Accounting & Tax, Crypto Tax

7 Tax Tips for your Crypto Portfolio

Crypto Tax Australia

Managing your cryptocurrency tax obligations at the end of the financial year can be a stressful process. In this article, we’ll highlight seven key tips that can eliminate crypto tax headaches.

Cryptocurrency tax in Australia can get complicated for even the most experienced crypto trading professionals. There are many factors to take into account when managing your crypto tax, such as the total number of trades you have executed, whether your crypto activities qualify as personal or business activities, and taking into account factors such as airdrops or chain forks.

1. Determine Whether You Qualify as a Crypto Investor or Trader

The scale and frequency at which you trade cryptocurrency may have an impact on how the profits you generate from trading are taxed. A professional cryptocurrency trader typically performs multiple trades weekly, or executes multiple trades in a single day.

Traders that purchase and sell cryptocurrency regularly in order to generate profit can potentially be traded differently than intermittent investors from a tax perspective. A professional trader that operates their trading activities as a business may fall into a category in which the profits generated from their trades are treated as part of their accessible income — this is important, as it makes it possible to potentially claim deductions on trading expenses.

Determining whether you qualify as a professional trader can be complicated. As a general rule, a cryptocurrency holder that purchases crypto on an occasional basis with the intent of generating profits over a long term is a cryptocurrency investor. A cryptocurrency trader that frequently purchases and sells crypto over short term periods in order to generate short term profit, however, is likely to be classified as a crypto trader conducting business activities. Read our article ‘Crypto Trader vs Crypto Investor’ here.

The frequency of your crypto trades and the intent behind them can have a significant impact on how you are taxed and, in some cases, can reduce your overall tax obligation.

2. Keep Accurate Records

Record keeping is critical at tax time. It’s important to ensure that you keep highly accurate logs of all cryptocurrency trades you make in a financial year, including trade data from every single crypto exchange you have traded on. This includes international cryptocurrency exchanges, crypto exchanges that don’t require KYC or ID information, or decentralized exchanges.

It’s also important to include trading data from previous years when managing your crypto tax — the cost basis of crypto assets you may have disposed of in the current financial year can be determined based on the the date at which the cryptocurrency was originally obtained, which may fall within previous financial years.

Always include all relevant information when calculating your crypto assets and crypto tax obligation — failing to include critical information could potentially result in a significantly higher tax bill.

3. Classify Crypto as Income Where Applicable

Not all cryptocurrency related activities are subject to capital gains tax alone. When you sell cryptocurrency you purchased with the intent of investing, any proceeds of the sale are likely to be subject to capital gains tax. If you’re generating and selling cryptocurrency through other means, however, such as cryptocurrency mining, you may find that the sale of the crypto you obtain through these activities is classified as income for tax purposes.

Cryptocurrency may be taxed as income if it is obtained through the course of “normal business activities.” The Australian Taxation Office provides several examples of activities that can be classified as business activities, which include:

● Professional cryptocurrency trading
● Operating a cryptocurrency related business
● Cryptocurrency transactions related to a business, such as accepting cryptocurrency as a payment method
● Commercial or large-scale cryptocurrency mining

Determining exactly how large a cryptocurrency mining operation must be in order to qualify as a business, however, can be slightly complicated — the ATO doesn’t provide explicit guidance on how to separate hobby or business crypto mining.

In general terms, the intent behind the operation of a cryptocurrency business is the best benchmark — if a cryptocurrency venture operates in a business-like manner with the expectation of commercial viability, or with a business plan, it’s likely that it is therefore defined as a business activity.

Profits or losses generated through the sale of cryptocurrency in this category are generally subject to business or income personal tax. If you’re not sure whether your activities are defined as businesslike, it’s best to consult with a cryptocurrency tax professional.

4. Don’t Neglect Filing Crypto Losses

Cryptocurrency investors will not generate a capital gain or loss until they dispose of their cryptocurrency — regardless of whether the market value of their investment significantly increases or decreases.

Capital gains tax rules are applied to cryptocurrency gains in the same way as they are applied to other assets — which means it’s possible to use cryptocurrency losses to reduce the total amount of taxable income.

If the proceeds generated by the sale of cryptocurrency are less than the total amount paid for the cryptocurrency when it was first purchased, an investor therefore experiences a capital loss. It’s possible to leverage capital losses to reduce the total amount of tax that must be paid either within a financial year or in future financial years.

