⚠️ Warning
Our legal team recommended us not to publish this article, but we’re doing it anyway, because we believe all Australians should have the power to achieve better tax outcomes.
The strategies we discuss below are all perfectly legal ways of reducing and minimising crypto tax in Australia. That's important, because tax evasion is a criminal offence in Australia. Taxpayers who lodge dishonest tax returns with the ATO can face serious consequences ranging from 1 - 10 years imprisonment and heavy penalties.
Please read everything carefully, use responsibly and seek advice from a tax professional before implementing these strategies.
1. Holding investments jointly with your partner 🤝
Joint investment is the most cost-effective approach to achieving better tax outcomes in Australia.
Joint investment is where you can achieve income splitting by holding your crypto investments together with your partner. Joint investments are a really common strategy for traditional share investments and are just as effective when used as a crypto tax minimisation strategy.
Joint investment has a lot of desirable benefits:
- simple to understand
- fixed income splitting
- easy to manage
All without the hassle and cost of establishing and maintaining a separate investment vehicle.
How does a joint investment work
A joint investment is when two individuals both have shared ownership over the same investment. When investments are held jointly, it is assumed that the ownership of that investment is divided equally (50:50).
Because the ownership of the investments is split evenly, the resulting income and gains from the investment will also be split evenly between both individuals. Splitting income can often lead to an overall lower tax outcome, as it allows for more balanced use of both individuals available marginal tax rates.
Holding your crypto investments jointly with your partner can be an effective strategy to lower your crypto tax. To understand how much tax you can save, let’s look at an example:
- Mary is a high income earner from her employment. She also happens to be the one most focused on crypto, and ended up holding all the crypto investments.
- John is a low income earner. He’s got a small amount of income from some casual work he performed earlier in the year.
In this particular year, there has been a lot of income realised from the crypto investments. Because the crypto is held entirely in Mary’s individual name, all the investment income must also be included in her tax return for the year.
Now let’s look at the same example, except the investments are now held jointly between both Mary and John. Now Mary only has to declare half the income from the crypto investments, as John will declare the other half.
In this example, the net result is a $12k reduction in total tax paid across both Mary and John.
You could also achieve the same tax outcome by splitting the total crypto in half, and holding half under each individual. The downside to that approach is the duplication in effort. You’ll need to have twice the number of exchange accounts and wallets to manage the investments. Every-time, you place a trade, you’ll also have to place the same trade on the other account to keep the tax outcomes in sync.
The benefit of Joint ownership is that you only need one set of accounts, so it’s much easier to manage the investments in practice.
How to achieve joint ownership of crypto
To hold crypto investments jointly you must be able to demonstrate clear joint legal ownership from the moment of first holding the crypto investments. This usually comes down to whose names are on the account and any other records you keep.
The best practice for holding joint crypto investments is:
- Setup a joint bank account that will be used to fund your investments.
- Setup a digital currency exchange account in your joint names.
- Use a separate hardware wallet (if you will use one) that is only used for your joint investments.
- Ensure there is no mixing between the joint investment activity and your individual investment activity, if any.
Bare trust legal agreement
It’s not super common for digital exchanges in Australia to support joint accounts yet. If your exchange doesn’t support a joint account, you can still document the joint ownership through a legal document.
This is commonly done either through an agency and bare trust agreement. You’ll need an accountant and/ or legal professional to execute the document correctly.
If you're using software to calculate your crypto tax, then make sure they also support documenting joint investments. Doing this will ensure the final tax reports are addressed correctly to your joint names and make it simpler for your accountant to understand the tax outcomes.
Syla is an example of an Australian crypto tax software that is able to address crypto tax reports with joint ownership.
2. Delay selling to get the CGT discount ⌚
Claiming the Capital Gains Tax (CGT) discount will have the biggest impact on reducing crypto taxes for many Australian crypto investors. Correct application of the CGT discount can quite literally cut your capital gains in half.
Make sure you fully understand how claiming the CGT discount on your crypto gains works and make it a core consideration in your strategy for minimising your crypto taxes.
Here’s how the CGT discount works.
CGT discount
Individuals who hold crypto investments for longer than 12 months are eligible for a 50% CGT discount on the resulting capital gains when sold.
