Cryptocurrency can generate big gains, and big capital gains tax events to go with them. In this article, we look at ways you can safely minimise your tax without bringing the ATO down on your head.
Following on from our first article in the series, ‘You might owe taxes on your crypto even if you haven’t cashed out your crypto’, CryptoTaxCalculator co-founder Shane Brunette joins us again to offer some quick hacks on how to reduce your crypto tax.
In this article:
1. Time your crypto disposals
The easiest and most efficient way to save tax on your crypto is to time your disposals. Holding for at least 12 months will reduce your capital gains tax (CGT) by 50%, so holding off until you meet that marker is an excellent initial strategy.
The second part of timing your crypto disposals is realising strategic losses in order to reduce tax on your gains.
“If you’re looking to offset some previous capital gains made, you could also strategically time some of your crypto disposals to align with you realising a loss,” Brunette explained.
“This loss could then be used to offset any gains made.”
2. Tax-loss harvesting
Taking strategic crypto disposals a step further, tax-loss harvesting is a strategy used by some investors to minimise their capital gains tax by carefully tracking gains and losses throughout the financial year and selling assets at a loss in order to offset CGT.
This strategy, when executed well, can help preserve the value of an investor’s portfolio while also reducing the cost of CGT.
“Volatility is commonplace for crypto investors, so tax-loss harvesting crypto market dips can be an effective way to reduce your tax liability for a particular financial year,” Brunette said.
Maintaining your portfolio over a financial year can be time-consuming and difficult, so it’s recommended to use a tax professional or crypto-tracking software to help manage your portfolio.
Crypto calculator software tracks which coins are under-performing and aren’t providing growth value, offering a more informed choice about which coins to sell down to offset CGT.
3. Personal-use purchases
Cryptocurrency is only considered to be a personal-use asset if it’s held for a limited time and disposed of in specific personal-use scenarios. Crypto can’t be classified this way if it’s used as an investment, in a profit-making scheme, or in the course of carrying out business activities.
“As Australian businesses continue to develop in their adoption of cryptocurrency, it will make personal-use purchases more accessible,” Brunette explained.
“As an example, there are certain IGAs that will allow you to pay in ETH or BTC. This kind of purchase might be seen as a personal-use purchase, and if so, would be exempt from capital gains tax.
“It’s best to work with a local tax professional, such as H&R Block (NYSE:HRB), who can help you to determine what would or would not fall into this category.”
4. Donate in crypto
While it may be a while before most charities accept crypto donations, donating in crypto is a viable way to dispose of your cryptocurrency without triggering a taxable event.
“According to a staff response on the ATO’s community forum, if the donation is made to a ‘Deductable Gift Recipient’ (DGR), then it should be viewed as a non-taxable event,” Brunette clarified.
Donating to a DGR is also tax-deductible, so long as it’s a genuine gift and you’re not receiving any benefit from the donation.
5. Self-managed super funds
While this is by no means a recommendation, it is possible to invest your superannuation in crypto through a self-managed super fund (SMSF). No other types of superannuation funds are able to invest in crypto.
Under current regulations, SMSFs gains – like all superannuation – are taxed at an income rate of only 15%, with long term gains taxed at an effective rate of 10%. This means you can enjoy a significant tax discount on your crypto gains, so long as they remain in your super fund.
And, if you manage to hold out all the way to retirement, you’ll be able to generate income from assets without any tax at all!
SMSFs come with a whole host of responsibilities and regulations, so make sure you understand what you’re signing up for if you choose to go down this path and consult with a tax professional to ensure you’ve done your due diligence.
6. Mining crypto as a business
There are two types of crypto mining: as a business and as a hobby. If you fall under the business category, your crypto movements will be taxed according to stock trading rules, circumventing CGT altogether.
“Business mining is taxed according to the trading stock rules, where sale of mined tokens will be treated as business income at the time of receipt,” Brunette explained.
“It’s best to work with an accountant to determine whether your mining activity falls into the hobby or business category.”
7. Staking Crypto
Income from staking crypto is treated as ordinary income under current ATO guidelines. This means you’ll pay no CGT on your staking gains, but they will count towards your income tax on top of your normal wages.
Staking is the process of using your cryptocurrency to be involved in a ‘consensus mechanism’. There are many levels of complexity here, but essentially the Proof of Stake method uses ‘staked’ coins to validate the next part of the blockchain, creating new crypto tokens in the process.
Those who stake their coins generally earn a percentage of the generated coins over time, similar to an interest-bearing savings account but with no government guarantees to back it up.
The bottom line
Reducing your crypto tax can be a cost- and time-effective way to save money on your market gains, but be wary of pushing the envelope too far.
The consequences of incorrectly reporting your crypto gains can be dire. Shane lays it out in plain language:
“It’s pretty simple,” Brunette said, “if you actively choose not to disclose your trades, gains, losses and/or income from cryptocurrency activity to the ATO, you will be liable for tax fraud and the relevant penalties this offence can incur in Australia.”
Tax fraud falls under the Criminal Code in Australia and comes with a hefty maximum penalty of 10 years imprisonment, not something to be taken lightly.
Overall, it’s best to consult an expert – or use software designed by one – to ensure that you’re meeting your tax responsibilities in the most cost-effective and safe way possible.
About Shane Brunette – CryptoTaxCalculator CEO
A software engineer by trade, Shane created CryptoTaxCalculator after experiencing the pain of doing his taxes during the 2017 crypto boom. He holds a Master in Artificial Intelligence, as well as a double degree in Psychology and Economics.
About CryptoTaxCalculator
CryptoTaxCalculator makes understanding your tax obligations simple and straightforward. Its signature tools help to identify, track and organise your personal crypto activity across hundreds of exchanges and blockchains, with both ease and accuracy.
CryptoTaxCalculator generates reports with added transparency, saving you time and stress. It is helping investors, traders and accountants by providing clear and secure records of your crypto activity, so you can relax at tax time.
CryptoTaxCalculator was co-founded by brothers Shane and Tim Brunette in 2018 and is headquartered in Sydney, Australia. For more information visit cryptotaxcalculator.io