⚠️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 are all perfectly legal ways to avoid crypto tax in Australia, and they are far removed from what the ATO considers tax evasion, which is considered 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 professional before implementing these strategies.
Legal ways to avoid crypto tax in Australia ✅
All the following methods are legal ways to avoid crypto tax in Australia. You can talk with your tax adviser about these strategies to better understand how they apply to your situation.
1 - Buy and Hodl your crypto investments for the long term
If you buy and never sell (including no crypto to crypto trades or other disposal events), then there are no tax events. So one of the simplest strategies to avoid paying crypto taxes, is to simply buy and hold your crypto. Even if the value of your crypto portfolio increases each year, you won’t have to pay tax until you sell.
This strategy works best the longer you hold. So you should be carefully considering what crypto investments will still be valuable in years or even decades from now.
Some investors who buy and hold for long term growth will also use a strategy called Dollar Cost Averaging (DCA). DCA involves purchasing small amounts of crypto over an extended period of time, say every month over a year or longer timeframe. This helps to smooth out the price volatility, meaning you might buy some amounts for cheaper and some more expensive, but it makes it easier to stick to the strategy.
Holding onto your crypto investments for a long time means you may also get the benefit of the 50% Capital Gains Tax (CGT) discount for when you do finally sell. Your crypto will qualify for the 50% CGT discount, provided you have owned it for longer than 12 months before you decide to sell.
The 50% CGT discount only applies to individuals and trusts holding crypto for investment.
2 - No tax on crypto gambling winnings
Winnings and losses from crypto gambling in Australia are generally tax free, unless you are a professional gambler or in the business of gambling. If you undertake gambling as a hobby or are trying your luck by placing bets online with your crypto, then any gains made are likely to be tax free.
Although gambling is usually considered a great way to lose your money, if you do happen to win big, then you’ll be happy to know your winnings are tax free. Just remember that the ATO does not consider investing or speculating in crypto to be gambling, and although your gambling wins are tax free, the crypto used for gambling is not.
Our tax team went into detail on that last part in a recent article, when we looked at crypto tax and gambling
3 - Personal use asset exemption
The personal use asset exemption is one of the few ways to legally avoid crypto taxes. If you transact with crypto that is a personal use asset, you may be able to disregard the resulting capital gain or loss.
Crypto is considered a personal use asset, if you keep it or use it mainly for personal use and it was purchased for less than $10,000. A common situation would be when you specifically purchase and use your crypto to buy low value items and services for personal use or consumption.
One of the most important factors to determining whether your crypto is a personal use asset, is the length of time that you hold the crypto before using it. The longer you hold on to the crypto before using it for personal use, the less likely your crypto will be considered a personal use asset.
Examples provided by the ATO indicate that you may only be able to hold crypto up to a maximum of 14 days before using it, along with some other conditions you must also meet.
Here’s an example where crypto you purchased is not held for personal use:
❌ Not personal use
You bought 1 ETH with the intention of keeping it as an investment. Five months later, you decide to buy some goods using your 1 ETH.
Because you held the ETH primarily as an investment, your ETH would not be regarded as a personal use asset. The length of time between when you got the ETH and when you used it to buy goods, indicates the ETH is not a personal use asset. In this case, capital gains tax would apply.
Here’s an example where crypto purchased is more likely to have been held for personal use:
✅ Possible personal use
You bought 1 ETH with the intention of using it for personal expenses, and you did actually use all the 1 ETH over a one week period to buy goods and services for personal use.
Due to the attractiveness of the personal use asset exemption to completely avoid tax on crypto, it’s really important to understand it in detail. Our tax team has previously written a very detailed analysis, including a diagram for how to structure for the personal use asset exemption.
4 - No tax under the tax free threshold
This one might be stating the obvious for some, but the tax free threshold is the easiest way to avoid tax on crypto in Australia, and it’s a great strategy for financial years where you have low income.
✅ Tax free threshold
If you are an Australian tax resident, the first $18,200 of your income is tax free.
Provided you don’t have any other income, than the tax free threshold will allow you to realise up to $18,200 in capital gains (or up to $36,400 in capital gains that are eligible for the CGT discount), and you will pay zero tax. That’s because you will still be under the tax free threshold.
There are also a number of tax offsets for low and middle income earners, that in practice pushes the tax free income a decent amount higher. These offsets will further reduce any resulting tax bill by $1,375, which effectively pushes your tax free income up to a total of $25,400, all while paying zero tax.
