Cryptocurrencies: how are they taxed?
I know that sounds like the punch line of a bad joke, but it’s the truth for many Australians. Especially those who’ve been in the cryptocurrency game for a long time. Tax on your bitcoin is the reality you’ll have to face.
Maybe a few years ago, everyone, including the Australian Tax Office, was concerned with how to pay taxes on bitcoin. But don’t worry everyone! The tax man figured out just how to get its greedy fingers on your crypto gains. Please note the heavy-handed use of sarcasm here.
Yes, the ATO has done its due diligence and figured out how to classify this cryptocurrency surge we’re witnessing. And according to the ATO, it’s an asset as well as money. That means that if you withdraw bitcoin and it happened to have earned some money on its rise, you’re going to pay tax. And, if you’re using bitcoin to pay for services, that will also be taxable as a form of money.
Now, let’s say this upfront. You’re going to have to pay taxes on bitcoin. Give unto Caesar what is Caesar’s. Give unto God what is God’s. (Although in this scenario, the ATO believes they’re God).
But just because you have to pay taxes, that does not mean that you have to pay more than you fairly should.
And let’s look at how we can do that for you.
In 1991, when grilled by journalists trying to crucify him, Kerry Packer famously said:
“If anybody in this country doesn’t minimize their tax, they want their head read. As a government, I can tell you you’re not spending it that well that we should be paying extra”
Well said. And very true as well. The Aussie government isn’t just taxing you; they’re blatantly ripping you off to fill their own pockets. Whether you’re paying for a politician’s mistress or funding some backhanded deals for bloated contracts, I don’t think you’d be 100% satisfied with how your tax dollars are getting spent.
And the ATO isn’t shy about asking for it either. Australia is one of the world’s most taxed populations, with the richest being taxed up to 48.5% of their earnings each year.
I happen to think that this cryptocurrency world we live in now makes this figure that much more egregious. In the past, my clients would make millions over the course of several years. And their tax burdens were high, yes, but it was a slow drain.
Now, I’m getting clients coming to me with their bitcoin gains of hundreds of thousands or millions within a matter of months, and they’re righteously upset at how quickly their gains are eaten up by taxes. Their anger is palpable. And very much justified.
Minimizing how you pay taxes on bitcoin is about making sure that you’re legally protecting yourself against these uncalled-for tax laws. And yes, I’m all about the legal means of slashing your taxes. The ABC mentioned me by name in a damning report about other Australians caught up in the Panama Papers leak. But when my name was mentioned, it was because I was legally conducting my business, creatively minimizing the taxes of my clients.
That’s a badge of honor for me.
I’m passionate about getting my clients set up with tax structures designed to protect their income, including anything you might be earning from your bitcoin and crypto trades.
Now, let’s talk about how to think about crypto taxes and prevention structures to keep more of your money 100% legally.
Keep more of these and pay less bitcoin tax
No matter how you look at it, the ATO wants to get into your wallet, digital or otherwise. And it wants you to pay the maximum amount of tax that you should pay.
In fact, many of my clients have alerted me to the notices that the ATO is sending out, notices that demand that you amend your previous tax assessments and start paying your fair share of bitcoin taxes. How messed up is that? I’ve never seen that level of grabbiness before with anything.
So, the ATO is serious about taxing your bitcoin. But there are some methods to making sure your cryptocurrency gains are kept in your wallet.
The first method is for the investors.
Now, this is a tricky one, and it’s worth noting that your accountant needs to work with you and advise you on what the ATO requires for you to qualify as a legitimate investor in cryptos. If you pass the strict guidelines and you have an accountant that’s worked with relevant crypto-reporting software, then here’s what you can do.
Now, remember when I said that the ATO considers bitcoin an asset? It’s because when you sell your bitcoin for a profit, that’s just like selling a property. You’re now going to be hit with capital gains tax on your earnings. As long as you qualify as a trader in the eyes of the government, that can work in your favour.
If you’re thinking about your bitcoin gains as capital gains, then it matters how long you’ve held the asset. Now, there are some arguments to be made that transferring your money between coins (like Ethereum to bitcoin) is still holding a crypto asset, you need to show that you’ve held it for 12 months or more. One year is a lifetime in the crypto trading game, but it’s automatically going to slash your tax bill in half. Capital gains taxes are halved if you can show possession for 12 months.
The other thing I’ll advise my clients is to use their losses wisely. What happens when you’ve got $30,000 tied up in bitcoin, and all of a sudden, the market collapses because, oh I don’t know, a massive exchange is revealed to be bankrupt and puts the entire cryptocurrency market in a downward spiral? You might consider holding on until the market (hopefully) rebounds.
Well, you might want to take the loss because if you’re a trader (again, meeting all the strict requirements laid down in various court rulings), you can claim your loss and offset it again payable tax from other income. How does this work? Let’s say that you sell your beach home and you make a $60,000 profit from the sale. Now, if you earn a healthy living from other sources of income, your marginal tax rate of 48.5% might require that you pay $29,100 from that sale.
That’s ridiculous, right?
Well, that’s when your savvy accountant who understands tax loss harvesting from cryptocurrencies comes in and advises you to sell off your bitcoin holdings, and report a $30,000 loss, which because it’s a capital loss, can be offset against the capital gains tax of your property.
Tax bill? It’s now down to zero, and all that profit is yours to keep. To reinvest in bitcoin? That’s your right to do. It’s your money, after all.
But what if you’re not an investor? What if you’re a naturopath, a landscaper, or a Centrelink employee with some crypto investments on the side? Well, your crypto sales are going to count as another form of income. And that’s reportable if you’re wondering how to pay your taxes on bitcoin.
But all is not lost here. For this situation, it would make sense to have all your crypto trades down under the banner of a family trust. The trust, managed by a trustee you dictate, is able to hold the profits of your bitcoin and distribute the funds pre-tax, all to whoever you choose.
The family trust allows you to disperse (and legally minimize) your tax burden among several individuals, like your wife, your children, and yourself.
What’s even better is to compound the trust tax structure with a bucket company that is legally responsible for the assets you hold. This adds another layer of legal protection, so should you ever be sued, your asset from crypto trades are legally locked away in the management of your trust and bucket company.
But this is starting to all get a little advanced.
For more tailored and specific advice, including ways to simply stop paying Australian taxes altogether, contact the team at Wealthsafe. We’ve been working with our clients to find ways to legally slash taxes, and in some cases, reduce them to absolutely nothing owed, all legally and above board.
I’m a massive fan of cryptocurrencies, and I’ve even won over our staff, who hold crypto coins of their own. We work for you to keep your money, and we don’t kowtow to the greedy money grubbers at the ATO.
I hope this article helped you. For more advice on what you can do to halt paying taxes on bitcoin, or any other income you make, contact our team today for a no-obligation assessment of your finances.