If you are looking for ways on how to avoid crypto tax in Australia, this article will help you understand the strategies to pay less tax.
The Australian Taxation Office (ATO) states that you must pay tax on your transactions if you are a cryptocurrency investor or trader in Australia.
Cryptocurrency is treated as a property for tax purposes, which means that any gains or losses from buying, selling, or exchanging it are subject to capital gains tax (CGT). Moreover, you must also report any income from mining, staking, or earning cryptocurrency as taxable income.
But it’s not all bad news; you can minimise your tax liability with strategic tax planning for your cryptocurrency activities. As the tax season is near, this article may come in handy and make you aware of the strategies to reduce your crypto tax implications in Australia.
Strategies To Apply Before The End Of The Financial Year (EOFY)
The Australian financial year runs from July 1st till June 30th of the next year. So if you want to save on your crypto taxes let’s start with the strategies you can implement before the end of the financial year.
Track Unrealised Losses
One of the answers to how to pay less crypto tax in Australia is to track unrealised losses. Unrealised losses are the losses that you incur when the market value of your crypto assets drops below your purchase price, but you have yet to sell them.
By tracking such losses, you can estimate how much tax you would owe if you sold your crypto assets at the current market price and plan your tax strategy accordingly.
However, tracking unrealised losses can be challenging, especially if you have multiple crypto transactions across different platforms and exchanges.
While there are many crypto portfolio trackers available, not all offer the same features. At a minimum, you should ensure the tracker allows you to monitor the following:
- Your total balance
- The cost per unit of each asset
- The overall value of your portfolio
- The current market price of each asset
- Your unrealised gains or losses
That’s where KoinX steps in as your saviour. With the help of our crypto portfolio tracker, you can easily track unrealised losses in real-time, so you can see how much tax you can save by holding or selling your crypto assets.
Harvest Unrealised Losses
Investing in crypto is risky; even the best investors sometimes lose money. Suppose you have invested in a cryptocurrency whose value plunged insignificantly or experienced a fraudulent scheme. In that case, you can utilise these unrealised losses to decrease your tax liability.
Doing so can lower your overall tax liability and save money. You can use any of the given methods to dispose of your crypto losses:
- Sell the tokens on any crypto exchanges.
- Spend them on DeFi games or DeFi protocols if possible
- Gift it off to someone.
- Swap it with any other token that has the potential to grow shortly.
- Send them to a burnt wallet.
In rare circumstances, you can lose the holding of your crypto or experience and halt the blockchain transaction process. You can file a claim with ATO for casualty loss and theft in these cases. Please note that to file these claims, you must have substantial proof.
Identify Tax Loss Harvesting Opportunities
Another strategy to avoid crypto taxes in Australia is through tax loss harvesting. The strategy involves disposing of your crypto assets that have lost value since you acquired them and using the losses to offset your taxable gains from other sources, but you can buy back those assets later.
However, if you are considering buying back the assets you sold as a part of tax loss harvesting, you must be aware of the wash sales rule. A wash sale is when you sell or dispose of a crypto asset at a loss and then buy back the same or substantially identical asset within a short period. Unlike other taxation offices, the ATO does not specify the time period of a wash sale; rather, it depends on the investor’s intent.
In June 2022, the ATO warned taxpayers against using asset wash sales to artificially inflate their losses and lower their tax bills. The ATO cautioned that those involved in wash sales could face swift compliance actions, along with extra taxes, interest, and penalties. Therefore, exercise great caution when harvesting tax loss to avoid a potentially larger tax bill.
HODL For Tax Benefits
Do you know that if you hold your crypto for over a year, you can pay less tax in Australia? Yes, if you are an investor in crypto assets in Australia, you may be eligible for a 50% CGT discount if you hold your crypto for over 12 months.
This means you can reduce your taxable capital gains by half when you dispose of your crypto assets after a year or more. It can significantly lower your tax liability and increase your net returns from your crypto investments.
However, the CGT discount is only available for individuals, trusts and complying super funds, and not companies. The amount of the discount depends on your marginal income tax rate and the type of entity that holds the crypto asset. For individuals, the discount rate is 50%; for trusts, it is 50% (unless distributed to a company beneficiary); and for complying super funds, it is 33.33%.
Utilise The Personal Asset Rule
The Personal Asset Rule is a provision in the Australian tax law that allows you to disregard any capital gains or losses on crypto assets held mainly for personal use or consumption as long as they cost you less than $10,000 to acquire.
Simply put, if you buy crypto intending to use it to purchase goods or services for yourself or your family and do so within a short period, you may not have to pay any CGT to dispose of your crypto.
For example, let’s assume you want to buy an NFT graphic image for your own use. The cost of that is 1 ETH. You must first purchase an ETH token from any supported exchange and then trade it off for the NFT. As you have kept the ETH token for a minimal time period and used it to buy an NFT for personal use, disposal of this ETH will not be subjected to any CGT.