This strategy starts to get really interesting when:
- You have a significant other who is not working and can hold the crypto investments.
- You have an investment structure that allows distributing capital gains to a low income earner.
- You are taking a short break or gap-year in your career and will be low income for a specific financial year.
- You are taking an extended unpaid break from your career.
- You have retired early from your career but not receiving a pension.
5 - Invest in crypto through a SMSF
As an individual you are earning in the highest tax environment in Australia. However, there are other tax environments, some that are lower and even zero tax in certain cases.
One of the most tax effective environments to invest through is superannuation. Although your industry or retail super fund does not yet support direct crypto investments, today it is possible to invest your super into crypto through an SMSF.
⚠️ Establishing and running an SMSF is very complex and has specific rules that you must follow. Don’t rush out and setup an SMSF tomorrow. Do your research, talk to a professional and understand what is involved and if it is appropriate for your situation.
Superannuation is generally considered one of the most tax efficient environments in Australia. Here’s what makes superannuation so tax effective:
- Zero capital gains in retirement phase.
- Otherwise, 15% tax or an effective tax rate of 10% on discounted capital gains.
Yes, you really can pay zero tax on capital gains once you’re in retirement phase. To maximise the benefit, you can combine the buy and hold strategy and carry the investments through to retirement to avoid crypto tax entirely.
There’s only one disadvantage. Depending how far away you are from the legal age of retirement, you may be waiting for a long time.
6 - Utilise your capital losses and revenue losses
If you’ve had some unsuccessful investments in the past, than not all is lost. Even if your investments went to zero, they still have some value. There value is that they can be claimed as a tax loss, and can be used to offset your gains.
There are two types of losses that can be claimed:
- Capital losses - these can only be used to offset against other capital gains.
- Revenue losses - these are like super-powered capital losses. You can use your revenue losses to offset against any of your ordinary income, provided some specific conditions are met.
What’s good about tax losses is that if you can’t use them in the current financial year, you still get to carry them forward to future years, for as long as needed.
Capital losses don’t just have to come from your crypto. If you have capital losses from shares, property or other sources, than they can also be used to offset your capital gains from crypto.
If your carried forward losses or current year losses are large enough, than they may completely offset your gains for the year, meaning you won’t pay any tax on your crypto.
While you probably prefer never to have the losses to begin with, if you do end up with some, make sure you always declare them in the year they occur so you actually get to use them.
Use crypto tax software
Claiming losses and tax exemptions can draw attention from the ATO. So when claiming large amounts, make sure you are confident in your tax position and you have all your records in perfect order.
The ATO will likely review your tax return when making a large claim to request clarification on your situation. Just make sure you have your paperwork in order, and an experienced tax adviser to back you up.
Having a reliable crypto tax calculator, such as Syla, will give you confidence that your records are in perfect order when utilising legal strategies for avoiding tax.
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Illegal crypto tax avoidance strategies❌
Offshore tax havens, wash sales and just not declaring, are all ways to avoid tax on your crypto… they also happen to be great ways to attract massive fines from the ATO and the potential of criminal charges.
The following strategies should quite simply, never be attempted, as it’s very clear and understood that they are not legal or just plain ineffective ways to avoid tax in practice.
⚠️ Be wary of unethical tax advisers who will happily advise on these illegal tax avoidance strategies to take your money, while you take on all the risk.
Aggressive tax planning
It is common practice for taxpayers to look for ways to reduce their taxable income where possible and tax planning is a normal part of this practice. Some of the more common tax planning methods usually include prepaying expenses to claim tax deductions, claiming business asset purchase deductions and making specific tax elections among others.
For many years, it has been common practice for business owners and investors who use family (discretionary) trusts to distribute trust income across family member beneficiaries. Sometimes, trust distributions are made to adult children as they may have lower tax rates than their parents. However, in many cases these distributions were actually being used by parents for their own personal expenses.
The ATO has heavily cracked down on these arrangements, with their most recent guidance outlined in Taxpayer Alert TA 2022/1: Parents benefitting from the trust entitlements of their children over 18 years of age. These arrangements are not legal ways to avoid tax and can result in the trustee being taxed at rate of 47% with penalties on top.
Offshore entities
Many Australians, especially those who are taxed at the highest marginal tax rate, look toward foreign tax strategies to help protect their wealth and reduce their income tax. With Australia’s high tax rates, the interest in using offshore entities has become popular.
