The growing popularity of cryptocurrencies has increased their use for transactions and investments, which has caught the attention of tax authorities. The Australian Tax Authority (ATO) is among the tax authorities worldwide that are closely monitoring crypto transactions to ensure individuals and businesses correctly report and pay taxes on any gains or income earned.
Cryptocurrencies are considered property for tax purposes, which means that transactions involving them are subject to capital gains tax, just like any other investment. This includes buying and selling cryptocurrencies and using them to purchase goods or services. To calculate tax liability, individuals and businesses must keep accurate records of cryptocurrency transaction dates and values.
It’s worth noting that decentralized finance (DeFi) protocols and self-custody wallets don’t necessarily mean that transactions are entirely hidden from tax authorities. Tax authorities can access tools and technologies to track transactions on public blockchain networks, such as Ethereum, which is commonly used for DeFi transactions.
Many tax authorities worldwide are investing in blockchain analytics tools to help them identify and track down individuals not reporting their cryptocurrency transactions.
Additionally, if a user exchanges cryptocurrency for fiat currency, such as USD, EUR, or GBP, the transactions may be subject to reporting requirements under anti-money laundering (AML) and know-your-customer (KYC) regulations. As all activities regarding crypto transactions are public, on-chain data shows activities via transactions recorded on blockchain networks. Is it possible to use data-matching algorithms to analyze and connect different pieces of information on the blockchain, including ownership of both assets and digital tokens.
Therefore, crypto holders must keep accurate records of their cryptocurrency transactions and ensure that they report and pay taxes on any gains or income earned from cryptocurrency transactions. It is essential to comply with tax obligations to avoid potential legal consequences and penalties.
