09/12/2025 • 17 min read
ATO Crypto Letter: What Australian Accountants Do Next (2025)
ATO Crypto Letter: What Australian Accountants Do Next (2025)
If your client has received an ATO letter about crypto trading, it should be treated as a targeted compliance prompt, not a generic “FYI”. In Australian practice, these letters are commonly issued where ATO third‑party data (from AUSTRAC-reporting channels, digital currency exchanges, and other data-matching sources) indicates crypto disposals or holdings that may not reconcile to the client’s lodged income tax returns, CGT disclosures, or business activity statements (BAS) where relevant. Immediate, methodical triage is required: confirm the exact allegation, reconcile on-chain and exchange activity to tax outcomes, quantify any amendment exposure (CGT, ordinary income, GST if applicable), and respond within the stated timeframe.
Why has the ATO sent my client a crypto trading letter?
The ATO sends these letters because it is established that crypto transactions are visible through extensive data-matching and are commonly misreported.
- Data-matching and exchange reporting: The ATO receives information from cryptocurrency designated service providers and other sources under formal data-matching programs. This is consistent with the ATO’s published crypto compliance approach and public guidance on data use.
- Mismatch indicators: The ATO may see:
- Risk rules: High frequency trading, large volumes, DeFi interactions, or patterns consistent with business-like activity commonly elevate review likelihood.
- ATO guidance (Cryptocurrency): The ATO’s public guidance sets out that crypto is generally treated as a CGT asset for investors and explains common disposal events (sell, swap, gift, pay for goods/services).
- Data matching program protocols: The ATO publishes data matching program information, including crypto asset data matching, outlining the collection and use of third‑party data.
- Capital gains tax framework: Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) govern CGT.
- Record-keeping obligations: General record keeping rules under the Taxation Administration Act 1953 and ITAA 1997 principles apply; the ATO expects contemporaneous records for calculating gains/losses.
What does the ATO usually think is wrong when it writes about crypto?
In practice, the ATO’s concern usually falls into one (or more) of the following buckets:
- Unreported CGT disposals: Crypto-to-crypto swaps, DeFi token exchanges, NFT trades, and “spend” transactions are frequently overlooked as disposals.
- Incorrect cost base: Missing fees, wrong acquisition dates, pooling errors, and ignoring non-AUD functional records.
- Revenue vs capital misclassification: The ATO may suspect the client is trading as a business (ordinary income) rather than investing (CGT).
- Omitted income: Staking rewards, airdrops, liquidity incentives, referral bonuses, and interest-like returns may be assessable as ordinary income depending on facts.
- Failure to account for chain events: Forks, token migrations, and wrapped assets can distort cost base unless carefully documented.
- GST confusion (limited but important): Most “investor” crypto activity is not a GST reporting item; however, businesses accepting crypto for taxable supplies must still account for GST on the AUD value of the supply. This is often misunderstood.
What should I do first when a client brings in an ATO crypto letter?
You should first secure the facts, preserve evidence, and control the narrative before any response is sent.
- Read the letter precisely and diarise deadlines.
- Confirm the scope of the client’s crypto footprint.
- Freeze the data set.
- Reconcile fiat movements to exchange activity.
- Classify the activity correctly (investor vs business vs isolated profit-making).
- Quantify the exposure and decide the response path.
Is crypto taxed as capital gains or as business income in Australia?
Crypto may be taxed on capital account (CGT) or revenue account (ordinary income) depending on the facts; there is no “one size fits all” rule.
- Investor (CGT regime under ITAA 1997):
- Business of trading (ordinary income under ITAA 1997 concepts):
- Isolated profit-making transaction:
Practical reality: The ATO’s investor vs trader distinction is heavily fact-driven. The accountant’s job is to document those facts and apply the correct characterisation consistently across years.
What transactions count as “disposals” the ATO expects to see?
A disposal is broader than “selling back to AUD”. The ATO commonly focuses on events clients do not intuitively treat as taxable.
- Sell crypto for AUD or other fiat
- Swap crypto-to-crypto (e.g., BTC to ETH)
- Convert to a stablecoin (e.g., ETH to USDC) — commonly still a disposal
- Use crypto to buy goods or services
- Gift crypto (CGT consequences can still arise)
- Transfer to another person’s wallet (distinguish from transfer between own wallets)
- Transfers between the client’s own wallets/exchanges: Not a disposal, but must be evidenced to avoid being misread as a sale.
- Staking and rewards: Often ordinary income when derived; CGT may apply later on disposal of the token received (cost base interaction must be tracked).
How do I rebuild crypto records to a standard the ATO will accept?
The ATO expects evidence capable of substantiating acquisition date, cost base, disposal date, proceeds, and transaction purpose. Where records are incomplete, you should apply a defensible reconstruction methodology and document assumptions.
- Source hierarchy (best to worst):
- Minimum data fields to capture per transaction:
- Valuation method:
- Cost base method:
Record-keeping reminder: ATO guidance emphasises keeping records of every crypto transaction and retaining them for the required retention period.
What response should be given to the ATO letter?
You should respond with a position that is both technically correct and evidentially supported; silence or a vague response is rarely acceptable.
- If the client is compliant (ATO data is misinterpreted):
- If errors are identified:
It should be noted that penalty remission is a discretionary matter; however, timely voluntary disclosure and strong cooperation are generally relevant factors under ATO administration practice.
What are common real-world scenarios and how should they be handled?
You should handle each scenario by identifying the tax character, proving the transaction pathway, and quantifying the outcome.
Scenario 1: “I only swapped coins, I didn’t cash out”
This is commonly taxable because a crypto-to-crypto swap is generally a disposal for CGT purposes for an investor.- Reconcile each swap to:
- Ensure fees are captured and correctly applied.
