Are you a crypto trader or investor and want to know how to save tax?
Tax on profits can be as high as 47%, causing you to lose a large amount of any gain, whilst the claiming of tax losses can be difficult due to complicated rules. You may end up paying more tax than you need and feel the pain that this money is gone forever.
You know that you need to be informed and ensure you have the right advice for your situation. The details below are based on research of how the ATO actually make decisions and apply these decisions to different situations, rather than a cursory reading of ATO guidance, so that you can be more fully informed and in the best position to save tax.
To understand how to save tax on crypto trading or investing, you need to understand;
- how the definitions of ‘investor’ or ‘trader’ will affect your tax
- the indicators the ATO employ to determine whether you are an ‘investor’ or ‘trader’
- that decisions are made based on prior court cases rather than black and white rules
- what some of these key court cases are and what the situations were in each case
- how your situation relates to both the ATO guidelines and the situations in the court cases, so you can then make an assessment as to where you fit in.
- decide on the best structure for your activities
- How the definitions of ‘investor’ or ‘trader’ will affect your tax
Tax on Profits
An investor will typically pay capital gains tax on the sale of crypto, whereas a trader is deemed to be in business and will pay income tax on the profit of trading.
An investor who holds a share for more than a year will effectively have their tax halved, through the 50% capital gains tax discount, whilst a trader will not be able to take advantage of this and will pay tax at their full marginal tax rate (assuming they trade in their own name rather than through a company).
An investor will only be able to apply losses on investments against capital gains and not against other income. The losses can be carried forward to future years.
A trader will be able to apply losses to other income as long as the ‘non-commercial loss rules’ have been met. If you don’t meet these rules, the losses can be brought forward until such a time that these rules are met.
If you have made losses on your crypto, it may be better from a tax perspective to be a trader rather than an investor.
- The indicators the ATO employ to determine whether you are an ‘investor’ or ‘trader’
The indicators are;
- the nature of the activities, particularly whether they have a profit-making purpose
- whether the person intends to carry on a business
- whether the activities are:
- repeated and regular
- organised in a business like manner, including the keeping of books, records and the use of a system
- the amount of capital employed in those activities, and
- whether the activity is better described as a hobby, or recreation.
The size and scale of the activities in question are relevant, but not necessarily conclusive, of whether they amount to carrying on a business.
An intention to make profits through active trading, a high frequency and regularity of trades, study of daily and longer-term trends and detailed analysis of various investments and keeping proper records are all indicators of being in business.
- Decisions on whether you are an investor or trader are based on prior court cases rather than black and white rules
The ATO indicators result in many cases in which it is difficult to know where to draw the line and where exactly you fit in. For example, what is the definition of ‘repeated and regular’ and ‘organised in a business like manner’? These can mean different things to different people. Furthermore, your activities may change over time and further cloud the picture.
Therefore, the way the ATO decide whether you are investor or trader is based on the circumstances of each case and the application of previous court cases that have considered this issue.
- What some of these key court cases are and what the situations were in each case
The ATO has considered whether share trading amounted to a business in various cases, details of which are listed below. It is reasonable to use this as a guide to crypto trading and investing.
In respect of share market trading, AAT Case 6297 (1990) 21 ATR 3747; Case X86 90 ATC 621 (AAT Case 6297), listed the following indicators of carrying on a business:
(a) the nature of the activities and whether they have the purpose of profit-making;
(b) the complexity and magnitude of the undertaking;
(c) an intention to engage in trade regularly, routinely or systematically;
(d) operating in a business-like manner and the degree of sophistication involved;
(e) whether any profit or loss is regarded as arising from a discernible pattern of trading;
(f) the volume of the taxpayer’s operation and the amount of capital employed by him;
and more particularly in respect of share traders:
(a) repetition and regularity in the buying and selling of shares;
(c) whether the taxpayer is operating to a plan, setting budgets and targets, keeping records;
(d) maintenance of an office;
(e) accounting for the share transactions on a gross receipts basis;
(f) whether the taxpayer is engaged in another full time occupation.
