Whether you have capital gains or income from crypto - the ATO has made it clear you need to pay tax on your crypto. You can’t avoid tax on crypto in Australia entirely, but you can get strategic and optimise your tax position to pay less tax overall. Here’s our top tips on how to avoid tax on cryptocurrency in Australia - legally.
How to avoid tax on crypto in Australia
A quick reminder before we dive in - the Australian financial year draws to a close on the 30th of June 2022.
Why does this matter?
Because for many of these strategies on avoiding tax on crypto, you’ll need to make your moves before the end of the financial year. You’ll also need to factor in whether the ATO views you as an individual investor or a trader, as some of these strategies will only apply for traders or investors.
Let’s dive in.
Offset your capital losses
Capital losses aren’t all bad news - you can offset them against your net capital gain to reduce your tax bill.
You can get strategic with offsetting your losses. The ATO allows investors to pick which gains you offset. So if you have short-term gains (where you’ve sold crypto you hold for less than a year) - you’ll be taxed on the entire gain at your marginal Income Tax rate. Whereas if you have long-term gains (where you’ve sold crypto you held for more than a year), you’ll only be paying your marginal Income Tax rate on half of your gain. In other words, you can strategically use your capital losses to offset your short-term gains, ensuring you get the lowest tax bill possible.
Harvest your unrealised losses
Got a shitcoin that just keeps on sinking? Quit hodling and sell if you’ve got a large capital gain for the year. You can sell to realise losses, and then later offset them against your gains.
If you want to get really strategic, you could also look at tax loss harvesting. This is an investment strategy where you sell an asset to create a loss, and utilise that loss to reduce your tax bill, but you may then buy back your asset at a later date.
An important note though if you’re thinking of buying your asset back - beware the wash sale rule.
The ATO states if an investor sells an asset at a loss and then purchases the same within a 61 day period (30 days before the sale, the day of the sale and 30 days following the sale), this would be a wash sale and the capital loss from this transaction cannot be claimed or offset.
Utilise the personal use asset rule
You can get a Capital Gains Tax exemption if you hold crypto as a personal use asset - provided it’s less than $10,000.
The personal use asset rule can get tricky - and the burden of proof is on the taxpayer to prove that your crypto was a personal use asset if the ATO decides to investigate. In general, the longer you’ve held crypto - the less likely it is to be considered a personal use asset.
However, if you buy crypto for the specific purpose of spending it on something - the personal use asset rule would apply. For example, if you buy ETH for the purpose of buying an NFT. As you’ve held the ETH for a very short period of time, and used it to immediately purchase an NFT for personal use, your ETH could be considered a personal use asset and you wouldn’t pay Capital Gains Tax when you dispose of it by trading it for your NFT.
Deduct crypto mining expenses
Hobby mining in Australia is tax free upon receipt, so you won’t pay Income Tax on mined coins when you receive them - but you will pay Capital Gains Tax when you later sell, trade, spend or gift them.
It’s another story for those seen to be mining as a business though. If you’re seen to be mining as a trader, you’ll pay Income Tax on receipt - bad times.
But there is a silver lining to this, as if you’re seen to be mining as a trader, you’ll be able to deduct a variety of mining expenses as business expenses. This could include things like rig costs and electricity.
Got diamond hands? You’ll reap the benefits in Australia from a tax perspective. If you hold your crypto for more than 12 months, you’ll benefit from a 50% Capital Gains Tax discount when you eventually sell, trade, spend or gift your crypto.
Invest in a Bitcoin ETF
In some very exciting news, a Bitcoin exchange traded fund (ETF) launched in Australia in April 2022.
ETFs are a tax efficient way to get exposure to BTC, without all the self-custody issues. Most Bitcoin ETFs pay investors in the form of dividend distributions - known as franking credits.
Many companies pay Income Tax on their taxable income, and then distribute after-tax profits using franking credits via franked dividends. If Income Tax has already been paid by the company within an ETF, investors don’t need to pay it again.
Donate to a DGR
While gifting crypto isn’t tax free in Australia, donations to a deductible gift recipient (DGR) are - and you can even claim a deduction. Provided you donate to a DGR, you’ll be able to claim a deduction equal to the market value of your crypto at the point of the donation.
Use crypto tax software
Koinly can help you track your entire crypto portfolio from one spot. Not only does it calculate your crypto taxes for you so you always know your tax liability - but you can even track your unrealised gains and losses on your dashboard.
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.