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Do You Have To Pay Taxes On Bitcoin If You Don’t Cash Out?.

Article by WealthSafe.

Date Published: 3 Feb 2023

Do You Have To Pay Taxes On Bitcoin If You Don’t Cash Out?

Keeping bitcoin in your wallet? What does the taxman say about that?

The rules around cryptocurrency seem to change every day. And coming from my world, this is considered groundbreaking. And maybe a little overwhelming. 

Do you have to pay taxes on crypto if you’re not cashing out your bitcoin? Probably not. But this is likely to change in the future. 

I think what’s more important is being aware of what the Australian Tax Office says about bitcoin, how it’s taxed, and what you can do to protect your hard-earned income. 

How Bitcoin is Taxed

For the purposes of getting as much money as they possibly can, the ATO has been very quick to rule on what they say about cryptocurrencies like bitcoin. 

In my view, it’s borderline criminal how they’re taxing the Australian people, but I’ve been saying that for years. The way the ATO is handling cryptocurrencies is both shocking and completely expected from those mouthbreathers in Canberra.

For starters, the ATO’s position is that all cryptocurrencies as capital gains taxable assets. So, just like property or investments, simply holding cryptocurrency is not going to attract any taxes. At least, not until you dispose of it. 

Now, disposing of bitcoin could happen in several ways, and there are a couple examples I can give you. 

If you’re going to sell off your cryptocurrency holdings, and if you make a profit, then the ATO is going to come knocking. 

And knock they will. I know that several of my clients have received preemptive letters from the ATO, gently reminding them that they have to declare their bitcoin gains in their income. In all my years practicing tax law, I have NEVER seen the ATO be so forthright and aggressive about a financial instrument. This is completely unprecedented, and it’s going to certainly mark a wave of bitcoin audits in the future.

But disposing of an asset might also be interpreted as using bitcoin for the purpose of a sale.

If you pay for a product or service using bitcoins, or any other cryptocurrency, that could be construed as liable for capital gains tax as well. The only time that wouldn’t apply would be if the bitcoin is used for personal goods and services, and if the value is less than $10,000 AUD.

It’s also worth noting that bitcoin is double-dipped when a business accepts bitcoin as payment because they have to charge sales tax on that transaction. So, the ATO gets your capital gains as well as the GST. See what I mean about criminal?

Protecting Your Bitcoin From Taxes

Bitcoin

More bitcoin for you, less for the government

So, unless you’ve decided to use your bitcoin for payment, you won’t have to worry right now about paying taxes if you don’t cash it out. 

Instead, it’s much more prudent to spend some time thinking about how you’re going to protect your crypto gains when you do cash out. There are some measures you should take right now that will go a long way toward keeping more of your own money in your pocket. 

Taxes From Bitcoin Investing 

I’ll warn you. If you want to make a claim that you’re a bitcoin investor, then you’ll have to convince the ATO that you’ve met their very stringent standards. While investors do have some tax advantages, the right to claim them on your taxes depends on your ability to say that you legitimately invest bitcoin as more than a hobby or interest. According to the ATO, these qualities include:

  • Showing a frequency of trades – Traders often buy and cash out cryptocurrencies several times a week, trading between different coins and taking the cash out when the market is where they want it. Whereas a bitcoin hobbyist might be an average salary-earning Australian who buys $5,000 of crypto on the side. Frequency of trades demonstrates that you have dedicated enough time to watching the crypto markets to be considered an investor
  • Demonstrating a system – This is a loose definition, because often my clients simply buy the dips in crypto trades, and sell when it spikes again, as it often does. If you can show a system, or maybe it’s better to call it a pattern, that conveys some forethought in the trade
  • Good record-keeping – This is a vital part of any bitcoin owner because even if you don’t cash out, you should have accurate reports of your digital wallet movements for tax records. There are a lot of accountants and tax professionals out there who look at the complexities of the crypto markets and simply throw up their hands. But when I foresaw several years that the Australian government would be “chomping at the bitcoin”  very soon, I got ready. Talk with your accountant to see if they’re capable of handling the reporting measures of your digital currencies
  • Operate in a business-like manner – As long as you’re not Joe Schmo, bumbling your way through crypto trades, but you have some professionalism to how you conduct your trades, that’s often enough to demonstrate your full-time interest in bitcoin trading. This is also a good point for me to mention in passing that you should be running your crypto trades through a bucket company or some other similar tax structure to shelter you from your assets. Not enough space to get into that one, but have a chat with someone who’s willing to work for you, and not for those ATO rugrats.  