If your crypto investments are made through an entity, then the amount of CGT discount can vary.
CGT discount for different entities
Individuals - 50%
Trusts - 50% (when passed through to an individual)
SMSF - 1/3 (~33.33%)
Company - not eligible
If you are in the business of trading crypto, then you will receive no CGT discount.
12 month + 1 day rule
You must hold your crypto for longer than 12 months to be eligible for the CGT discount. If you want to time your disposal to the day, then you will need to understand exactly how the 12 month rule works.
Let’s look at an example that will help you time your CGT disposals to the day:
Kate purchases 1 BTC on 10 Feb 2021 at 6pm.
Kate now wants to know the absolute earliest date that she can sell, and still be eligible for the CGT discount.
To satisfy the 12 month rule, Kate must wait until 11 Feb 2022 to sell her crypto. The time has no impact as the requirement is day based.
If you’re using software to calculate crypto capital gains, then make sure the software you are using is Australian-based tax software. If the 12 month period is not calculated correctly, than you may be missing out on your CGT discount or making a costly mistake.
3. Realising capital losses
We all have them, some investments just don’t work out, and they end up sitting in a loss position. While the investment may have made sense at the time, your opinion on the investment may change. If you no longer believe in the investment, then you may be thinking about selling your cryptocurrency.
Fortunately, even if your crypto has hit rock-bottom, it still has some value as a tax loss.
When you sell your crypto for less than you purchased it for, than it will result in a capital loss. The capital loss can then be used to offset your other capital gains.
That means it’s always worthwhile to revisit your portfolio regularly and decide which investments are worth holding on to, and which investments are better to sell down at a loss. Investments that are sold at a loss can then be utilised to offset other gains.
Here’s an example.
- Mark has $50,000 in capital gains from a sale of BTC.
- Mark is also sitting in a loss position due to LUNC that he’s still left holding.
- Mark decides to sell his LUNC, resulting in the realisation of a $30,000 capital loss.
Mark has no other capital gains events for the financial year, and no carried forward losses from prior years.
In this scenario, the $30,000 capital loss will offset the $50,000 capital gain, resulting in a net capital gain of just $20,000.
Avoid tax loss harvesting and wash sales
You might think it’s a smart idea to sell all your cryptocurrency for a loss at the end or financial year and then repurchase it back the next day…
In fact, you’ll often hear this strategy promoted by foreign tax advisers who refer to this as Tax Loss Harvesting. That’s a really US-centric term, so it might be great if you're lodging your tax return in the United States, but not so great if you're doing your tax here in Australia.
In Australia, this strategy is referred to as a wash sale and the ATO has been clear that it is not a legal way of minimising your crypto tax in Australia. Make sure you always get your tax information from Australian sources, and while realising a capital loss is totally okay, Tax Loss Harvesting is not.
4. Super contributions 💵
We all get compulsory superannuation paid when we are employed in Australia, but you may not realise that you are also able to make voluntary super contributions on top.
Voluntary super contributions are actually one of the top strategies that financial advisers in Australia will consider when advising on long term wealth building.
Super contributions are very tax effective as they can be claimed as an immediate tax deduction on your individual tax return. That means you won’t pay any tax as an individual on amounts that you contribute into your super.
Super contribution tax
Although you won’t pay tax as an individual, your superfund will be required to pay 15% tax on the contribution. If your marginal tax rate is over 15%, you’ll still see a net tax benefit.
There is a limit on the contributions that you can make, with the most important being the concessional contribution cap.
You are only allowed to make concessional contributions into your super fund up to the concessional contribution cap. If you contribute more than the concessional contribution cap, than you’ll end up paying your normal marginal tax rate on the excess amount, so it won’t be as tax effective.
Concessional contribution cap
The concessional contribution cap for the 2023 financial year is $27,500.
Compulsory super contributions from your employer also use up your available concessional cap. So if you earned $20,000 in super from your employer for the year, than only $7,500 will be remaining for voluntary contributions.
This strategy sounds simple, and that’s because we just covered the basics. There’s actually quite a bit more to it, including how to document the contributions with your super fund, and calculating the exact amounts that you can contribute. The ATO also has some great information on how to correctly do personal super contributions.
