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Factors to Consider When Managing Crypto Taxes

Managing crypto taxes can be a nightmare, given the complex nature of digital assets and the evolving regulatory landscape. However, there are various strategies and options available to crypto users in Australia to help manage their tax obligations. In this chapter, we’ll explore some of the key factors to consider when managing your crypto taxes and discuss several strategies that could be considered in relation to your taxes.  

This course is for educational purposes only and should not be considered tax or financial advice. You should seek out the help of an accountant to obtain advice. 

1. Holding Cryptocurrencies for More Than 12 Months 

One of the most important factors to consider when managing your crypto taxes is the duration of holding your cryptocurrencies. In Australia, if a taxpayer holds a cryptocurrency for more than 12 months, any capital gains made upon disposal may be eligible for a 50% discount under the capital gains tax (CGT) rules. This means that only 50% of the capital gain will be included in the taxpayer’s assessable income, resulting in lower tax liability and potentially saving money! 

NOTE: The 50% CGT discount is only applicable to individuals and trusts but not to companies. 

Fictitious Example 

  • Suppose you are an Australian taxpayer who purchased 100 Ethereum tokens for $10,000. After holding the tokens for 18 months, you sell them for $30,000. 
  • Acquisition Cost: $10,000 
  • Selling Price: $30,000 
  • Capital Gain without Discount: $30,000 – $10,000 = $20,000 
  • Since you held the Ethereum tokens for more than 12 months, you are eligible for the CGT discount. The discount allows for a 50% reduction in the capital gain for individuals. 
  • Discounted Capital Gain: $20,000 x 50% = $10,000 
  • Therefore, your net capital gain after applying the CGT discount would be $10,000. 
  • This discounted amount would then be included in your taxable income for the financial year in which the sale occurred. 

2. Donating Cryptocurrencies to Registered Charities 

Another strategy to consider is donating cryptocurrencies to registered charities. In Australia, if an individual donates a cryptocurrency to a registered charity, they may be eligible for a tax deduction equal to the market value of the donated cryptocurrency at the time of the donation. This means you can get tax benefits while also supporting charitable causes! 

To be eligible for the tax deduction, your donation must be made to organisations that are registered with the Australian Charities and Not-for-profits Commission (ACNC) and have a status as a deductible gift recipient (DGR). This means any donations made to social media or crowdfunding platforms won’t be tax deductible unless the recipient organisation holds DGR status. To check whether the organisation you are donating to has DGR status, you can enter the ABN or name in the search box of this page or use the advanced search

3. Choice of Inventory Method 

The inventory method you choose can also impact the calculation of capital gains or losses when disposing of cryptocurrencies. In Australia, the most common inventory methods used are First-In-First-Out (FIFO), Last-In-First-Out (LIFO), and Highest-In-First-Out (HIFO). 

FIFO assumes that the cryptocurrencies acquired first are the ones sold or disposed of first. LIFO assumes the opposite (i.e., the last coins acquired are the first ones sold), while HIFO selects the coins with the highest cost basis and disposes of them first. 

It’s important to note that once a method is chosen, it should be consistently applied for all transactions across all years (i.e., if you pick FIFO, you must stick to FIFO for all the years thereafter). Employing specialised crypto tax software (like CryptoTaxCalculator) can help you to efficiently analyse and compare the different inventory methods in order to work out the most advantageous option based on your transactions. 

Fictitious Example 

Let’s see an example where choosing one inventory method over another may reduce your tax liability. 

Say you are an investor who has bought and sold Bitcoin (BTC) multiple times over a specific period. We will consider four transactions in each inventory method example. 

FIFO Method (First-In-First-Out): 

Date Trade Price Balance Cost Basis Proceeds Gain (Loss) 
1st Jan Buy 1 BTC 3,000 1 3,000   
3rd Feb Buy 1 BTC 6,000 2 6,000   
4th Jun Buy 1 BTC 2,000 3 2,000   
 
6th Aug Sell 1 BTC 4,500 2 3,000 4,500 1,500 

In the above example, you sell the first BTC you purchased on the 1st Jan with a cost basis of $3,000, leading to a gain of $1,500. 

LIFO Method (Last-In-First-Out): 

Date Trade Price Balance Cost Basis Proceeds Gain (Loss) 
1st Jan Buy 1 BTC 3,000 1 3,000   
3rd Feb Buy 1 BTC 6,000 2 6,000   
4th Jun Buy 1 BTC 2,000 3 2,000   
 
6th Aug Sell 1 BTC 4,500 2 2,000 4,500 2,500 

In the above example, you sold the last purchase of BTC on the 4th June with a cost basis of $2,000, leading to a gain of $2,500. 

HIFO Method (Highest-In-First-Out): 

Date Trade Price Balance Cost Basis Proceeds Gain (Loss) 
1st Jan Buy 1 BTC 3,000 1 3,000   
3rd Feb Buy 1 BTC 6,000 2 6,000   
4th Jun Buy 1 BTC 2,000 3 2,000   
 
6th Aug Sell 1 BTC 4,500 2 6,000 4,500 (1,500) 

In the above example, you sell the highest-priced purchase of BTC on the 3rd Feb with a cost basis of $6,000, leading to a loss of $1,500. 