If you’ve made a loss on any cryptocurrency investments, remember to file capital gains losses if applicable — this could potentially reduce your overall tax obligation.

5. Don’t Forget Forks & Airdrops

Cryptocurrency can be obtained through trading, investment, or as income. A unique feature of the cryptocurrency market, however, is the financial impact of forks and airdrops.

Hard forks occur when a blockchain splits into two different chains, such as the creation of the Bitcoin Cash blockchain from the Bitcoin blockchain in 2017. During a hard fork, individuals that hold tokens on the original blockchain may be provided with tokens on the new blockchain, which can result in significant financial gains.

Airdrops operate in a similar manner, often providing cryptocurrency holders with significant amounts of a new cryptocurrency if they hold a cryptocurrency related to a new project executing an airdrop. The Australian Taxation Office does not consider individuals who have received cryptocurrency due to a hard fork or an airdrop to have made a capital gain or generated any regular income — but this doesn’t mean crypto gained through forks or airdrops isn’t subject to taxation.

Any cryptocurrency gained due to an airdrop or hard fork is considered to have a value of $0 at the time it is received for the purpose of capital gains tax evaluation — a taxable event occurs when the cryptocurrency gained in this manner is disposed of.

If you’ve sold any cryptocurrency gained through forks or airdrops in a financial year, it’s important to include this in your crypto tax reporting. It’s worth noting that cryptocurrency gained through airdrops or hard forks held for over a year is eligible for a capital gains tax discount.

6. Follow an Effective Crypto Tax Strategy

Cryptocurrency can be obtained through trading, investment, or as income. A unique feature of the cryptocurrency market, however, is the financial impact of forks and airdrops.

Hard forks occur when a blockchain splits into two different chains, such as the creation of the Bitcoin Cash blockchain from the Bitcoin blockchain in 2017. During a hard fork, individuals that hold tokens on the original blockchain may be provided with tokens on the new blockchain, which can result in significant financial gains.

In addition to following the tips outlined above, there are a number of straightforward strategies you can adopt that will increase the efficiency of your cryptocurrency tax administration and reporting. These tips can help you reduce the total amount of capital gains tax you may be obligated to pay and ensure that you will remain compliant with all current ATO cryptocurrency tax requirements.

Some of the strategies you can adopt today to enhance your crypto tax strategy include:

● Carefully plan your cryptocurrency purchases in advance in order to ensure that you are aware of any potential tax consequences. Keep in mind that trading one cryptocurrency for another may, in some scenarios, create a taxable event.
● If you’re planning on investing in a cryptocurrency for an extended period of time, it’s best to hold the cryptocurrency you have purchased for over 12 months — this allows investors to take advantage of a 50 percent capital gains discount on disposal.
● Maintain highly accurate records of all cryptocurrency purchases, sales, and trade as they are made. Taking a proactive approach to maintaining accurate records is significantly more efficient and less time consuming than backdating transactions.
● Remain aware of any potential deductions you may be able to claim on cryptocurrency gains or income.
● Always ensure that you have disclosed any and all information regarding your cryptocurrency trades, investments, or other activities to the Australian Taxation Office.

7. Consider Using Crypto Tax Automation Tools

Cryptocurrency traders and investors are now able to take advantage of a variety of cryptocurrency tax reporting tools, many of which integrate directly with Easy Crypto or Swyftx. These tools automatically collect and classify cryptocurrency trading activity from exchanges and generate reports, significantly reducing the total amount of administrative time required to generate crypto tax reports.

While it’s possible to manually log cryptocurrency trading activities via spreadsheets, the scale at which most cryptocurrency investors and traders execute trading activities can generate vast amounts of transaction data.

Most crypto tax automation software tools allow you to edit the profit calculation as as well such as the LIFO, FIFO and OPTI methods seen on cointracking.info.

Key Takeaways

Ensuring that you are following a comprehensive crypto tax strategy can reduce the amount of time you’ll need to confirm that you’re compliant at tax time, as well as reduce your overall tax obligations. Accurately recording and reporting all relevant information and remaining aware of changing ATO rulings on cryptocurrency tax will help you keep tax time headache-free.

Finding the best crypto tax strategy can be complicated. If you’re unsure of your tax obligations as a crypto investor or trader, reach out to the crypto tax accountants at Fullstack for personalised tax guidance today.

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