When done correctly, your personal super contributions can be claimed as a tax deduction on your tax return, which can be a very effective way to reduce tax on your crypto gains.
If you want to understand how to maximise your concessional contributions, then you should consult your accountant or financial adviser. We’d be happy to connect you with our network of advisers who can help you.
Investing in crypto through your super
It’s also possible to invest your super in cryptocurrency through a Self-Managed Super Fund (SMSF). If you do, your resulting income enjoys a fixed tax rate of only 15%, and any long term gains are taxed at an effective tax rate of 10%.
This means you can enjoy a considerable tax discount for any crypto investments that are made within a complying super fund. Compare that to what you would otherwise pay at your personal tax rates, which can be the difference between paying tax at 47% vs 15% in an SMSF.
5. Using a family trust for crypto 🔺
A family trust is another very popular structure for cryptocurrency investments. A family trust is popular for crypto investments due to the following benefits:
- Income Splitting - you can distribute income and gains to any eligible beneficiary of your family trust to optimise your tax strategy, such as distributing to beneficiaries with lower marginal tax rates.
- Discounts on capital gains tax - you can still retain eligibility to the 50% discount on capital gains for crypto held longer than 12 months.
- Asset protection - a trust is a commonly used structure for ensuring your investments are held in a separate legal structure.
If you are investing significant amounts into crypto, then you might want to consider the potential tax benefits of using a family trust for your crypto investments. The major tax benefit of a family trust is the ability to split income to beneficiaries each year, in any proportion.
How to get a tax benefit from a family trust
To receive a tax benefit, the trustee will need to distribute the income in a way that takes advantage of the available individual marginal tax rates of beneficiaries. The tax minimisation strategy is quite simple, just distribute more income to those beneficiaries who have lower marginal tax rates.
To demonstrate the tax effectiveness of a family trust we’ll start with a simple example. Here, everyone in the family unit is an individual, and the high income earner, Mary, is also holding the crypto investments.
And here’s what the same example would look like if the crypto investments were instead held in a family trust.
In this example, the net outcome is a $13.5k reduction in tax paid.
The great part of having a family trust, is that the distribution proportions can change each year. So if Mary is a low income earner in the following year, she can have more income distributed to her.
You can try running your own examples using pay calculator, which is what we used to estimate the tax payable in the above examples.
Establishing a family trust
A family trust is an advanced structure for an investment activity. There are a lot of considerations to ensure that it is appropriate for your situation, that it is established correctly to meet your goals, and that you operate the structure correctly. You’ll need to have a tax adviser onboard who can help you establish the structure and manage the ongoing compliance.
6. Claiming related expenses and deductions 📒
Costs that are related to your crypto can be claimed, either as an immediate deduction or capitalised into the cost base of the investment. Both have the effect of minimising your crypto tax.
Here’s the general rule to get you thinking about the possible expenses that you can claim:
💡Claiming related expenses
Any cost incurred that is related to an income producing activity or investment, may be eligible to claim as a deduction or cost base.
The most common tax expenses for crypto are:
- subscriptions to news services, magazines or podcasts
- education costs related to learning how to invest or trade crypto
- memberships to trading groups or trading programs
- equipment costs for computers, monitors and hardware wallets
- subscriptions to market feeds and signal groups
- subscription to your crypto tax software
- tax agent fees
If you have incurred any of these expenses that are related to your crypto activity, then there's a good chance you’ll be able to claim them.
It’s really important that you keep records so you can substantiate your claim for expenses. Here’s what you need to keep to claim a tax deduction for expenses related to your crypto:
- tax invoice or receipt
- retain for a period of at least 2 years for individuals or 4 years for trusts.
Even if you don’t know exactly what you can or can’t claim, there’s no harm in collecting all your expenses through the year.
When it comes time to do your tax return, you can ask your tax accountant to help you decide which expenses are eligible to claim immediately, which can be capitalised, and which can’t be claimed.
7. Incorporating fees in cost base 📃
The cost base of your crypto is used to offset the proceeds from the sale. The cost base of an asset is the cost of ownership, including the purchase price, and any other costs associated with acquiring or holding the asset.