Whether a taxpayer is carrying on a business of dealing in shares “is a question of fact and degree, a question of impression” (Federal Commissioner of Taxation v. Radnor Pty Ltd 91 ATC 4689 at 4702; (1991) 102 ALR 187 at 205 per Hill J).
In AAT Case 4847 (1988) 20 ATR 3182; (1988) 89 ATC 171, a taxpayer purchased twenty parcels of shares between April 1986 and February 1987. All the shares were sold between September 1986 and April 1987. No share was held for more than five months. The Tribunal ruled there was the carrying on of a business because the shares were bought and sold repeatedly with a view to making a profit and because all shares were sold within a year of acquisition.
In Shields v. Deputy Commissioner of Taxation (Cth); Case  AATA 4 (1999) 41 ATR 1042; (1999) 99 ATC 2037, during the period from 6 February 1996 to 4 March 1996, the taxpayer bought shares in Australian banks which were about to pay franked dividends for cum dividend prices and sold shares in the same banks at their ex dividend prices. Applying the factors listed in AAT Case 6297; Case X86, even though the activity was for a short time only, the Tribunal decided the taxpayer was carrying on a business because of the volume of transactions and because the transactions were so carefully and systematically organised and handled.
In Damien Patch and Li-anne Grew v. Commissioner of Taxation  AATA 240, the taxpayers undertook twenty-seven buy and thirty-seven sell transactions over a period of three months. Although there was a remarkable lack of sophistication and planning about the trading, the Tribunal concluded, on balance, the taxpayers were carrying on a business. Here, the Tribunal had regard to the amount of capital involved, the repetition and regularity of the activity and the profit making purpose, coupled with the fact the taxpayers had no other real occupation.
In AAT Case 6297; Case X86, one factor contributing to the decision the taxpayer was not carrying on a business was the small number of share transactions. During the relevant income year, only two lots of shares in two different companies were sold (which were part of six lots of shares bought in six companies in the previous income year, of which four lots were disposed of in that previous income year).
In the Federal Court case of Radnor Pty Ltd, it was decided the taxpayer did not carry on a business because there was no pattern of buying and selling of shares. In general, many of the shares in question were held for many years.
In AAT Case 9183, 27 ATR 1168; Case 1/94, 94 ATC 101, whilst accepting the taxpayer’s evidence that shares in one company were purchased for resale and the dominant motive was profit making by sale, the primary factor contributing to the decision the taxpayer was not carrying on a business was there was no evidence of any regular, routine or systematic trading in shares. The purchase of any of the shares appeared to have been made on a very spasmodic basis.
Volume of operation & amount of capital injected
The amount of capital injected is not, on its own, considered to be a crucial factor in determining whether a person is carrying on a business of share-trading. This is an area in which it is possible to carry out business activities with a relatively small amount of capital.
It is also an area in which a taxpayer might invest a substantial amount of capital, without being in a business of share-trading. The larger the amount of capital that is invested, the more likely it is that the person is carrying on a business.
For example, in Case X86 90 ATC 621 the taxpayer invested $100,000 and was not considered to be carrying on a business, whilst in Case W8 89 ATC 171 the taxpayer invested approximately $1,300 and was held to be carrying on a business.
Business-like manner & Keeping Records
Generally, most businesses have some form of forward planning to take account of contingencies and market fluctuations, as well as setting profit targets, budgets, periodic financial reviews, record keeping systems, an appropriate office and so forth.
It would be reasonable to expect a share trading business to involve study of daily and longer-term trends, analysis of a company’s prospectus and annual reports, and the seeking of advice from experts.
In Case X86 90 ATC 621, in which the taxpayer was found not to be carrying on a business of share-trading, the taxpayer sought advice and consulted relevant newspapers, but did not operate to any particular plan apart from his goal of maximising profits.
