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Crypto Tax Loss Harvesting: What You Need To Know.

Article by WealthSafe.

Date Published: 31 Jan 2023

Crypto Tax Loss Harvesting

There is a lot to say about the cryptocurrency markets, but there isn’t a lot on how to think about it in terms of tax. Especially with cryptocurrency losses. If you’ve made big money in the crypto markets, then bully for you. There are a lot of my clients who’ve done the same, making their millions in months from wild swings within bitcoin, ethereum, and other coins.

But if you’ve endured some losses, and you’re holding on thinking that it’s going to rebound soon, you might want to reconsider. Especially if you can sell some of your cryptocurrency assets at a loss for tax savings later on. This is known as tax loss harvesting, and it’s a tricky field that’s pretty new for cryptocurrency traders.

What does the Tax Office Say about Cryptocurrency Assets?

Let’s first establish the baseline. 

The Australian Tax Office has been closely monitoring the cryptocurrency markets for years. At first, the government was wary of traders, seeing bitcoin holders as those trying to sneakily move money or use it for nefarious purposes.

Many of us thought that, myself included. But my thoughts changed on the matter when I saw that my clients were making literal millions with the crypto trades they were making. Tweets and rumours were enough to push markets up in a day, and that meant big money for many crypto holders.

And that movement also got the tax office to lean forward a little closer. The grace period they once extended to those who held and made money in the crypto markets are now subject to close scrutiny.

And now, the ATO is really getting greedy. I’ve heard many of my clients telling me of emails now being sent to them, reminding them that cryptos are considered assets, and selling a crypto coin must be claimed as capital gains.

Wow, they are sure greedy.

I don’t recall this strong a push from the ATO. As in, ever! And I know that my opinions about cryptocurrency are slightly different than the taxman. When my clients pay me in bitcoin, and I transfer that into Australian dollars, I’m not taxed on the transaction. But if I held it over in a digital wallet for a week and bitcoin made a sudden jump, I’m pretty sure that the ATO wouldn’t wait to claim their cut from me.

Makes you think that you could use your crypto losses to keep more of your money. And that’s where crypto tax loss harvesting comes into its own.

How Does Tax Loss Reporting Work

At its most basic, if the ATO is going to view a cryptocurrency as an asset, just like your beach house or your stock portfolio, then the same rules apply to how you report your losses. 

To give you some perspective on the power of using your capital gains and losses, let me direct you to an article written by Peter Martin in the Sydney Morning Herald.  Martin points out that in 2013-14, 56 of Australia’s highest earners were legally able to pay next to nothing on their taxes.

How did they do this? They claimed deductions and losses from their businesses and asset sales. In plain English, these wealthy taxpayers deducted the losses they incurred from their assets, which offset the tax they would have owed from incomes, some as much as millions of dollars per year. 

What’s also interesting to note is that all 56 of Australia’s highest earners spent over a million dollars on their tax advisors. Having a good tax expert on your side seems to be crucial to taking full advantage of these kinds of laws.

Tax loss harvesting essentially lets you look forward to how much money you can claim from your taxes if you can sell some of the assets and claim those losses against the income you’ll make in that year.

Many accountants are not well-equipped to handle these types of trades, with not enough understanding of the cryptocurrency markets to accurately report, at least to the standard that the ATO expects from you.

Once I saw that the ATO was going to seriously crack down on crypto tax loss, I knew that I had to make the upgrades and educate myself on crypto tax reporting. It’s a finicky field, one that requires up-to-date knowledge of what the ATO is doing and what’s legally considered viable when crypto tax loss reporting.

How to Pay Less Tax with Crypto Trades

Crypto trades

I’ll be brutally honest. If you’re going to simply withdraw money from your bitcoin account once it’s jumped up in value, you’re throwing your money away.

Seriously. Take your wallet to the nearest cliff and throw it over if that’s your plan to handle your crypto trades.

There are many ways to legally pay less tax, or even harvest tax losses from the drops in your cryptocurrency wallets. No need to jump online and join this foolish “#DiamondHands” trend where you hold on to worthless assets simply because it’s cool. Make your losses work in your favour.

First off, it requires that you can accurately claim that you’re a cryptocurrency trader. Saying the right lingo and constantly talking about cryptocurrency meme coins is not going to be enough for the ATO to see you as the real deal.

  1. If you want to claim your crypto tax loss properly, you need to prove that you’re taking these trades seriously. That means that you have a frequency in your trades. If you’re just buying a couple crypto coins here and there, holding on to them for long periods of time, that’s not a trader in the eyes of the tax office. But if you’re making a high volume of trades, dozens of buys and sells during the week, you can prove the frequency requirement. Mind you, holding some assets can still qualify you as a trader.
  1. Second, you need to show that you have a system to your trades. If you want to accurately claim a tax loss harvest from crypto, you need to show that you’ve planned out your moves. This can be tricky, and your accountant can best advise you on what qualifies as a provable, measurable system that ATO can quantify.
  1. Very important here, you need accurate reporting. Your crypto losses can be harvested as tax offsets for the future, letting you invest more later on. But that only happens if you’re able to open up your digital wallets and exchange to the government. Again, a good accountant can show you the right reporting and record-keeping tools to keep you above board on all your tax loss reporting.

Let’s take a look at how this could practically apply to your next tax filing.

You’ve got a diverse portfolio in your cryptocurrency trades. You’ve done well on some, but you’ve lost $20,000 on what you believe is just a momentary drop in the market.

Then, it’s tax time. You file your taxes, making sure to accurately report everything to your accountant when you mention in passing that you’ve lost $20,000 of value in one coin but you’re hoping that it bounces back in the near future.

Your accountant, having seen that you can qualify as a crypto trader, advises that you sell the crypto coin and harvest the tax loss of $20,000 to offset the tax burden from your other income. You can either use that $20,000 as a future offset, but it could certainly benefit you to save an extra $20,000 on your tax bill and keep more of your money.

Is it legal? Yes.

Is it common? Not yet. But I foresee that this kind of crypto tax loss harvesting won’t be

around forever.

Selling Crypto For the Tax Loss

The way I see it, the ATO is just sitting on their butts in Canberra, watching you hold on to your digital cryptocurrencies. They’re eagerly anticipating that moment when you decide to sell. Because when you sell an asset, that’s a capital gain.

Now, if you’ve made some profit on your bitcoin sale, then you’d best believe that the government will be quick to expect their cut. After all, that’s what they do.

But if you sell at a loss, are they going to be as quick to point out that you’re eligible for a tax break? That you can offset those losses against your other taxes owed? That you can make claims on future capital gains? Not bloody likely.

Remember that the ATO is going to come after your gains, even if you’re donating your cryptos, or simply using one bitcoin to purchase another type of cryptocurrency.

But there are exceptions to offloading your cryptos that might be exempt from being taxed.

As always, it’s best to speak with a trusted professional who understands these markets and what the government allows and demands.

Conclusion

In conclusion, if you’re ready to keep more of your own money in your pocket, be sure to get in touch with us today. We can give you a no-obligation recommendation for the tax structures that you should be using to save more money.

If you have questions about crypto tax loss harvesting, reporting your crypto gains, or want some general advice before making your next investment, feel free to call us today

Book Your Free
Tax Saving Assessment.

Wealth Safe
 

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