If, and only if, you’ve been able to satisfy those requirements, then you can use your trader status to your advantage. Because as the ATO has made abundantly clear in their court rulings, all cryptocurrencies are assets. 

And as an investor, you will be taxed on the capital gains of your profits, just like any other asset you own. But you won’t be paying any taxes on bitcoin assets if you don’t cash out. The point of sale is what matters. But here are a couple of options for you to consider as you think about cashing out your crypto:

  • Time your cash outs – Do you realize how many of my clients tell me about their purchases and sales, without taking any notice of the dates they made them? It’s more common than you think. I’ve seen people cash out assets on the last day of the financial year, costing them more tax than necessary, simply because they didn’t wait a couple days to sell off their holdings.

And it’s also worth noting that the length of your holds matters. If you can show that you’ve held an asset for over 12 months, then your CGT owing is cut in half. Now, the practicalities of showing that you own a particular amount of bitcoin are tricky, so speak with your accountant about proper tax recordkeeping.

  • Harvest your tax losses – As an investor, you can use your losses to your advantage. Rather than simply hoping that your dogecoin will someday bounce back, take the hit and sell. That loss is a capital loss, and therefore it can be offset against your other forms of income. In certain cases, I’m completely OK with advising my clients to simply give up on a certain investment and harvest that loss because it can even be used against future gains.    

Bitcoin Taxes for Non-Investors

Let me take a moment to get a rant out of the way. If you’re earning your way through bitcoin trading, the ATO wants to classify your profits as capital gains. And yet, if you’re simply doing this as a hobby on the side, the ATO classifies all your profits as income, even though it’s just a bonus project. Talk about screwy priorities. Is it any wonder that I’m passionate about getting my clients to pay attention to their bitcoin taxes, even if they’re not cashing out? 

OK, rant over. If you’re just trading cryptos on the side, any profits are going to be taxed as normal income. But that’s not to say that you have to pay the maximum the ATO would be willing to steal from you. Consider a couple of tax structure options that would help you protect your earnings. 

  • The family trust – This is my go-to suggestion for all my high net-worth clients. If all your income goes into one bank account, that’s just begging for the ATO’s attention and greedy grabbers. But if your bitcoin profits are instead held in trust, and distributed pre-tax to your beneficiaries, that distributes the tax burden in several places. Normally, my clients would distribute earnings to themselves, their partners, children, charities…etc. And then they find that since they’re not taking the bitcoin profits all in one hit, the tax bills are just a fraction of what they would have alternatively paid.
  • Offshore tax structures – If you’re just fed up with the unfairness of the Australian tax system, why bother playing that game at all anymore? Just like many of my clients with e-wallets, you can pick up your bat and ball and leave Australia for offshore accounts. Is it legal? Absolutely. As noted in an ABC article on the Panama Papers, my work is without fault to legally minimize taxes for my clients using legitimate offshore tax structures. There are many countries that save you considerable taxes, but you need to speak with someone well-versed in international tax laws. 

That’s the best point to make – that all your best efforts will be in vain to not pay taxes on bitcoin unless you choose to work with a good tax professional. To learn more about anything I’ve mentioned here, or to simply find out the options best suited for your business, have a chat with us today. We’ll give you a no-obligation assessment of your finances, and make sure that your bitcoin profits stay with you. 

Talk to us today.           

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