You may have heard of people setting up offshore entities in tax havens such as Panama or British Virgin Islands to avoid tax on crypto. Or even setting up in well respected tax jurisdictions such as Singapore where there is no tax on capital gains.
The good news is, you certainly can establish an offshore entity, and generally you’ll be entitled to do so provided you satisfy any requirements in the local jurisdiction.
The bad news is, the ATO has already known about this for years, and there is no tax loophole for crypto.
As Australian tax residents, we are taxed on our worldwide income. Even if you setup a structure, and find someone else to act as director, Australia’s tax system will still reach into the entity through our Controlled Foreign Company (CFC) rules, and tax you on the income.
If you don’t declare the income, then you will fall into offshore tax evasion. Deliberate structuring to illegally avoid tax is one of the most risky things you can do. See here how the ATO is using information from data leaks such as the Panama Papers for tax enforcement.
In short, offshore entities can certainly be established legally, and you’re allowed to do so. Unfortunately, they just don’t live up to the hype. You’ll end up paying the same or more tax, with the added burden of international tax compliance. If you want to do it right, you’d be much better off migrating to another country and legally ceasing your tax residency in Australia.
Using risky tax advisors
Tax risk management is a key part of the ATO’s regulatory function and there are some red flags that should be avoided at all costs, otherwise you could land in an unfortunate tax situation.
- Offshore tax advisers - offshore tax advisers are likely not qualified or experienced enough about Australian tax law to provide accurate and reliable advice. Do not rely on the advice of offshore advisers on the promise of lower taxes or no tax on your crypto. Please seek proper tax advice on your crypto investments from Australian tax professionals to avoid any adverse tax consequences.
- Unregistered tax agents - don’t take advice from unregistered, sanctioned or disqualified tax agents. You can check on the registration status of a tax practitioner on the Tax Practitioners Board Register. Search by the tax agents name, or the name of the legal entity the business operates under. If a tax adviser is not registered, or not in good standing, don’t use them.
Wash sales
Tax loss harvesting is a tax strategy where you sell your crypto to realise a loss, use that loss to reduce your income tax, and finally buy back the same crypto, all within a short period of time.
The ATO has issued an official warning to taxpayers to not engage in wash sales, which is where taxpayers sell assets at a loss and re-purchase within a short period of time to reap tax benefits, especially around tax time.
So while it’s totally okay to sell your poorly performing investments to realise a capital loss, it’s not okay if you’re just buying them back immediately after. Doing this is called a wash sale.
As there is no specific time period for a wash sale, it usually comes down to the intent with which the taxpayer carries out their crypto activities. If a taxpayer is seen as creating artificial losses to gain tax benefits, then usually the ATO would disallow the capital loss from being claimed, and may additionally apply interest charges and penalties, given the severity of the situation.
Not declaring your crypto taxes
The worst thing you can do is not declare your assessable income from your crypto investments. If you think you can get away with it, you should consider the following:
- Where do you buy your crypto?
- Every crypto exchange in Australia is registered with AUSTRAC and has your identity on file, tied to your transaction history.
- The ATO has been operating a data sharing program with every major Australian crypto exchange since April 2019.
- When you or your tax agent prepares your tax return, the prefill report from the ATO may already indicate that you have crypto activity to declare.
If you think the ATO can’t track your crypto in your private wallet, consider the following:
- Every transaction you make is permanent and immutable on a public blockchain.
- Did your original transactions originate from a crypto exchange?
- How are you planning to spend your crypto in the future?
- The ATO develops and uses forensic tools that allow them to track transactions and detect tax avoidance.
In short, it’s just not worth it. The ATO has information about crypto investments and data sharing facilities with banks, financial institutions and digital currency exchanges to track crypto transactions back to Australian taxpayers.
To stay in good standing with the ATO, you must disclose and declare all tax outcomes from your crypto in your income tax returns, and seek professional advice if you are not certain. With your records being permanently recorded on the blockchain, and the ATO data matching with both current and future techniques, the ATO will eventually track you down and there are severe penalties for deliberately avoiding tax.
Fortunately, it’s become a whole lot easier to declare your crypto tax, with crypto tax calculator software such as Syla. It’s now very simple to import all your crypto transactions, legally avoid tax where possible, and meet your tax obligations.
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Read our next article in this series > How to minimise crypto taxes in Australia
