Utilising Your Capital Losses in 2024

With some big wins for crypto in the 2024 financial year (1st July 2023 to 30th June 2024) there are many of you that are trading in the green and being so close to the end of the financial year it’s an important time to consider some tax planning opportunities with prior crypto capital losses.

Claiming Capital Losses

It is important to ensure that you keep adequate records in particular any prior year crypto investing or trading activities. Ensuring that you have kept adequate records means that any prior year carried forward capital losses can be easily substantiated and effectively used to offset your current year’s capital gains and reduce your income tax liability.

A common misconception among crypto investors is crypto is only reportable in your Income Tax Return if you have made a profit or gain. This is incorrect and any transaction resulting in a capital gains tax (“CGT”) event (regardless of whether it is a capital gain or capital loss) is reportable in your Income Tax Return in the financial year that it occurred. Remembering that a CGT event will occur most often when you have swapped to another crypto asset or sold to fiat currency, there are other transactions that the Australian Taxation Office (“ATO”) will consider as triggering a CGT event. Some other CGT events include:

  • ‘Gifting’ your crypto to a non-deductible gift recipient (“DGR”)
  • Crypto chain splits
  • Depositing crypto into a liquidity pool
  • Bridging crypto between networks
  • Lending your crypto

Please note, despite the ATO’s guidance on their views of transactions that will trigger a CGT event, this is not binding and at the time of this article there are no tax rulings or other legislation to reinforce the ATO’s views. If you do not agree with how the ATO’s views relate to your situation, please reach out to us to discuss the options of seeking a private ruling.

Crypto Exchange Bankruptcy

Unfortunately, many of you have been embroiled in the FTX bankruptcy and while there is promising news circulating the media that FTX creditors in Australia will be paid out in full, the reality is that this may not be the case for all. For those of you who will not be paid out in full, you will be eligible to claim a capital loss for any crypto that has not been paid out (recovered) when you receive notice from the administrators. If this occurs before 30th June 2024 then you will be able to claim a capital loss and offset your capital gains in your 2024 Income Tax Return.

Regardless of the outcome, it is important that your records reflect the result of the bankruptcy concluding as it relates to your affairs. In most cases, this will need to be accounted for correctly in your Crypto Tax Reports and recognised in your Income Tax Return.

For example, any crypto assets you originally held on the exchange will likely be redeemed in another crypto asset meaning your original holdings will likely need to be treated as being disposed of and a new asset being acquired (the amount you have been paid in another crypto asset). If you are not paid in full for your original holdings, the difference will need to be recognised as a loss and correctly reflected in your Crypto Tax Reports and bought to account in the Income Tax Return.

Getting this right is imperative to ensuring you are claiming capital losses you are eligible for and correctly accounting for any disposal events as a result

Wash Sale Arrangements

A popular option amongst investors in the lead-up to the end of the financial year is to sell underperforming assets to realise a capital loss and divert the proceeds to either better-performing assets or put aside for your tax savings. In the lead-up to the end of the financial year 2024, it is important to watch out for “wash sale” arrangements. A wash sale arrangement will provoke Part IVA (an anti-avoidance tax provision) of the 1936 Income Tax Assessment Act (“ITAA”) and is discussed in detail in Taxation Ruling (“TR”) 2008/1.

A capital gains event transaction that is entered into those results in a capital loss, and there being no change in economic exposure (or interest) in the crypto asset will likely be seen on face value as being a wash sale arrangement. Unfortunately, you may genuinely enter into a transaction that realises a capital loss and repurchase the same crypto asset in a short period.

These transactions ought to be executed with care and caution. If the reason for the re-acquisition is genuine, for example, being a staple token for a network that you wish to operate on, then this needs to be documented. Remembering that income tax law treats the taxpayer as guilty until proven innocent, it is your responsibility to ensure your records adequately show the reasoning behind a transaction of this nature.

If, however, you were to realise a capital loss, and not immediately (or within a short period) re-acquire the same crypto asset, then you shouldn’t have anything to worry about. With, it is imperative to have adequate records for all of your activity so that in the instance of an ATO review or audit, your activity can be justified and not seen as avoiding taxes.

Record Keeping

As is regularly the case, your record keeping obligations must be strictly adhered to. This is a large area of focus that needs to be emphasised especially when it comes to crypto-related activity. If the ATO is to continue it’s focus on crypto in the 2024 financial year, your affairs must be adequately substantiated by having thorough Crypto Tax Reports professionally prepared that reflect all your activity.

Not doing so will put you at risk of the ATO amending your Income Tax Return and in severe situations where you are unable to substantiate your crypto affairs, assume a zero cost base on your crypto assets sold.

With the implications of not adhering to your record keeping responsibilities being clear, there are simple steps you can take to ensure this doesn’t happen. Most notably these are:

  1. Ensure you document each centralised exchange and self-custody wallet (hot and cold storage wallets) that you use.
  2. Regularly extract full history transaction data from centralised exchanges (in CSV/Excel format).
  3. Document each network that is being used, for example a Metamask wallet that is being used on ETH and SOL blockchains.
  4. Document the use of any Decentralised Finance (“DeFi”) platforms and transactions.
  5. Document any acquisition of Non-fungible Tokens (“NFTs”).
  6. Document any crypto assets that have become lost or stolen, this will assist in claiming a capital loss should the event be eligible.
  7. Review any transactions occurring via relevant blockchain explorers and note any scam tokens or airdrops you have received and flag these for your crypto.

Our Commitment

As one of the original and largest crypto tax and advisory firms in Australia, Fullstack Advisory’s crypto tax return team is committed to your success. We are committed to providing exceptional ongoing tax compliance and advisory services to the crypto community. Our crypto tax team has extensive knowledge and experience working with crypto matters from day one, including complex DeFi situations, tax structuring and strategy advice, and more.

As part of our commitment, we welcome you to schedule a free 10-minute consultation to discuss your affairs and how we can help. Reach out to the Fullstack Crypto Tax Team 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 & online companies.

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