Even after a crypto market fall driving several investors into the red, tax experts have warned that certain crypto traders may be liable for thousands of dollars in unexpected tax bills as a result of the failure of major stablecoin Terra.
After reaching record highs in November, when the market capitalization of the sector exceeded $4 trillion, cryptocurrency prices have fallen as much as 60% in the last eight months. Investors tend to record a loss on their cryptocurrency trades for the most recent fiscal year as a result of the downturn.
The ATO has been targeting cryptocurrency taxes, particularly since the 2021 financial year, when many traders claimed capital gains as a result of bullish markets driven by the pandemic.
Tax experts have advised traders who took part in well-known crypto “staking” scams that they may be surprised by their tax bills this year.
Cryptocurrency owners who “stake” agree to lock up their funds for long durations in exchange for a payout at a percentage rate, comparable to term deposits. The assets staked also support the blockchain network’s operation.
Yet, rewards received through “staking” are classified by the ATO as ordinary assessable income at the time they are received, which means that if the reward is large, it may push an investor’s tax rate higher. This becomes especially important if the value of a cryptocurrency asset falls, as happened in the example of Terra, an algorithmic stablecoin whose value sensationally crashed in May and lost over $80 billion in value.
Shane Brunette, co-founder of CryptoTaxCalculator, a company that offers tax software for cryptocurrency investors, told The Age and Sydney Morning Herald that he was aware of one instance in which an investor staked $1 million in Terra at a 20% return rate, giving him an extra $200,000 in income. They were thus placed in the highest tax bracket of 45%.
However, the investor lacks the funds to cover their suddenly huge tax bill because Terra is now only worth a fraction of a penny as opposed to the $1 value it had prior to the crash.
While Terra is the most drastic example, several other well-known coins used in “staking” schemes have also seen their prices plummet during the downturn and may provide a similar problem for investors who choose to maintain their rewards in cryptocurrency instead of convert them into fiat money.