Although the recent losses within the crypto market have caused huge amounts of pain on crypto investors there are still plenty of things an investor can do to reduce their crypto related tax bill.
Cryptocurrency has the potential to generate huge gains, and big capital gains tax events to go with them. Here are some tips to assist you with safely minimising your tax without getting the Australian Tax Office (ATO) upset.
Time Your Crypto Disposals Strategically
The easiest and most effective 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 percent. This means that holding off until you meet that marker is a fantastic strategy to follow.
The second part associated with 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. This loss could then be used to offset any gains made,” says CryptoTaxCalculator co-founder Shane Brunette.
Tax-loss harvesting is a strategy used by many crypto investors to minimise their capital gains tax by closely tracking gains and losses throughout the financial year and selling assets at a loss in order to offset CGT.
This strategy, when executed effectively, has the potential to 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,” says Shane Brunette.
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.
Cryptocurrency is only considered to be a personal-use asset if it’s held for a short period of time and disposed of in specific personal-use scenarios. Crypto is unable to 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. 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, who can help you to determine what would or would not fall into this category,” says Shane Brunette.
Donate In Crypto
Although it might 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,” says Shane Brunette.
Donating to a DGR is also tax-deductible, as long as it’s a genuine gift and you’re not receiving any benefit from the donation you make.
Self-Managed Super Funds
Although this is by no means a recommendation, it is possible to invest your superannuation in crypto via 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 percent, with long term gains taxed at an effective rate of 10 percent. This means you can enjoy a significant tax discount on your crypto gains, so long as they remain in your super fund.
Furthermore, 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 it is important to ensure that 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.
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. It’s best to work with an accountant to determine whether your mining activity falls into the hobby or business category,” says Shane Brunette.
Income you make from staking crypto is treated as ordinary income under current ATO guidelines. This means you will pay no CGT on your staking gains, but they will count towards your income tax on top of your normal wages.
Staking can be best described as 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, thus creating new crypto tokens in the process.
Taxpayers 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.