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Apply first principles to crypto assets

principles cryptocurrency assets

First principles should be applied to cryptocurrency assets to ensure they are recognised and receive the proper tax treatment.

The ATO has recommended advisers apply first principles to the treatment of their clients’ transactions involving cryptocurrency to ensure the proper recognition and tax treatment of these assets.

Speaking at last week’s Accounting Business Expo in Sydney, ATO risks and strategy individuals assistant commissioner Adam O’Grady told attendees: “When you’re working with your clients or trying to work out how would the tax apply in this situation, what my recommendation is try and bring it back to first principles.

“[That means] how would this transaction look in a pre-crypto world [and] what is the equivalent in the financial markets you already know, and the financial products you already know well, and what is the tax treatment there.

“Nine times out of 10 the tax treatment is exactly the same.”

O’Grady pointed out the time is right for investors to start to improve their knowledge about cryptocurrency assets as the regulator is about to shift its focus in this area from an education-based approach to a more traditional compliance one.

“Now is a really good time to start educating yourself … for the future because the ATO, we are changing our footing on this and we’re going to become much more active in this space,” he said.

According to O’Grady, a fundamental understanding of the asset that has been purchased remains paramount for investors with regard to cryptocurrencies and unfortunately the regulator has witnessed a distinct weakness in this area among investors.

“Given the general principles of some of the things we’re seeing, it’s important for [investors] to actually understand what those assets are, why they were purchased and what they are being used for,” he said.

“The key thing that we’re seeing, though, is people not understanding what it is that they have actually purchased. Did they purchase a coin? Did they purchase the right to obtain a coin?”

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