How to Reduce Your Crypto Taxes This End of Financial Year

Reviewed by Syla – Australia’s low-cost tax software. 

It’s that time of year again – tax season. For some, this means a mad scramble to get their financial affairs in order. And with the Australian Taxation Office (ATO) cracking down on crypto obligations, things can get a little stressful for crypto investors. 

Unfortunately, there’s no way to get around your tax obligations – if you sell or use a digital currency in a financial year, the ATO is going to get a slice of your profits. However, there are some strategies you can use to potentially reduce the financial burden that may come with trading or investing in cryptocurrencies.

Things You Can Do to Reduce Your Crypto Tax 

1. HODL for Longer Than 12 Months for a CGT Discount

Unless you meet certain requirements, most casual crypto investors and traders will be subject to the Capital Gains Tax (CGT). A CGT obligation is incurred anytime you dispose of a digital asset and make a profit – this can mean selling crypto for cash, swapping it with another token or using it to pay for goods and services. DeFi users will likely run into CGT obligations quite frequently, too.

These taxes can quickly pile up – however, investors can lessen the load thanks to an Australian policy. Assets held for longer than 12 months before disposal incur a 50% discount on CGT owed. This means if you have a bullish outlook on crypto, it can be financially beneficial to HODL your tokens for over a year before selling (or disposing via other means).

2. Utilise Your Capital Losses

Everyone makes a bad trade from time-to-time – it’s part of growing as an investor. Although these mistakes can be gut-wrenching, having a few losses up your sleeve can actually be of benefit, as you can claim crypto losses on taxes.

Just as profiting from your investments can increase your tax burden, misguided crypto purchases can reduce your CGT obligations. 

If an investor is set to owe a significant amount to the ATO, they can strategically sell some of their poor-performing tokens and potentially lower their taxes. Once these losses are realised, they can be used to offset capital gains from crypto and other investments. It’s worth noting that Capital Gains aren’t isolated to one sector – so you can leverage the stock and even the property market.

Best of all, capital losses can be carried forward through financial years. For example, if you have no CGT obligations this tax season due to HODLing, it might make sense to use your capital losses in the future.

3. Take Advantage of Superannuation

The Australian system is set up to reward people who use their super to invest in assets – including digital currency. Trading with a typical crypto account will usually incur a CGT event, which can be rather costly. 

However, those who invest in crypto with their superannuation will often see a vastly reduced tax rate. Disposals made via a super account are taxed at a 15% rate for short-term gains and at an effective 10% rate on long-term gains (held over 12 months), which can be much lower than your individual tax rate. Even more enticing is that gains in your super aren’t taxed at all once you hit retirement. 

Of course, using superannuation to invest in crypto does come with a couple of downsides. For the most control of your retirement fund, you need a Self-Managed Super Fund which can be expensive to set up.

And of course, you can only (barring certain exemptions) access your funds come retirement – which might be 30+ years away depending on your current age!

4. Use Crypto Tax Software which saves tax

Figuring out your crypto tax obligations, especially as a high-frequency trader, can be complex even for experienced crypto traders. Making even a simple accounting error can end up being time-consuming and costly. This is why it can be a good idea to benefit from low-cost crypto tax software.

Related: Syla review

Australian companies like Syla have created ATO-specific tax algorithms that can integrate with prominent trading platforms via API (or importing CSV  transaction data) and automatically figure out what you owe to the ATO. This takes the guesswork and stress out of tax time.

Best of all, Syla utilises a unique “parcel selection method” which can legally reduce your tax burden without any extra effort. For example, Syla uses a Lowest Tax First Out (LTFO) model which can result in savings for some traders.

Things You Can Not Legally Do

Wash Trading

Wash trading is an illegal strategy employed by some tax evaders to reduce money owed to the ATO. The technique involves selling an underperforming cryptocurrency (or another asset) right before tax time to reduce CGT owed, only to immediately re-purchase the investment once the EOFY is settled.

Unfortunately, the rules around wash trading are a little murky. Traders are allowed to sell bad investments before tax time to reduce their capital gains. And selling a cryptocurrency for this purpose doesn’t mean you can’t re-invest if the opportunity arises. The definition of wash trading ultimately comes down to “intent”, which is based on  Part IVA of the Income Tax Assessment Act 1936. 

When in doubt, don’t give the ATO a chance to accuse you of wash trading, as they may wipe your capital losses and even charge you penalties and additional interest on tax owed. If possible, allow ample time after realising capital losses to re-invest in a digital asset (if at all).

Not Declaring Your Crypto Taxes

In the early, Wild Wild West days, some investors thought it was a good idea to avoid notifying the ATO of any crypto tax obligations. However, as regulations have tightened and the sector has matured, this has become one of the worst things you can do to reduce your crypto tax burden. 

Not only is it illegal, it can result in greater tax obligations than if you had just declared your tax result in the first place. And in the worst instance, deliberate tax evasion can result in massive fines or even jail time!

The ATO has improved its data monitoring connections for the crypto sphere over the past decade, making it extremely risky to avoid declaring tax obligations. Remember, using DeFi services can incur a taxable event too – so don’t think you’re exempt because you’re using a private blockchain or wallet.

Presented by Syla