If you're currently mining crypto, it's important to learn how cryptocurrency mining is taxed. This…
Cryptocurrency Tax Efficiency Strategies of the Best Traders
The cryptocurrency market has exploded in value over the last decade, creating an entirely new asset class that has been leveraged by forward-leaning traders around the world to generate massive profits — but how are they managing their taxes? We explore in more detail.
Cryptocurrencies may be a powerful new asset class, but that doesn’t mean they are exempt from taxation. In this guide, we’ll break down the most effective tax efficiency strategies of the best traders.
Separate your HODL Portfolio from your Trading Portfolio.
- Most traders don’t trade all currencies equally. More often than not, some crypto is held for more extended periods of time to realise a significant cryptocurrency gain in a rising market. Frequent coins for an extended HODL are most alt-coins, particularly after an ICO.
- But where crypto activity classes someone as a trader then the ‘business of trading cryptocurrency” applies to all their activities. So no 50% CGT discounts on your long term capital gains where the currency is held over 12 months.
- A more sensible means of accessing the discount is to purchase your HODL portfolio instead through a family trust. Trusts are great for 3 reasons:
- Firstly, you are entitled to the same 50% CGT discount as individuals where the crypto asset is held for more than 12 months.
- Secondly, you can also distribute the taxable income of the trust across different adult family members as appropriate. Different family members may have less taxable income and therefore a lower tax rate. Most Australian tax residents would get access to the tax free threshold of $18,200 as well. It is important however that a trust resolution be made before 30 June to have the distributions made in the right manner.
- Thirdly, family trusts offer a degree of asset protection. Should you come under a lawsuit personally, a charge is less likely to be placed on the crypto assets held by your trust since these are not held by you.
Family trusts with corporate trustees are usually the structure of choice as they are effectively intergenerational and don’t require revision of the deed should the key members change.
Your trading portfolio conducted personally may have good & not so good years of activity. The Non-Commercial Loss provisions means that providing you have over $20,000 of crypto trading turnover then any losses made that year can be applied against your other income (such as a salary).
Why Are Detailed Crypto Trading Records Essential?
Maintaining highly accurate records is the most important element of executing an effective cryptocurrency trading tax efficiency strategy. Regardless of whether a cryptocurrency investor or trader is generating income from staking, trading, or other crypto-related endeavors, accurate record keeping is critical as it allows for accurate valuation.
The data upon which cryptocurrency gains are received in a wallet address is used in the valuation process that calculates the market value of cryptocurrency gains in fiat currency.
Should a trader trade on a futures platform, for example, and generates 0.01 BTC in realised profit over a single day, the taxable income for that day is calculated at 0.01 x the specific market value of Bitcoin on the same day.
In the above example, if the price of Bitcoin on the day of trade was $5,000 AUD, the trader has generated an income of $50. The price of Bitcoin may dramatically increase six months later, doubling to $10,000, but the tax liability for tax assessment purposes of the income generated on that specific day does not double. For this reason, it’s essential to ensure that all trades are logged in chronological order to minimize tax liability.
Making that your Cost Base is Adequately Recognised to reduce your Trading Profit on Sale.
Australia, like the USA, bases cryptocurrency taxation on previous principles established in similar markets, such as the share market, that dictate the amount of an asset is taxable at current market rates when the cost basis of an asset cannot be determined — not just the trading profit alone.
These rulings have a profound effect on the way crypto trading is taxed in Australia. If a trader cannot reveal the ledger or transaction history from the exchange or platform upon which trades were executed, it’s possible that a trader will be taxed on the entire current market rate of all cryptocurrency holdings on the day a ruling on the holdings is made.
This taxation method is upheld regardless of whether the cryptocurrency gains were made from trading, staking, or otherwise, and could potentially mean up to a 45 percent tax on the current market value of all crypto holdings.
The ATO taxes cryptocurrency in this manner due to the difficulty in tracking overall cryptocurrency movement — it’s impossible for the ATO to determine whether a trader sent cryptocurrency during large market dips or before disposing of an asset in order to lower purported income or capital gains tax obligations.
Keeping accurate records of all trades and cryptocurrency purchases ensures that cryptocurrency holdings are taxed accurately.
Choosing the right method to allocate your Cost Base
When selling instalments of the same coin, traders will have to choose a method for allocating the cost base to provide the most tax effective outcome. If you are using a platform such as cointracking.info or bear.tax to allocate your cost base then you are provided a number of different means to calculate this from First-in-First-out, Last-In-First-Out to OPTI which simply takes the highest cost bases to recognise the lowest trading profit.
Don't Forget your Deductions!
This is perhaps the easiest and most overlooked way by traders to reduce their taxable profit. Many traders don’t realise by being in the “business of trading crypto” that they are also eligible for business like deductions as well.
Most deductions that will apply would be in-line with running a home office, so expenses like the following are generally worth investigating:
- training courses
- computer/laptop & gear
- office furniture
- associated electricity costs
- mining equipment
- portion of the rent (although recommend discussing the effects with a tax accountant first)
For the above it is important to retain invoices for the expenditure and have a reasonable means for establishing how you arrived at the business % for the expense.
Note that should the above reduce your trading profit to nil, that losses are carried forward generally until $20,000 in turnover is achieved per the non-commercial losses provisions.
Thorough Tax Planning
The best traders don’t wait for the ATO to send an garnishee notice requiring a surprise sell off of their crypto portfolio. They look ahead and anticipate any tax payable well in advance. This gives themselves the maximum runway to have funds in store to pay the tax amount on their terms.
Meeting with your crypto tax accountant in May or June allows you to establish your relative tax position before 30 June and determine whether
- delaying the lodgement and payment of tax til May or whenever is the last day of lodgement
- bringing forward the tax return to get an early refund
is the best course of action. You’ll also get an opportunity to take up any last positions on your portfolio or tax deductions that might suit your overall tax position. You can also discuss different structures like a crypto SMSF or crypto family trusts.
On Changing Your Tax Residency
It is quite common for traders to comtemplate a tax jurisdiction with a lower tax rate, such as Singapore, Caymans for their activity – after all most cryptocurrency transactions don’t occur in Australia. The rules in play by most tax treaties however negate any perceived tax arbitage as Australian tax residents are taxed on their worldwide income – not just Australian based trades.
The only method then is to forgo one’s Australian tax residency by adopting a permenant place of adobe overseas and to remove their immediate ties (i.e. bank accounts, family home) with Australia. Whether a trader willing to make this sacrifice to achieve potential tax savings is the real decision to be made.
Fullstack is the tax advisor for a great deal of Australia’s best crypto traders and we recommend tailored advice for any situation rather than internet hear-say. Book a time with our tax specialists for the best insights into your situation.
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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.