Any qualifications, expertise, training, or skills which a taxpayer may have in this area would be relevant to determining whether business activities were being carried on.
If records of purchases and sales of shares were not kept, it would be more difficult for a taxpayer to establish that a business of share-trading was being carried on.
However, the fact that records of purchases and sales are kept would, in itself, lend little support to the question of whether a taxpayer was carrying on of a business of share-trading, given that the taxpayer would be required to keep the same records for capital gains tax (CGT) purposes if the shares were held as an investment.
In most legal cases, the greatest weighting is given to the repetition and regularity of the activities, occasionally followed by organisation in a business-like manner as a supportive indicator.
ATO carrying on a business of share trading example
Further to the case law and principles established in the body of law, the Tax Office has prepared the the following example of someone carrying on a business. However, this example doesn’t have any inconsistencies, such as a high volume of trades but no business plan, or a high volume of trades but with little capital. It can be instructive to review this example but the existing case law also needs to be reviewed. The example follows directly below;
Molly is an electrical engineer. After seeing a television program, Molly decides to become involved in share trading activities.
Molly sets up an office in one of the rooms in her house. She has a computer and access to the internet.
Molly has $100,000 of her own funds available to purchase shares and, in addition, she has access to a $50,000 borrowing facility through her bank.
Molly conducts daily analysis and assessment of developments in equity markets. The resources she uses include financial newspapers, investment magazines and stock market reports.
Molly’s objective is to identify stocks that will increase in value in the short term to enable her to sell at a profit after holding them for a brief period.
In the year ended 30 June 2001, Molly conducted 60 share transactions: 35 buying and 25 selling. The average buying transaction involved 500 shares and the average cost was $1,000. The average selling transaction involved 750 shares and the average selling price was $1,800. All the transactions were conducted through stock broking facilities on the internet. The average time that Molly held shares before selling them was twelve weeks. Molly’s activities resulted in a loss of $5,000 after expenses.
Molly’s activities show all the factors that would be expected from a person carrying on a business. Her share trading operation demonstrates a profit making intention even though a loss has resulted. Molly’s activities are regular and repetitive, and they are organised in a business-like manner. The volume of shares turned over is high and Molly has injected a large amount of capital into the operation.
- How your situation relates to both the ATO guidelines and the situations in the court cases
Now that you understand the ATO indicators of a trader or investor and what some of the key court cases have decided, you have to make a decision as to where your circumstances fit in.
This decision must be objective and based on all the available facts. Where you are unsure of the decision or your situation is unclear, seek professional advice.
- Decide on the most appropriate structure for your circumstances
Once you understand your situation with regard to case law, you can make a decision about the best structure for your future activities. The structure of your existing activities may be unlikely to change as if you ‘transfer’ your crypto to a trust or company, you are creating a ‘taxable event’ and tax may have to be paid. Whether you should transfer existing holdings to another structure requires professional advice.
If you are a trader and in business, you may want to use a company so that you can cap your tax rate at 27.5%. If you are an investor, you may want to use a discretionary, or ‘family’ trust, so that you can access the CGT discount and possibly choose whom to distribute profits to. You will almost certainly want to consider the best structure for asset protection purposes, as well as for tax.
Obtain a free, no-obligation consultation for the remainder of July 2018
If you are unsure of your status as a trader or investor or want to understand or establish the best structure for you, whether it is a trust, company or sole trader, you can obtain a free, no-obligation consultation with me through a 15 minute phone or zoom internet meeting consultation.
How to book your consultation and ensure you don’t pay any more tax than necessary
Simply click on this link
Tax law is complex and in many cases, there are no black and white answers. You need to understand your situation and how it relates to previous cases for existing investments.
To ensure you best prepare yourself and don’t pay any more tax than is necessary, for future investments, you need to decide whether your expected activities will mean you are a business or an investor and then choose the most appropriate structure.
Book your consultation to ensure you don’t pay more than necessary. Book at this link http://bit.ly/2McjRct