniswap.”

FOMO is a powerful beast.

This renewed interest in cryptocurrency has come after an influx of new retail investors entered the (traditional) stock market in 2020. As the likes of Bloomberg and the Australian Financial Review have covered extensively, the free time afforded by lockdowns, combined with many white-collar workers being paid the same wage as they were before (and if not, receiving support cheques) while stocks took a dive saw a boom in mobile trading apps like Robinhood (in the US) and CommSec (in Australia).

That sports betting and the pokies were temporarily out of action may have helped too. In any case, the habit seems to have stuck with many. Various stocks on traditional financial markets, such as Tesla, have hit all-time highs in the last 12 months, even as the so-called ‘real economy’ has faltered.

RELATED: ‘Fluttering’: The Seductive Stock Market Trend Young Australian Investors Need To Be Wary Of 

Cryptocurrencies too have enjoyed a moment in the sun. After Bitcoin’s various spikes and falls over the last five years, it enjoyed an all-time high in February 2021.

Whether or not cryptocurrencies like Bitcoin and Ethereum have the real value some traditional investors demand of an investment (let alone the potential to replace fiat currency), they certainly now command Australia’s attention. Even bus shelter advertisements are spruiking them…

Image: Bitcoin advertisement at London bus stop (photo via Twitter). DMARGE has also sighted similar advertisements in recent weeks in Sydney.

However, before newbie Australian crypto investors get in on The Bit (and other cryptocurrencies like Ethereum), there is a warning they need to hear.

You could find yourself in hot water with the ATO (or bleeding more cash than you thought) if you don’t get your head around how to pay tax on your cryptocurrency investments.

One mistake, in particular, is catching a lot of people out, brothers and co-founders of Crypto Tax Calculator, Shane and Tim Brunette recently told DMARGE. That mistake? Assuming you don’t have to pay tax until you cash out (or assuming you don’t have to pay tax unless you cash out for a greater amount than you put in).

Shane told DMARGE, “Generally there is not a lot of awareness in the market around paying taxes on cryptocurrency.”

“The general theme is that you only pay taxes – maybe – if you cash out for a positive amount than you put in.”

“But actually, when you trade a cryptocurrency for another cryptocurrency, that triggers a capital gain – and you’re expected to keep all your records in your local currency.”

“This means if you’re trading on an overseas exchange, which is actually pretty common, you’ve got to try to work out what the Australian dollar was at the point of sale, and you don’t have any reference prices there. Things like that are catching a lot of users off guard.”

“It’s like stocks – if you traded Apple for Tesla stocks directly you’d be triggering a capital gain and that’s no different to crypto.”

“When you’re trading a very bullish market at the moment where bitcoin is up around $50,000 dollars, a common strategy when the price crashes is for people to hold onto their losses hoping that it will rebound in a couple of years.”

“In that case you’ve already realised gains by trading at the top of the market. If you hold on through to the next financial year you’ll have a realised gain you’ll have to pay and that gain can be significantly more than your current portfolio balance. So you can actually end up losing more than you put in just because of the taxes.”

“That happens quite a bit.”

This is why cryptocurrency tax, Shane explains, “is kind of a lagging market.”

“We’re still picking up a lot of customers who were trading in 2017/2018.”

The brothers founded the company a year ago, doubling down on a software tool Shane came up with in mid-2018.

“In mid-2018 I first had the idea – we were trading back in the 2017 market.”

“Back then there were a couple of products on the market, but they were aimed at Bitcoin Protocol, which is much simpler. Now you’ve got more complicated products and this idea of decentralised finance… well back then it was more like just [the] Ethereum network. There was no tool for dealing with more complex transactions.”

“The existing software didn’t really handle any of this and the solution at the time was to have someone manually manage it for you.”

“For the mid four figure quotes we were getting… I naively thought as a software engineer I’d be able to just write a script that would just solve this problem pretty quickly. It ended up taking me a few months. Then I released it on Reddit for free.”

“It sat there for a couple of years and was a free tool for quite some time. Then a year ago I doubled down and Tim joined.”

“Since then – since the rewrite – we’ve been getting a lot of traction because of those complex transactions that people are engaging in now.”

“Tax scenarios that people have got themselves in end up being really complex and can only really be solved with appropriate software tools.”

How do the pair know they are getting the programming right? Well, first of all, they told DMARGE, they trade crypto themselves (and have since the very beginning, with the initial program being designed to circumvent their personal need for an accountant), so they are constantly testing and refining the software.

Also, they told us, “we do work with a lot of accountants,” and “a lot of accountants use our calculator.”

Beyond that, “We’ve had 1000s of users using the platform. So we get a lot of feedback from them.”

The pair have seen huge growth since October 2020, telling DMARGE – if it continues – they are on track to hit one million Australian dollars in revenue this year.

“New users who only recently have started trading are starting to realise there will probably be tax implications to those activities,” Shane told DMARGE.

“Those kind of new customers have been coming in since October… but more so in the last couple of months and that’s also reflected in the price increases – the crypto space itself was lagging behind the share market.”