For crypto investments, the cost base is the amount you paid for the crypto, plus any brokerage fees related to the purchase. When you are charged a brokerage fee, it will get added to the cost base of your crypto.
Tax benefits of claiming cost base
The cost base of your crypto is used to offset the proceeds from when you do eventually sell. So the higher your cost base, the less your overall gain. That means you’ll want to make sure you claim any brokerage fees in the cost base of your crypto wherever possible.
Here’s an example of how capitalisation of brokerage fees works:
- Satoshi purchases 1 BTC for $10,000 AUD.
- He is also charged a brokerage fee of $100 (1% fee) on the purchase.
- Satoshi sells his 1 BTC a few months later for $11,000 AUD.
- He is also charged a brokerage fee of $110 (1% fee) on the sale.
Here’s how the capital gains would be calculated if Satoshi forgets to capitalise the brokerage fee’s that he is eligible to claim:
Capital Gain - no fees claimed
Cost Base = purchase price = $10,000
Proceeds = sale price = $11,000
Capital Gain = Proceeds - Cost Base = $11,000 - $10,000
Net Capital Gain = $1,000
And here’s what it looks like when Satoshi correctly capitalises the brokerage fees that he is eligible to claim:
Capital Gain - fees capitalised
Cost Base = purchase price + purchase fee = $10,000 + $100 = $10,100
Proceeds = sale price - sale fee = $11,000 - $110 = $10,890
Capital Gain = Proceeds - Cost Base = $10,890 - $10,100
Net Capital Gain = $790
Satoshi is better off by $210 AUD (21% reduction in his resulting net capital gain), simply because he made sure to capitalise all the brokerage fees that he was eligible to claim.
In this example the brokerage fees were quite high at 1%. So if you are paying a lot of fees, definitely make sure you are capitalising them, or otherwise claiming them as a deduction wherever possible.
If you're using software to calculate your crypto tax outcomes, then make sure you choose one that is correctly capitaling the cost base in Australia. If you don’t use software that is specific to Australia, than it’s unlikely to be correctly capitalising all your fees and you’ll end up paying more tax than you need to.
8. Claiming capital losses for lost crypto 🛄
If you have unrecoverable crypto due to a theft, scam or just having lost your private keys, then you might be able to claim a capital loss for the lost crypto, provided you can show evidence.
To claim a capital loss on lost crypto, the ATO will require you to keep evidence such as:
- when you first acquired the crypto assets
- the wallet address
- the amount of crypto that was lost
- transactions evidencing your ownership of the crypto
The claim for a capital loss is possible in situations where there is no chance of the lost crypto being replaced or compensated. That means there is genuinely no hope of retrieving it and it is permanently lost. In such cases, you can usually declare a capital loss for your lost crypto in your income tax return.
It’s not enough for the token to be almost worthless. If there is still a market price for the token, then there is still value. In that case, you’ll need to sell the crypto to realise the loss.
Our tax team went into a more detail on how to claim unrecoverable crypto in a recent article.
9. Charitable donations to a DGR
You can claim a tax deduction for crypto donations when they are made to an organisation that is a Deductible Gift Recipient (DGR).
You can check the DGR status of an organisation using the ABN lookup to see if they are registered to receive tax deductible donations.
When donating crypto, you will need to check if the organisation is able to accept crypto assets directly. If they can accept the crypto, then the next step is to transfer the crypto assets into their legal name.
Claiming donations as a tax deduction
The ATO will require you to keep the following records when claiming a crypto donation to a DGR as a tax deduction:
- the date you donated the crypto
- the market value of the crypto asset
The amount of the tax deduction will be the market value of the crypto asset at the time of the donation. In order to be deductible, it is also necessary that you make the donation without expecting to receive any benefit in return.
Donated crypto is still taxable
Although donations to a DGR are tax deductible, the disposal of your crypto will still normally result in a capital gain or capital loss that must be declared. That means you still have to do your tax calculations as normal, you’ll just have an additional tax deduction that you can claim for the donation.
That might be a bit confusing at first, so here’s a simple example to understand.
- Satoshi purchases 1 BTC for $10,000 AUD.
- Satoshi later donates the 1 BTC to a DGR registered organisation.