However, this rule is a complex way to avoid crypto tax. Before claiming this exemption, you must know some complexities and limitations. For example:
- The rule only applies to traditional cryptocurrencies like Bitcoin or Ethereum. Non-fungible tokens (NFTs) are not considered personal use assets by the ATO.
- The time for computing if a crypto asset is a personal use asset will be when you dispose of it, not when you acquire it. Hence, if you initially buy crypto for personal use but later change your mind and keep it as an investment or use it in a business, you will lose the exemption and must pay CGT on any gains or losses.
- The rule only applies to disposals of crypto assets for personal use or consumption. If you exchange one type of crypto for another or use crypto to buy items for investment or business purposes, you will trigger a CGT event and have to report any gains or losses.
- The rule is valid on crypto assets that cost you less than $10,000 to acquire. If you buy crypto for more than $10,000, even if you use it for personal use or consumption, you will have to pay CGT on any gains or losses.
Hence, to use this rule, you must keep accurate records of your crypto transactions and prove that your crypto assets were mainly for personal use or consumption at the time of disposal.
Invest In A Bitcoin ETF
In April 2022, Australia launched its first spot Bitcoin exchange-traded fund (ETF), which allows you to gain exposure to the price of Bitcoin without buying or storing the cryptocurrency yourself.
So, investing in a Bitcoin ETF is like buying a piece of a large Bitcoin collection managed by a company. The value of your shares goes up and down based on how the price of Bitcoin moves. You get profits through the dividends distribution process known as ‘franking credits.’
Let’s further simplify this for you. Imagine a company paying income tax on its taxable income. After that, the company shares the remaining after-tax profits with its investors, i.e., you, through ‘franked dividends.’
Here’s the cool part: since the company already paid some tax on that money, you can get a tax discount. You can lower the tax you owe by using these ‘franking credits’ to show that the company has already paid some tax on your behalf.
It’s like getting credit for taxes already paid by the company, which helps investors keep more of the money they earn from their investments.
Invest In A Bitcoin Self-Managed Super Fund (SMSF)
Another way to avoid tax on crypto in Australia after retirement is by investing in a Bitcoin Self-Managed Super Fund (SMSF). A crypto SMSF is a particular savings account for retirement. However, instead of investing in traditional things like stocks and bonds, you also decide to invest some of your retirement money in cryptocurrencies, like Bitcoin or Ethereum.
As an Australian resident, you can plan your retirement using Bitcoin SMSF. The income you receive from an SMSF is taxed at a lower rate: 15%. Moreover, you can also enjoy the HODL tax benefits described above as you have held your crypto for over a period of 12 months. Additionally, you can enjoy a CGT-free income from these funds while in your pension phase.
To buy cryptocurrency using your Self-Managed Super Fund (SMSF), you can use major exchanges like Swyftx, Kraken, and CoinSpot. Simply register your SMSF Trust with the chosen exchange to get started.
A word of caution: the ATO has strict rules on how an SMSF must be managed. Failing to meet these requirements could result in significant penalties. To learn more about investing through an SMSF and its regulations, visit the ATO website.
Donate To A Deductible Gift Recipient (DGR)
If you want to pay less crypto tax in Australia, you might consider donating to a Deductible Gift Recipient (DGR). A DGR is an organisation or fund registered to receive tax-deductible gifts or donations.
One of the benefits of crypto donating to a DGR is that you can claim a tax deduction for your gift or donation as long as it meets certain conditions. These are:
- The donation must be crypto assets such as Bitcoin, Ethereum, or other digital currencies.
- Regardless of its value, the asset was purchased within 12 months before donating.
- The ATO values the asset at more than $5,000.
If you meet these conditions, you can claim a deduction equal to the market value of the donated crypto assets.
For example, if you bought one Bitcoin for $10,000 in January 2023 and donated it to a DGR in June 2023 when it was worth $15,000, you can claim a deduction of $15,000. Although you have made a capital gain of $5,000, you will not have any CGT liability.
Strategies To Employ After The End Of The Financial Year (EOFY)
What if you could not implement any of the above crypto tax saving strategies, and the financial year has ended? Worry not; you can still pay less or avoid crypto tax in Australia. Here are some of the tax-saving methods that you can use after the end of the financial year:
Offset Capital Losses Strategically
If you have kept a record of your crypto losses, it’s time to offset them against your capital gains strategically. The ATO lets you choose the capital gains you want to offset.
You might have enjoyed two types of gains:
Short-Term Gains:
Where you have acquired and disposed of cryptos within 12 months. Such transactions make you liable to pay CGT on the whole profit.
Long-Term Gains:
Where you have traded the cryptos you have held for over a year. The ATO allows you to enjoy a 50% discount on CGT upon such transactions.
Hence, you can significantly reduce your tax liabilities if you use your losses to offset short-term gains where you are liable to more CGT.