4. Purchasing Cryptocurrencies Using a Self-Managed Super Fund (SMSF) 

A self-managed super fund (SMSF) is an alternate way to save for retirement, often used by many Australians due to the many tax incentives involved. For individuals looking to invest in cryptocurrencies with their SMSF, there are specific considerations and options available but you must comply with superannuation laws and regulations. The Australian Taxation Office (ATO) has issued the following guidelines for those who want to invest in cryptocurrencies with their SMSF: 

  1. SMSFs may invest in cryptocurrencies if it is permitted under the fund’s deed and aligns with its investment strategy. 
  1. Clear ownership of crypto assets is essential for SMSFs. Legal documentation proving ownership becomes particularly important for non-exchange wallets (e.g., MetaMask), as they do not provide default ownership details. 
  1. SMSFs investing in cryptocurrencies must follow the ATO’s valuation guidelines for SMSFs. 

For more information on purchasing cryptocurrencies using an SMSF, please check out CryptoTaxCalculator’s guide, and you can read up on some of the present challenges which the ATO has outlined here. If you have any specific questions about your SMSF, we highly recommend seeking professional advice from a qualified SMSF specialist or tax advisor to ensure compliance. 

Did You know?

As of December 2021, $227 million AUD worth of crypto assets had being incorporated into Australian SMSFs.

5. Tax Loss Harvesting 

Tax loss harvesting is a strategy that involves selling cryptocurrencies at a loss to offset capital gains and potentially reduce your overall tax liability. In Australia, capital losses can be used to offset capital gains made within the same financial year or carried forward to offset future capital gains. 

Fictitious Example 

  • Alice purchases 1,000 LTC at a price of $5 per LTC, resulting in a total investment of $5000. 
  • After holding the LTC for some time, the value increases, and Alice decides to sell her LTC when it reaches $19 per LTC. 
  • In this case, Alice has made a capital gain of $14,000 ($19 per LTC – $5 per LTC) x 1,000 LTC. 
  • During the same financial year, Alice also acquires 2 BTC for $15,000. 
  • Unfortunately, the price of BTC drops, and she decides to sell her BTC when it reaches $8,000 per BTC. 
  • As a result, Alice incurs a capital loss of $14,000 ($7,000 per BTC – $10,000 per BTC) x 2 BTC. 
  • Since Alice has a capital gain of $14,000 from her LTC investment and a capital loss of $14,000 from her BTC investment, she can offset her capital gain against her capital loss. By doing so, Alice can reduce her taxable capital gains and potentially lower her overall tax liability associated with the capital gain. 
  • In this scenario, Alice will have a net capital gain of $0 ($14,000 capital loss – $14,000 capital gain). 

Wash Sales 

A wash sale refers to a situation where an investor strategically sells an asset at a loss (taking advantage of market downturns) only to buy it back almost immediately. This allows the investor to maintain their original asset position while creating an opportunity to claim a capital loss for tax purposes. 

So you might be wondering why everyone doesn’t do this. If you can reduce your tax liability without altering your crypto positions, it’s a win-win, right? 

As expected, tax authorities are well aware of wash sales, and on the 27th of June 2022, the ATO issued a warning to investors not to engage in asset wash sales. The ATO does not define specific timeframes for a wash sale, but it ultimately depends on the taxpayer’s intention of the sale. If it is perceived that the taxpayer is intentionally generating artificial losses with the sole purpose of obtaining a tax advantage, the ATO would consider this as a wash sale. 

Tax Loss Harvesting Tools 

To effectively implement tax loss harvesting, it is crucial to maintain accurate records of cryptocurrency transactions, including the purchase price, sale price, and any associated transaction fees. Using a tool like CryptoTaxCalculator (which automatically tracks your transactions) can help identify potential tax loss harvesting opportunities for you to potentially capitalise on and possibly reduce your tax burden. 

Summary

As you’ve witnessed in this chapter, effectively managing crypto taxes requires careful consideration of the many different factors and options which can help optimise your tax outcomes. We’ve seen strategies ranging from holding your cryptocurrencies for more than 12 months, all the way to the use of tax loss harvesting strategies. 

In the last chapter, we’ll run through some of the ways to file your crypto taxes in Australia and tools you can utilise to make this process as stress-free as possible. 

Authored by Crypto Tax Calculator

Australian-made to ATO standards, CryptoTaxCalculator (CTC) simplifies crypto taxes for Aussie investors. Whether you’re simply buying and holding, staking or diving into DeFi and NFTs, CTC has you covered.

Simply connect your accounts, follow the automated tax-saving suggestions and generate your ATO-ready report. Claim 20% off new CTC plans using code SWYFTXTAX. See you soon!

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