Understanding the intricacies of cryptocurrency trading can be an uphill battle, especially when it comes to managing its taxes. The unpredictable nature of the crypto market and the complex taxation rules make it a daunting task for investors to ensure tax efficiency while maximising their profits. Nonetheless, adopting strategic approaches can significantly mitigate the tax burden while amplifying your investment return.
This article outlines ways to maximise profits and minimise crypto tax.
1 Incorporate tax planning into your trading strategy
Cryptocurrency in Australia is subject to ordinary income tax and capital gains tax, as regulated by the Australian Taxation Office (ATO). So, to make your trading activities as tax-efficient as possible, you must consider these and incorporate tax planning into your trading strategy. Just as you analyse market trends before executing a trade, consider the tax consequences of each transaction. Factoring in tax considerations can help you keep a larger share of your earnings.
2 Utilise cryptocurrency tax software
There are useful tools that can help you maximise your profits and minimise crypto tax. Software solutions like Syla CoinSpot Integration can automatically track your transactions, including your portfolio; calculate your gains and losses, and generate tax reports based on your tracked records. This integration is perfect for CoinSpot users, as it can provide a real-time view of your tax position and its built-in tax optimisation algorithm ensures you’ll achieve lower tax outcomes when doing your tax return.
By automating these processes, you can focus more on your trading activities and analyse your performance better.
3 Stay updated with the latest tax laws
The cryptocurrency industry is rapidly evolving, and tax laws keep changing, making it necessary to stay updated to avoid non-compliance. Being well-informed ensures that traders and investors make informed decisions, avoid penalties, and minimise tax liabilities by taking advantage of any tax-saving opportunities.
4 Capitalise on tax loss harvesting
Tax loss harvesting is a strategy that involves selling an underperforming cryptocurrency at a loss. Investors can offset taxes against capital gains by realising and ‘harvesting,’ this loss. The cryptocurrency sold can then be replaced by a similar one, maintaining the optimal asset allocation and expected returns. However, you have to be mindful of the ATO’s wash sale rules against artificial losses or buying back the asset sold and be aware of the prescribed harvesting dates.
5 Consider long-term holdings
When it comes to minimising your tax liabilities, it’s important to consider the applicable tax breaks for cryptos. One of these applies to holding a cryptocurrency for over a year without trading or selling. This will allow you to take advantage of the 50% discount on capital gains tax. By strategically planning your trades and holding your crypto assets for the required period, you can maximise your profits by reducing the amount of tax you owe on your gains.
6 Diversify your portfolio
Diversification is not only important for managing risk but also for tax efficiency. By investing in a variety of cryptocurrencies, you can spread your gains and losses across different assets. This can help balance out any potential tax liabilities and maximise your tax efficiency. By diversifying your portfolio, you also create opportunities to offset losses with gains, reducing your overall tax burden and potentially increasing your after-tax profits.
Donating cryptocurrency to any charity or organisation with a deductible gift recipient (DGR) status can provide tax benefits. This approach allows you to deduct the donated amount from your tax return, lowering your taxable income.
8 Monitor all transactions
Ensure that you maintain a thorough record of all your transactions. From the purchase of a cup of coffee using Bitcoin to the acquisition of a major asset and receiving free tokens, each transaction matters when it comes to taxes. Comprehensive record-keeping will enable you to calculate your capital gains and losses accurately, ensuring that you pay the correct amount of tax.
9 Understand FIFO, HIFO, And LIFO
FIFO (First-In, First-Out), HIFO (Highest-In, First-Out), and LIFO (Last-In, First-Out) are accounting methods for calculating gains and losses, which can be used on crypto. Your accounting method can determine how much taxes you must pay, so understanding how each method works and finding out which one suits your situation can help you reduce your taxes.
10 Identify crypto-to-crypto trades
In Australia, crypto-to-crypto trades (exchanging one type of cryptocurrency for another) are considered taxable events. Remember, it’s not just when you cash out into fiat currency that you might need to pay tax.
11 Watch out for gains from airdrops and forks
Airdrops and forks can result in you receiving additional cryptocurrencies passively. Airdrops are giveaway tokens, while forks are an upgrade where a blockchain’s code is copied and modified to create a new product. Forks can split the blockchain network into branches and impact prices. It’s important to note that these could have tax implications.
Hard forks or backward-incompatible upgrades may also result in coin gains. The ATO treats gains from both airdrops (except the initial one) and forks as ordinary income at the market value of the new cryptocurrency on the date you received them.
12 Take advantage of superannuation funds
In Australia, you have the opportunity to hold cryptocurrency in your self-managed super fund (SMSF) under certain conditions. However, it must align with your SMSF’s investment strategy, comply with all legal requirements, and, of course, be in the best interests of fund members. If done correctly, this can offer a tax-efficient approach to handling your cryptocurrency.
13 Work with a tax professional
Navigating through the complex world of crypto taxation can be challenging. Thus, working with a tax professional familiar with cryptocurrency can be beneficial. They can provide tailored advice and strategies, helping you maximise your profits while remaining tax compliant.
Conclusion
Cryptocurrency investors can navigate the tricky waters of tax-efficient trading by implementing these strategies. The key is to approach crypto trading as more than just buying and selling; consider the tax implications when strategising, and utilise the tools at your disposal.
By being mindful of the above considerations, you’ll be better positioned to boost your profits while mitigating your tax obligations. After all, every bit of strategy counts in the volatile crypto trading landscape.
This information is of a general nature only and should not be regarded as specific to any particular situation. This should not be taken as financial advice to buy, trade, or sell cryptocurrency or use any specific exchange. This is not intended for use as investment, financial or legal advice as each individual’s need will vary.