Deduct Crypto Mining Expenses
If you have someone who did crypto mining as a hobby, i.e., you have invested an insignificant amount on mining techs and have not earned high-end income, then your minted token is tax-free on receipt.
In other words, you do not have to pay income tax on the token received. However, if you dispose of the tokens, you will be liable to pay CGT on the gain.
Now, if you have set up a mining rig to mine crypto on a large scale or as a business, you are liable to pay income tax on your said income. But, in this case, ATO allows you to deduct expenses you have incurred to run the business from the income before reporting it for taxation.
Choose The Best Cost Basis Method
If you are a crypto investor, you can choose any of the three cost-basis methods at your convenience.
FIFO (First-In, First-Out) Cost Basis Method:
Assume that the first crypto assets you acquired are the first ones you sell. It’s like selling the oldest cryptos in your portfolio first. This method may result in the highest gain but can reduce your tax liability by disposing of your long-term gains.
LIFO (Last-In, First-Out) Cost Basis Method:
LIFO assumes that the most recently acquired crypto assets are the ones you sell first. It’s like selling the cryptos you bought or invested in most recently before the older ones. Although this method allows you to have the lowest gains, the tax liability increases significantly as the focus is on short-term gains.
HIFO (Highest-In, First-Out) Cost Basis Method:
HIFO assumes you sell the crypto assets with the highest cost basis first, potentially leading to lower capital gains and taxes if your earliest purchases had a lower cost basis. You can enjoy the lowest gains, but you need to have proper records to justify that you have followed it.
Note: If you are a crypto trader, the ATO allows you only to follow the FIFO cost basis method to calculate your taxes.
Use Crypto Tax Software
Crypto tax software like KoinX simplifies your financial life by automatically calculating your cryptocurrency taxes. It ensures accuracy, saves time, and helps you maximise tax deductions, giving you peace of mind and control over your crypto investments.
KoinX is a crypto tax software designed to meet tax guidelines and requirements given by ATO. It can import your transactions from over 180 exchanges and wallets, including popular platforms like CoinSpot, Binance, and Coinbase. It auto-classifies transactions based on whether they’re DeFi, NFTs, staking, mining, trading and airdrops. This further aids in generating reliable and accurate tax reports.
How To Reduce Crypto Taxes As A Business In Australia?
Reducing crypto taxes as a business in Australia requires strategic planning and adherence to Australian Taxation Office (ATO) guidelines. If you operate a crypto business, such as mining, trading, or exchanging, you can claim tax deductions on most expenses directly tied to your operations. These deductions help lower your taxable income, as long as you meet the ATO’s criteria for a legitimate business under the non-commercial losses rules.
For businesses that buy and sell cryptocurrencies as an ordinary course of business, trading stock rules, rather than Capital Gains Tax (CGT) rules, apply. This means any gains from selling cryptocurrency held as trading stock are treated as ordinary income. Additionally, the costs of acquiring cryptocurrencies are deductible, allowing businesses to offset some of their operational expenses.
It’s essential to declare the value of your cryptocurrency at the end of the financial year. If your turnover is under $10 million, you may benefit from the simplified trading stock rules. You have the flexibility to value your crypto at cost, market, or replacement value, which can assist with effective tax planning.
Conclusion
As the financial year draws to a close, it is essential to take stock of your financial situation and ensure you are taking advantage of all available tax planning strategies. By taking action now, you can minimise your crypto tax liability and maximise your wealth in the long term.
However, if you are unsure how to proceed, it is always best to seek professional advice from KoinX’s qualified tax advisors. They can help you develop a personalised tax plan that meets your needs. So, try KoinX today to get reliable tax reports.
Frequently Asked Questions
Can ATO Track My Crypto Transaction?
Yes, the ATO can track cryptocurrency through data-matching programs with Australian exchanges, accessing transaction data since 2014. It collects personal information like names, addresses, email, and transaction details. In May 2024, the ATO requested data for 1.2 million crypto investors to ensure tax compliance. This includes KYC details, wallet addresses, and transaction histories from crypto exchanges.
Can I Save Income Tax On Crypto Income?
Yes, you can save on income tax for crypto income, but it depends on your total annual earnings. In Australia, you won’t need to pay any income tax until your total income, including crypto profits, exceeds AUD 18,200. Once you pass this threshold, your crypto earnings will be subject to taxation according to the applicable income tax rates. Keeping accurate records of your crypto transactions is crucial.
Does Tax-Free Gifting Limit Apply To Crypto Gifting In Australia?
No, the tax-free gifting limit in Australia does not apply to crypto gifting. In Australia, cryptocurrency is classified as property for tax purposes, meaning that gifting crypto is considered a disposal. As a result, gifting crypto is subject to Capital Gains Tax (CGT), unlike cash gifts, which fall under the tax-free gifting limit. Therefore, you must account for any gains or losses when gifting crypto.
