How to Cash Out Bitcoins Without Paying Taxes.

Cash out bitcoin and keep it

The best time to start worrying about paying taxes when you cash out of bitcoin is before you even buy it. The second best time to think about paying taxes on bitcoin is today after you already made your gains.

• Warren Black

I’m being a little cheeky, but that’s the message I want to get out to every Australian involved in the cryptocurrency game. If you’re worried about how to cash out your bitcoin 100% legally without paying tax or at least while paying significantly less than 48.5%, there are some steps you can take to prepare yourself before you click “Sell”.

But before we get to that, I’d like to scare you with the reality of the Australian government. Generally, any politician scares me, but I’m very concerned about the state of our current tax system, especially when it comes to taxes. 

Did you know, for instance, that Australia’s byzantine tax law is so horrendously unfair that we’re one of the most overly taxed countries in the world? Aussies pay a top rate of 48.5%, which is blatant theft if you ask me. 

Why is it theft? I don’t see that our money is put to good use when it gets funnelled (or stolen, as I like to say) into the Canberra coffers. Australia is certainly not alone in paying high taxes, but we don’t see the social happiness on the scale of other countries like Norway or Finland, countries whose governments actually provide services to their citizens. 

And it’s not like this problem is going to go away. As more people retire, and the burden of pensioners starts to drag down the country’s budget, the only solution is paying higher taxes. It doesn’t take Einstein to figure out that soon, the Aussie government is going to say that 48.5% isn’t high enough. 

But by then, you’ll have taken the proper precautions to protect your money, both digital and actual. 

And that brings us around to paying taxes on your bitcoin profits. 

Paying Tax When Cashing Out Bitcoin? Is it Possible? 

There’s no legal way to get out of paying your taxes. I’m no advocate for that. In fact, when my name was featured in an ABC expose on the Panama Papers leak, I was found to be without fault in my practice. In truth, I was discovered to have all my work above the law, legally minimizing taxes as much as possible.

So, yes, when you’re going to file your tax returns this year, I’m only going to advise you in the ways you can legally and truthfully avoid paying more than you must. Because as we can see, offering up more of your money to the government willingly, especially when you don’t have to, is peak stupidity. 

The other aspect of cryptocurrency that I find hilarious is the way the Australian government skews the definition of bitcoin to suit their purposes. And as we all know, their purpose is to get more money from you. 

According to the ATO, cryptocurrency is both an asset and digital money. And why does that seem so wrong? It’s so that they can get more tax from you. Bitcoin is an asset, like property or vehicles, so when you sell it, you have to declare it as capital gain, so you pay capital gains taxes. 

But it’s also ‘money’, meaning that if you pay for a service with bitcoin, you’re supposed to add GST, like you would do with a bartering transaction. That sounds an awful lot like double-dipping to me – but who am I to judge? All I ever did was study tax law and write my thesis on it.

But what can you do to avoid this horrible scheme? That’s where a bit of planning and prevention will be your friend. 

Tax Planning When It’s Time to Cash Out Bitcoin

Plan today to keep more of your bitcoin tomorrow

Prevention beats all else in the cryptocurrency game. And I can think of several options that I would advise to all my clients when they’re thinking about their crypto futures. 

The first is to have a solid investment plan with your cryptocurrency. If you simply dabble in bitcoin, you can’t claim some of the tax benefits I’m about to list, but there are still options for you, so keep reading. 

As an investor, you have some legal protections surrounding your investments and how you’re taxed. Let’s cover a few of them:

• Time your sales – as an investor, you have to pay capital gains tax on all profits you make on your bitcoin sale. But if you can plan your exit, you might be able to slash your tax bill in half. If you can prove you’ve held an asset for 12 months, you are allowed to only pay half of your capital gains tax. I understand that 12 months in cryptocurrency timing is a lifetime, but if you can save $50,000 in taxes from waiting another month to cash out, that’s worth it.

• Claim your losses – when cashing out your bitcoin, you’re not always going to come out ahead, are you? In this crazy crypto market, swirling forces can drop prices massively in a matter of weeks and days. So that $20,000 profit you had yesterday might be -$20,000 today. It happens. I’ve seen it. But if it makes sense, I advise my investor clients to sell their bitcoin for tax benefits. If you claim your losses, you can offset them against any other income you’re reporting that year. You’re also able to carry forward to the next year to offset against bigger gains.  

• Categorize your assets for personal use – There are some exemptions on CGT if the value of what you’re holding is less than $10,000, and can be classified as a personal use asset. There are some specific guidelines on how to avoid paying tax on your bitcoin cashouts, especially if your value is under that threshold, so be sure to speak with a certified accountant who understands cryptocurrency tax law. So important.

• Work with cryptocurrency-aware accountants – In this day and age, not every accountant is up-to-date on their tax laws around newer financial instruments. Cryptos like bitcoin are changing so often that it’s hard to find someone who understands the nuances around it. But it’s so important because if you want to classify yourself as a bitcoin investor, you need to have proper documentation of your trades. And that only happens with the help of an educated and aware accountant.  

Cashing Out Bitcoin For Non-Investors

I think it’s crazy that if you’re a full-time investor in bitcoin, anything you earn from sales isn’t classified as income. Even though many full-time crypto investors make their income from their trades, that’s not an *income*, at least according to tax laws. 

Try and wrap your head around that one!

But if you’re not in this for the *income*, your bitcoin cashouts are classified as income. Again, my mind just reels at how this is all supposed to make sense. 

If you can’t prove that you have a legitimate system or frequent cryptocurrency trades, any time you cash out bitcoins, you’ll be paying taxes on it as income. But how much you pay depends on how prepared you are for it. 

In my mind, there’s no easier way to start saving taxes on bitcoins than to start a family trust, or a discretionary trust as you may have heard it called. 

Family Trusts for Saving Taxes on Bitcoins

If you make the mistake of simply withdrawing some of your bitcoins and exchanging them into Aussie dollars in your bank account, you’re going to be stung for the whole tax owed. But that’s not the only way to withdraw your bitcoin profits. 

A family trust is a tax structure that allows you to hold onto your assets and distribute them among many beneficiaries. This is all done pre-tax, mind you, so the option to distribute the bitcoin profits is spread out among several people or organizations. 

It looks like this: imagine you have a $200,000 profit that you want to withdraw. If you’re using the family trust structure, you can send that $200,000 to several places, each according to how it will be taxed after you distribute it. So, if you pay $100,000 to yourself, $35,000 to your wife, and $10,000 to each of your four kids, you can still make a $25,000 tax-free donation to anything you like. This one structure alone is worth the very minimal time it takes to set up, simply because your tax burden doesn’t all fall on you. 

For the ATO, when you cash out your bitcoins, it automatically hears the sound of money. And the government isn’t going to advise you how to pay it less money. 

That’s my job. It’s my passion. And it’s what I happen to be good at. 

In conclusion, if you’re ready to keep more of your own money and not give the government any unwanted donations, it’s time to speak with the accountants at WealthSafe, each with the knowledge and advice that serves your purposes, not the ATOs. We understand your fascination with bitcoins, and we’re crypto investors as well. Speak to WealthSafe today to get tailored advice to legally slash your tax bills.