Setting up a trust may seem like a headache — but can be achieved through…
Investing: Cryptocurrency and Family Trusts
For many cryptocurrency investors, setting up a family trust can be a highly effective tax strategy. What is a family trust, though, and what benefits can be gained from investing in crypto through one?
Cryptocurrency and family trusts are a useful combination for an investor.
A family trust, also referred to as a discretionary trust, is a powerful tool that can be used to manage property and assets, minimize the potential of probate, and ensure your family members are provided for.
Family trusts provide trustees with the ability to determine which beneficiaries will benefit from the trust. The unique structure of trusts makes them, in some cases, an efficient component of a cryptocurrency tax strategy.
If you’re currently investing in cryptocurrency, you may want to consider the potential benefits of family trusts and crypto in Australia.
What are Family Trusts?
In Australia, the term “family trust” refers to a discretionary trust established in order to conduct business or hold a family’s assets. In most cases, family trusts are established by a family member with the purpose of benefiting members of the family group.
A family trust can deliver a range of tax advantages, as well as protect the assets held by a family from liabilities. If a family member becomes bankrupt or insolvent, for example, a family trust can minimize the impact that it has on family assets.
The terms of a family trust are defined in a trust deed. Trusts are established by a trust settler and trustees. For more information on how to set up a family trust, see the Fullstack guide on Setting up a Discretionary Trust or Family Trust.
What are the Traditional Tax Benefits of Family Trusts?
- Establishing a family trust can deliver a broad range of traditional tax benefits. These benefits include:
- Tax minimization: The structure of some family trusts makes it possible to distribute income or capital to trust beneficiaries on lower marginal rates. This benefits assists with tax planning and minimization — in some cases, tax on income or capital distributed to beneficiaries can also be reduced though a process called “streaming.”
- Capital Gains Tax Discounts: Family trusts offer the advantage of a 50 percent capital gains tax discount on the disposal of assets on the condition that the trust must hold the assets for a period longer than 12 months.
- Carry forward losses: In some scenarios a trust makes it possible to carry forward losses
A major tax benefit offered by a family trust is that a trust does not have to pay income tax on income that is distributed to beneficiaries. The trustee that manages the assets held by a trust is able to distribute income to as many beneficiaries as needed. Importantly, the trustee is able to distribute income in a manner that takes advantage of the individual marginal tax rates of beneficiaries.
Investors who combine cryptocurrency and family trusts can use these advantages to manage their tax.
What are the Crypto Tax Benefits of Family Trusts?
Cryptocurrency and family trusts are a good combination.
The way in which cryptocurrency is taxed in Australia presents unique opportunities for the creation of tax strategies that integrate family trusts. The ATO provides detailed guidance on how cryptocurrencies are treated from a tax perspective. From the ATO’s perspective, cryptocurrencies aren’t defined as currency. Instead, the ATO classifies cryptocurrency as property.
The tax treatment of cryptocurrency depends on whether a cryptocurrency holder is defined as a trader or an investor. Cryptocurrency investors typically purchase cryptocurrency and hold it for an extended period of time. Capital gains tax is applicable to cryptocurrency disposed of by cryptocurrency investors — if a cryptocurrency investor holds cryptocurrency for over one year before disposing of it, it’s possible to benefit from a significant capital gains tax discount.
Cryptocurrency traders are taxed in a different manner. A trader that purchases cryptocurrency with the intent to sell it within the short-term in order to generate a profit is defined as a cryptocurrency trading business. In this case, the sale of cryptocurrency is subject to income tax.
Depending on the structure of your family trust, it’s possible to compose a highly effective tax strategy by splitting the distribution of crypto asset investments between investor and trader tax status.
The income distribution potential of a family trust makes it possible to distribute crypto trading income to beneficiaries at favorable individual beneficiary marginal tax rates. Trusts are also able to leverage ATO rules that apply to capital gains tax incurred by the disposal of assets held by the trust.
Transitioning from Personal Trading to a Trust
If you think you could benefit from combining you investing in cryptocurrency and family trusts, then you need to take steps.
When you are transitioning from personal crypto currency trading to a trust, there are a number of factors to consider. It’s best to consult with a tax professional before establishing a trust. A trust that splits crypto between trader and investor tax status, for example, may need to be structured in a manner that allows the trust to conduct the trading of a business.
- Establishing a discretionary or family trust follows a basic procedure. To set up a trust, you’ll need to:
- Select a trustee that will manage the trust in accordance with the terms outlined in the trust deed
- Draft a discretionary trust deed and settle the trust
- Pay stamp duty for the establishment of the trust
- Apply for an ABN and TFN for the trust
- Set up a bank account for the trust
A trust designed to integrate into a crypto tax strategy may be more complex to establish than a traditional discretionary trust.
A discretionary trust can provide your family with a wide range of tax benefits and, when applied to cryptocurrency tax, can offer a broad spectrum of potential tax advantages. While the tax treatment of cryptocurrency is a relatively new addition to ATO rules, the relationship between trusts and cryptocurrency tax is clearly defined.
A family trust can function as a highly effective tax strategy for managing cryptocurrency tax, but can be complex and time-consuming to establish. If you’re interested in the potential tax benefits of combining cryptocurrency and family trusts or even an crypto SMSF, reach out to Fullstack today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.