This isn’t one of those spammy articles where you have to read to the end to get the answer.
Yes, you do have to pay taxes on cryptocurrency gains…
You don’t have to pay as much as you think.
That’s my mission in life – to get people to realize the absolute idiocy of paying the government any more money than they legally have to. But without any sort of plan going forward, that’s exactly what you’re going to do.
And you might be celebrating some serious wins in the crypto markets, but I promise you that unless you’ve planned ahead, you could be stuck with some ludicrously high tax bills. You think you’re excited about your wins? Imagine how excited the tax office is when you have to pay taxes on your cryptocurrency gains.
Especially when you’re asked to fork over as much as 48.5% of your profits.
Yes, that’s legit. And no, I’m not kidding. But yes, there is a way to legally (and I have to emphasize that we’re doing everything legally here) slash your cryptocurrency tax bills dramatically, paying way less than you should from your digital wallets.
I’ll admit that I wasn’t always favourable towards cryptocurrencies. I saw them as an unregulated scam arena, rife with danger and losing your hard-earned wealth. But then I had clients telling me that they were making hundreds of thousands and millions in months from Bitcoin surges, Ethereum, and several other smaller meme coins.
Ok, there’s something in this. That’s when I predicted that the Australian Tax Office was just as likely watching these crypto markets even closer than me. Because it’s been my experience that for a new financial product, the ATO typically waits up to 5 years before taking any serious action about it.
Well, that’s behind us, and you’d better believe that the ATO is closely monitoring the profits and losses that you’re seeing. And they’re ready to audit, too. Yes, the tax office has declared in many of their rulings and court cases that cryptocurrency is considered an asset, just as much as property or stocks or your vintage Monaro. And that means they can tax it just like any other asset in your possession.
But there are some ways we can get around those buggers in the tax office, and we can institute some legal structures that help you when it’s time for you to pay taxes on your cryptocurrency gains.
The ATO and I do not share similar views. It’s been that way for most of my life, and I’m passionate about getting people to realize that there are ways to legally slash your tax bill and keep more of your money.
In my radicalist view, I’m leaning toward the idea that cryptocurrency is a currency, like the US Dollar or a Chinese Yen. It’s in the name! It just happens to fluctuate more than a stable currency. So if you transfer $10,000 AUD into Bitcoin, and then transfer it back into AUD when Bitcoin jumps in price, that should be an untaxable gain from currency fluctuation.
Unfortunately, my views don’t count for much when submitting tax returns. That being said, I do propose two main structures that will help you keep more of your cryptocurrency gains, including one method that will actually help you offset your losses and lessen the sting of a bad day in the markets.
At its simplest, the family trust is a tax structure designed to hold onto assets for a period of time and then distribute those assets, pre-tax, to the beneficiaries you choose. This is done through a trustee, someone who is assigned to make these decisions but does not own the assets within the trust.
I think that a simple explanation will demonstrate the effectiveness of this simple, powerful tax structure.
Let’s say that you have $20,000 to invest into the cryptocurrency markets. You put the majority of it into more established cryptos like Bitcoin, but you set aside some smaller amounts to take risks on some newer coins.
After 6 months, the total of your portfolio has skyrocketed. Your cryptocurrency portfolio is now worth $200,000, and you believe that it’s time to cash out. You should be celebrating a nice $180,000 profit. Time to pop the champagne?
Not quite yet.
If you transfer all that Bitcoin back into Australian dollars, that’s considered income from the sale of an asset, and it’s liable to be taxed. And with the amount you’ve made, that’s likely to be at the highest rate, 46.5% for high-income earners. Yes, you might be just a first-year teacher, but now the ATO looks at you as a high-income earner and will slap you with a whopping $80,000+ tax bill!
That’s just insane! And I agree.
Which is why you played it smart and decided to use the family trust to make all your investments. Now, when you cash out your e-wallet gains, it’s first held by the trust, not yet applicable to be taxed. And now you can distribute that $180,000, part to you, part to your wife, some to your kids, maybe a healthy donation to a registered charity. And you’re only going to be paying 25% tax as a maximum. Right away, you’ve saved at least $35,000 on your tax bill, simply by using this one structure.
Or by using a family trust, you’ve given yourself a $35,000 raise this year. Now, it’s time to pop that bubbly!
I would just caution you here that the trust is designed to distribute assets, not to hold it. If the family trust holds assets, then it’s liable to be taxed at 40% in Australia. Just make sure that your beneficiaries are clearly defined when it’s time to distribute the funds to avoid that steep penalty.
While some people just noodle around in cryptocurrency, investing in their spare time and without a clear strategy, others see the crypto market as a digital playground. And if that’s you, then as a trader in the cryptocurrency markets, your tax will be looked at differently by the tax office.
Of course, the ATO has always viewed the sale of any asset as the time when they get paid. That’s why they were so quick to have official court rulings that declared cryptocurrency as a financial asset. But that doesn’t have to be a deterrent.
First, let’s clarify the distinction between a trader and a normal cryptocurrency holder.
For the Australian government to see you as a trader, you’ll have to show intent and commitment. That could mean that you’re working with an accountant who understands and is resourced to help you keep records of your crypto trades. You’ll be able to show that you’re a full-time trader, or at least using enough of your time to make this your occupation. You’ll have proven strategies that you use to make your trades. You buy and sell with frequency, meaning that if you’re simply holding long-term, you’re not a trader. But several trades a week are going to qualify you as a trader, at least in the eyes of those money-grabbers in the tax office.
Now, if you can pass that rigorous test, your profits are considered capital gains and they are taxed as such. Now, when you’re asking if you need to pay taxes on cryptocurrency gains, your profits can be taxed just like when you sold property or normal stocks.
This is especially handy if you’re operating on your own (or through the trust that I mentioned above). This way, you can claim the capital gains tax general discount, which equates to 50% of your reported gains. So, let’s say your regular trades earned you $200,000 profit this year. You can legally slash your tax bill by showing that these are capital gains through legitimate trades, and since you’re an individual, you only have to report a $100,000 profit.
The real advantage though is when you incur some losses. If the market crashes (and I know a few of my clients have come to me with this problem), you can take those losses and offset them against your other income.
So, if you’ve lost $40,000 this year on some misguided trades on meme coins, and some billionaire made some disparaging tweets that sunk its value that’s a legitimate tax write-off. You can legally lower your tax bill against any other income sources you may have. You can also claim that against future capital gains you might make next year.
Of course, this is all going to be highly personalized to your specific needs. That’s why you absolutely need to speak with an accountant who understands how to think about paying taxes on cryptocurrency. You need an accountant who can advise you about the tax structures and methods of legally reducing your cryptocurrency tax bill.
Speak with our team today. Most of my staff holds cryptocurrency, so they speak your language when it comes to evaluating your tax bill on crypto gains and losses. Get personalized advice today and keep more of your money.