- The market value of 1 BTC at the time of the donation is $11,000 AUD.
There are two important tax outcomes:
- When the 1 BTC is donated, there is a CGT disposal event that will result in a capital gain of $1,000 (11,000 - 10,000).
- Because the donation was to a DGR registered organisation, Satoshi is also able to claim the full market value of $11,000 as a tax deduction.
10. Parcel selection optimisation 📦
When it comes to choosing a parcel selection method for your crypto disposals, many accountants and investors will default to using First-In-First-Out (FIFO). That’s because it’s a really simple method that anyone can understand and calculate.
While FIFO seems to be the default method used by many, it is very rarely the most tax effective. In fact, choosing the optimal tax parcel method can have a huge impact on your resulting tax outcomes.
To show you just how much impact the parcel selection method can have, we’re going to look at 3 common parcel methods, and one smart parcel method.
- FIFO (First-In First-Out)
- LIFO (Last-In First-Out)
- HIFO (Highest-In First-Out)
- LTFO (Lowest-Tax First-Out) ← this is the smart parcel method optimised for Australia.
Let’s look at a really simple example in the illustration below to understand how these different parcel selection methods can impact your tax liability.
We’re also going to make one other assumption; that our investor in the example has no other CGT events or revenue losses in the financial year, and no losses carried forward from prior years. This is going to make our calculations nice and simple.
Now, we can have a look at the tax outcomes for each of the possible parcel selection methods.
- FIFO - the first parcel for $5,000 is sold, resulting in a capital gain of $45,000 (50,000 - 5,000). This parcel was held for longer than 12 months, so it will be eligible for the CGT discount, resulting in a final assessable income of $22,500.
- LIFO - the last parcel for $15,000 is sold, resulting in a capital gain of $35,000 (50,000 - 15,000). This parcel was held for less than 12 months, so there is no CGT discount available.
- HIFO - the parcel for $25,000 is sold, resulting in a capital gain of $25,000 (50,000 - 25,000) This parcel was also held for less than 12 months, so there is no CGT discount available.
- LTFO - the parcel for $20,000 is sold, resulting in a capital gain of $30,000 (50,000 - 20,000). This parcel was held for longer than 12 months, so it will be eligible for the CGT discount, resulting in a final assessable income of $15,000.
By selecting LTFO, a smart parcel matching algorithm that is optimised specifically for Australia, the crypto investor was able to substantially improve his tax outcomes.
In this example, LTFO resulted in $20,000 less assessable income compared to the worst option and $7,500 less assessable income when compared to the next best option.
Achieving tax optimised parcel matching with LTFO
To be able to track your investments and identify the most tax optimal parcels to dispose, you’ll need a reliable and dedicated crypto tax calculator.
Most crypto tax software out there will only implement FIFO, but that means you’ll end up overpaying a lot of tax. Syla is an Australian-only crypto tax software that is a great alternative to global crypto tax calculators that don’t have a good understanding of Australian tax law.
Syla has designed an LTFO algorithm, that is designed to guarantee the lowest crypto tax outcome for a specific disposal, so you don’t have to worry about overpaying tax anymore.
You might find other software attempting lowest tax, but it’s very hard to completely optimise for Australian tax, unless it’s the only country you focus on. The algorithm behind Syla’s LTFO is proprietary, and it’s been tailored specifically for Australian crypto investors.
You can see how much tax you’ll save by starting a free account on Syla.
Would you prefer to just avoid all tax on your crypto?
Yes, it’s actually possible to legally avoid crypto taxes… at least on certain transactions. Our tax team recently did a deep dive into every possible opportunity to legally avoid taxes on your crypto.
Seek assistance from tax professionals 🎓
Crypto tax is a rapidly evolving area of law and can require help from a tax specialist to assist you with tax planning strategies and implementation.
It’s important that you talk with a tax professional before implementing tax minimisation strategies to ensure you are doing everything correctly and that you are achieving the tax outcomes you expect.
If you don’t already have a tax adviser, we’d be happy to put you in touch with our network of crypto tax professionals who can assist you. They’ll be able to provide you with specialist tax advice on your crypto tax related matters. Ask us.
