You Can’t Avoid Crypto Tax - Here’s How to Pay Less in Australia
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 are our top tips on how to pay less tax on cryptocurrency in Australia.
How to pay less 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 2023. Why does this matter?
Because for many of these strategies, 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 to traders or investors. Here are the steps you can take:
Before the EOFY:
Track your unrealised losses
Harvest your unrealised losses.
Identify tax loss harvesting opportunities.
Utilise the personal asset rule when spending.
Invest in a Bitcoin ETF.
Invest in a Self Managed BTC Super Fund.
Donate to a deductible gift recipient.
After the EOFY:
Offset your losses - strategically.
Deduct mining expenses if possible.
Pick the best cost basis method.
Use crypto tax software.
Let's dive in.
Track your unrealised gains and losses with a portfolio tracker
You can't know how your crypto portfolio is really looking unless you have a dedicated app to track all your investments from one spot (like Koinly). This will let you not only identify the best opportunities to sell and realise a gain but also to sell and realise a loss.
There are many crypto portfolio trackers, but not all of them are equal, as a minimum, you should make sure you can track:
Your cost per unit
Current market price
Your unrealised gain/loss
Harvest your unrealized losses
Bad investments happen. If you've invested into a coin that's plummeted from hero to zero, or fallen foul of a rug pull, there is a small silver lining as you can harvest these unrealized losses to reduce your tax bill.
To harvest your losses, you need to realize your loss. This means you need to make a disposal by selling, swapping, spending, or gifting your crypto. So for example, you could:
Sell your tokens on an exchange if possible.
Swap your tokens for another token - potentially using a native wallet if exchanges have limited transactions on your coin.
Spend your tokens via a DeFi protocol if possible.
Gift your tokens by sending them to a friend, family, or total stranger.
Send your tokens to a burn wallet.
In the rare instances where a blockchain halts, or you lose access to your tokens, it is possible you could make a claim with the ATO for a capital loss due to theft or casualty loss - but you'll need plenty of evidence to prove it.
Once you've realised your losses... you can look at tax loss harvesting.
Identify tax loss harvesting opportunities
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 utilize 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 of the wash sale rule.
The ATO states if an investor sells an asset at a loss and then purchases the same within a certain time period with the intention to create a paper loss to reap a tax benefit, this would be a wash sale, and the capital loss from this transaction cannot be claimed or offset. Unlike many other tax offices, the ATO doesn't have specific time periods for a wash sale - instead, it comes down to intent, if a taxpayer is seen to be deliberately creating artificial losses in order to gain a tax benefit, this would constitute a wash sale.
In June 2022, The ATO issued a warning to taxpayers saying they should not engage in asset wash sales to artificially increase their losses and reduce their tax bill. They said taxpayers who engage in wash sales are at risk of facing swift compliance action and potentially additional tax, interest, and penalties - so proceed with extreme caution when tax loss harvesting or face a potentially larger tax bill!
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.
What this means is you should be strategic about the assets you sell. Although they may have accrued value from hodling them longer, you'll pay far less tax on assets you've held more than a year.
Utilize 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.
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.
Invest in a Bitcoin SMSF
Crypto Self-Managed Super Funds (SMSFs) are a means for Aussie taxpayers to include crypto in their retirement portfolio - and they come with some nice tax perks too.
If you want to buy crypto using your SMSF, you can do this on a couple of major exchanges like Kraken, Swyftx, and CoinSpot. You'll just have to register your SMSF Trust with the exchange you want to use.
When you have invested - when members of the SMSF are in the pension phase - any capital gain would be exempt from taxation.
A word to the wise though - the ATO is very specific about how a SMSF must be run, and should you not meet their requirements you can potentially face high penalties. You can learn more about investing and running a SMSF on the ATO site.
Donate to a DGR
While gifting crypto isn’t tax free in Australia, donations of crypto 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.
Once the financial year has drawn to a close on the 30th of June... here's what you can do next to pay less tax.
Offset your capital losses - strategically
Once you've tracked and harvested your losses within the financial year, you can now use them to offset your capital gains and reduce your tax bill.
You can get strategic with offsetting your losses. The ATO allows investors to pick which gains they 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.
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 because 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.
Pick the best cost basis method
For individual investors in Australia, you can use the FIFO, HIFO, or LIFO cost basis methods - although you must be able to prove that you followed these accounting methods. This is great news because these can make a huge difference to your tax bill. You can learn all about crypto cost basis methods in detail in our guide, but in summary:
FIFO tends to produce the highest gains, but may lower your tax bill through the 50% long-term CGT discount.
LIFO tends to produce the lowest gains, but may increase the tax rate you pay due to paying short-term Capital Gains Tax.
HIFO tends to produce the lowest gains, but you'll need good records to prove you followed this cost basis method.
It's a different story for those viewed as traders by the ATO though - they may only use the FIFO cost basis method.
Use crypto tax software
Koinly can help you track your entire crypto portfolio from one spot and know your tax liability throughout the entire financial year. Not only does it calculate your crypto taxes for you so you always know your tax liability - and you can even track your unrealized gains and losses on your dashboard so you know when to harvest gains and losses. Better still, Koinly is totally free to use. You'll only need to upgrade to a paid Koinly plan when you want to download your ATO myTax report when you're ready to file.