Shane and Tim attribute the rapid growth of the platform to both the growth of the market of late (both fiat and crypto), the Aussie tax season, and the October rewrite (which turned their calculator product into a subscription model).

“We started rewriting February last year.”

“We took the lessons from the prior two years. Cryptocurrency is a very new domain and cryptocurrency taxes is an even newer domain. You’ve got some very unique requirements, which isn’t traditional to normal accounting. For example, the decimal places of cryptocurrency coins can be to 18 decimal places… so how do you handle that?”

“Then with fees, you know, [there is the whole] trying to match that back to the two decimal places that you have in fiat currencies. There are a lot of technical challenges.”

“The release of the product timed pretty well, because it unknowingly coincided with the ATO cracking down on cryptocurrency taxes. They were reportedly sending out a lot of emails around. I think the number was around 300,000. So that was driving a lot of demand to our site as well.”

“As you can imagine, if you’ve got a letter like that, you’re going to be looking for a solution.”

“Now it’s becoming more known in the market that you do need to pay taxes on crypto, whereas before, I think, there were a lot of people trying to naively pretend that they didn’t have to pay taxes until they got told that they had to,” Shane told DMARGE.

Tim added: “A lot of people think, ‘Oh, no, you don’t need to pay tax until you cash out. This is something I’m going to kick down the line.'”

The increasing number of people seeking cryptocurrency tax calculator services like the Brunette brothers’ may also be down to the growing trend of “de gens” – a phenomenon whereby internet-savvy (but not necessarily financially savvy) hoodlums (think, everyone from Silicon Valley tech bros to teenage Cronulla surfers) play in the wild west of decentralised finance.

For those who aren’t in the know, it’s kind of like ‘Wall Street Bets‘ but for crypto.

Coindesk describes decentralised finance and its glorified games of chicken as “a crossover between massive multiplayer online (MMO) games, like World of Warcraft, and crypto pump-and-dump schemes.”

In other words: “minimally viable monetary experiments,” as one experiment even dubbed itself.

“These new projects are about leveraging Ethereum’s tech for unintended uses,” Coindesk reports. “They’re about making crypto fun again.”

“They’re about making money.”

To better understand the attitude of those involved in such schemes, the comments of Amentum Capital co-founder Steven McKie are illuminating.

McKie told Coindesk, “The longer it takes you to do due diligence in this cycle, the lower your alpha.”

“If you are clued in to play the game, play it. If not, sit out to the next one.”

As we said – an extremely risky game of chicken…

“McKie was an early liquidity provider for Based.Money, another DeFi MMO game (as he likened it to),” Coindesk reports. The project’s anonymous ‘Ghouls’ founding team welcomed its users warmly via Tor, allegedly, with the following message:

“WE ARE LIVE. GET THE F*CK IN YOU DEGENERATES.”

Speaking of “de gens”… Tim told DMARGE, these days “you don’t need to even have a cryptocurrency or verify your identity [to invest in this ‘meme space’]. With an exchange, you don’t need to be over 18. I was in the surf the other day and there were grommies talking about trading on Uniswap.”

“They’re talking about their mad gains and stuff. And I’m like these kids are 14 and have no idea…”

“The space is ‘meming’ at the moment, a lot of our competitors can’t really handle that and we’re trying to expand that offering as much as possible, by being able to support the various protocols.”

 

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“Anyone can apply a protocol on to the Ethereum network, for example. And then anyone else can interact with that protocol. So it’s about understanding a smart contract, and being able to categorise certain transactions, which interact with that protocol, appropriately within our platform.”

“The way that we handle that is that all you have to do is add your Ethereum wallet, for example. Whereas for a lot of other competitors, the ability to be able to correctly categorise or build a product that is able to handle this complexity is limited.”

As for the future, Shane told DMARGE, “We’re really hoping to have a breakout in overseas markets too. We’ve been getting some good traction in Canada at the moment.”

“We want to make our favourite products easier to use for people who are experimenting with these decentralised financial products. I think there’s a lot that needs to be done still.”

Tim added: “The people who are using these products… there are almost no options for them. Like they’re completely in the dark when it comes to tax implications. There’s so much going on. So much new stuff.”

“We really want to cover 90% of these use cases for these decentralised products for those customers, so they can actually feel like they’re not getting screwed over when it comes to tax time. I think that’s the biggest thing.”

Another big focus, Shane told DMARGE, is growing the accounting side. “A lot of accountants are actually using our product, inputting client data, and things like that. So we want to try to offer some better tools for accountants and bookkeepers and their clients as well, because a lot of these things are too complex for a division for them to completely do themselves.”

To summarize, Tim said, “As software engineers, we’re building the software product and we want to make that product the best it can be. We want to make our customers the happiest. So we do a lot of work where we take customer requests, and we will put out that feature often within the week from the time they request it. It could even only be a few days – depending on the complexity.”

“Servicing the customers is equal or up there with working on the product and improving it. It’s hand in hand.”

At the time of writing one Bitcoin is worth AU $71,075.70, and one Ether is trading at AU $2363.17.

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