Scenario 2: “Those transfers were just between my wallets”
This is commonly non-taxable, but frequently flagged by ATO data.- Prove common ownership of wallets/exchange accounts.
- Provide transaction hashes showing “send” and “receive” legs.
- Reconcile timestamps and amounts net of gas fees (small differences must be explained).
Scenario 3: “I staked and got rewards”
Staking rewards may be assessable as ordinary income when derived, depending on the arrangement and facts, with CGT consequences later on disposal.- Identify reward receipts and their AUD value at time of receipt.
- Track separate parcels for later CGT (avoid double counting).
Scenario 4: “I traded every day; I’m an investor”
High frequency, short holding periods, and sophisticated systems may indicate business-like trading.- Document indicators both ways (systems, intention, scale, repetition).
- Apply a consistent characterisation and ensure the return presentation matches the position adopted.
How does this change BAS, GST, and business clients?
For many clients, the crypto issue is income tax/CGT rather than BAS; however, BAS impacts can arise where crypto intersects with enterprise activities.
- Businesses accepting crypto as payment: GST is calculated on the AUD value of the taxable supply, not on the crypto itself.
- Crypto as an investment activity: Typically not a GST reporting item, but must be assessed based on the specific fact pattern.
- GST and fees: Exchange fees and transaction costs may have GST implications depending on supplier and the nature of the supply; evidence must be retained.
Given complexity and frequent misunderstanding, BAS reconciliation software and strong working papers discipline materially reduce risk. This is precisely where automation is valuable.
What working papers should my firm prepare for an ATO crypto review?
You should prepare working papers that allow an independent reviewer to trace from source records to the tax return labels.
- Client fact memo (purpose, intention, scale, systems, years involved)
- Full transaction ledger (exchange + on-chain) with classification tags
- AUD valuation methodology paper (source, timing, consistency)
- Cost base method paper and rationale (consistency across years)
- CGT summary by asset and by year
- Income summary for rewards/airdrops/other receipts (where applicable)
- Reconciliation:
- Amendment workings and return label mapping
How can AI accounting software in Australia reduce crypto compliance risk?
AI accounting software in Australia reduces crypto compliance risk by improving the completeness and audit trail of reconciliations, especially where fiat on/off ramps and high-volume transactions make manual work error-prone.
- Automated bank reconciliation: MyLedger AutoRecon routinely reduces reconciliation time from 3–4 hours to 10–15 minutes per client (around 90% faster), which helps firms spend time on crypto classification and evidence, not ticking and tying.
- AI-powered reconciliation workflows: Automated categorisation and bulk operations reduce exception handling and improve consistency across years.
- ATO integration accounting software: MyLedger provides direct ATO portal integration for client data, statements, and due dates, supporting faster triage when an ATO letter arrives.
- Automated working papers: MyLedger generates working papers workflows in-platform, reducing reliance on manual Excel packs that often break under crypto complexity.
- Reconciliation speed: MyLedger = 10–15 minutes per client, Xero/MYOB/QuickBooks = commonly 3–4 hours when transactions are messy or when extensive matching is required.
- Automation level: MyLedger = AI-powered, ~90% auto-categorisation with bulk tools, Xero/MYOB/QuickBooks = more manual review and rule maintenance.
- Working papers: MyLedger = automated working papers suite (including compliance-focused workflows), Xero/MYOB/QuickBooks = typically manual working paper packs or third-party add-ons.
- ATO integration: MyLedger = complete ATO portal integration, many competitors = limited ATO connectivity and heavier reliance on separate portals and manual downloads.
- Pricing model (practice scale): MyLedger (planned) = $99–199/month unlimited clients (and currently free during beta), many competitors = per-client pricing that scales cost as the practice grows.
What are the key risks if the client ignores the ATO crypto letter?
Ignoring the letter materially increases audit and amendment risk, and may expose the client to penalties and interest if omissions are later detected.
- Amendments across multiple years: Crypto activity is often multi-year; the ATO may expand scope.
- Administrative penalties and interest: The Taxation Administration Act 1953 provides the framework for penalties; remission is discretionary and fact-dependent.
- Credibility issues: Poor cooperation can increase scrutiny and reduce the likelihood of favourable discretion.
Next Steps: How Fedix can help your practice respond faster
If your firm is handling ATO crypto letters, the bottleneck is usually not “tax knowledge”—it is assembling complete evidence, reconciling activity quickly, and producing defensible working papers under time pressure.
- Automate bank reconciliation with AutoRecon (10–15 minutes per client, around 90% faster)
- Produce consistent, review-ready working paper packs without fragile spreadsheets
- Leverage ATO portal integration to pull client statements and key compliance data quickly
- Reduce manual processing by approximately 85%, enabling capacity to handle more compliance work without adding staff
Learn more at home.fedix.ai, or consider trialling MyLedger (currently free during beta) to standardise your ATO response workflow for crypto-heavy clients.
Conclusion
An ATO letter about crypto trading should be treated as a structured compliance project: verify scope, reconstruct complete records, correctly characterise the activity, calculate the tax outcomes under Australian law, and respond with evidence or amend promptly. Practices that systemise reconciliation, evidence capture, and working papers will handle these letters faster, with lower risk and better client outcomes—particularly as ATO data matching becomes more comprehensive each year.
Disclaimer: This article is general information for Australian accounting professionals as of December 2025 and does not constitute legal or tax advice. Tax outcomes depend on the client’s specific facts and the law and ATO guidance as applied at the time. Consider obtaining specialist tax advice for complex crypto, DeFi, or residency scenarios.