Cryptocurrency investors, especially those with significant investments, can leverage family trust as a highly effective tax strategy. But what is this family trust? And how can it benefit you when it comes to crypto investing?
The combination of family trust and cryptocurrency is incredibly useful for investors. Also known as a discretionary trust, it is a financial instrument to manage assets and property, minimizing estate probates and ensuring your loved ones are provided for.
With family trust, the trustees get the ability to determine who (beneficiaries) gets financial benefit from the trust. Because of the novel structure of trusts, they can be very effective in strategizing cryptocurrency taxes to benefit the investor the most.
If you are investing in or thinking of putting your money in crypto, then learning about the benefits of combining cryptocurrency and family trust in Australia can pay off big time. Read on to know more in detail.
Briefly Understanding Family Trusts:
A family trust is known as discretionary trust in Australia that is formed for business purposes or to hold assets of a family. Most of the time, family trust is established by someone when they want to benefit their family group.
It’s mainly for minimizing estate taxes to ensure the transfer of wealth and property is done with the minimal cut paid to the government. It also helps in securing family assets from liabilities. For instance, if a family member gets bankrupt, having most of their assets in a trust will minimize the impact.
Some Common Tax Benefits of Having Family Trusts:
A number of traditional tax benefits can be obtained when you establish a family trust, and that’s why it’s the go-to shelter for many Aussie wealthy families. Here are the main advantages you can get by setting up your own family trust:
- Reduction in Taxes: Because of the structure that some family trusts have, it becomes possible to distribute wealth or income to the beneficiaries of the trust at low tax rates. Knowing the right kind of trust for your number of assets and wealth can help with planning and minimizing taxes. Also, in some instances, income or capital transferred to beneficiaries can and be trimmed down through a process known as streaming.
- Tax Discounts: Another benefit of having family trust is getting a 50% discount on capital gains when you dispose of those assets. However, the trust has to hold those assets for at least 12 months for the discount to be utilized.
- Carry Forward Tax Loss: In some situations, trust can also allow you to carry forward losses, which happens when the net expenses are more than gross income. You can move the tax loss to some time in the future for profit offsetting.
The main benefit of establishing family trust is that you don’t have to pay income tax when distributing income among the beneficiaries. The trustee (person who manages assets under a trust) can transfer the income to as many beneficiaries as he/she wants without having to pay taxes on it.
Aussies who invest in cryptocurrencies can leverage family trusts to get the aforementioned advantages and better manage their taxes.
So, What Crypto Tax Benefits Can a Trust Offer?
As mentioned above, if your crypto investing works in conjunction with a trust, then as per crypto tax laws in Australia, you have great opportunities to establish tax strategies and keep more returns to yourself. As per the guidelines provided by ATO (Australian Tax Office), crypto is not considered as a currency, rather a property. And the tax treatment on crypto depends on who the owner is; investor or trader?
- The investor typically purchases the cryptocurrency, holds it for a long time. Since the capital gains tax is levied on cryptocurrency that is bought, held for over a year, and then sold, investors have to pay that tax. However, with the tax discount on capital gains, which is 50%, investors can get a significant reduction on taxation when selling their cryptocurrency.
- As for the traders, rules are somewhat different/ Traders purchase the currency with an intent to sell it in the near future, a few months at best, to generate short-term profit. In this case, they will not have to pay capital gains tax, but rather, income tax. Family trusts benefit in reducing income tax as well.
Depending on how your family trust is structured, you can come up with the optimal tax strategy by dividing your crypto assets between trader and investor tax statuses for maximum returns. The income distribution in trust is free from income tax in family trusts, so traders can benefit from it.
While investors can save 50% of the tax on capital gains. So you can categorize your short-term and long-term crypto investments in these two brackets and get the most tax benefit.
How to Move from Personal Trading to Establishing a Trust?
If the incredible tax benefits of family trusts have light up a bulb in your brain and you want to seize the opportunity that comes with the combo of crypto trading and trusts, then read this section carefully. When you transition from personal trading to establishing a trust, you need to consider a lot of factors.
The best way to do this is to get in touch with a professional consultant with specialities in crypto, or at least fiat currency trading. Your trust may divide crypto assets into investor and trader tax brackets, and for that, it might have to be structured in a specific way to carry out trading business.
A professional will help you hammer out the specifics of the structure. But to give you an idea of how things work, here’s a brief breakdown of how trust is set up:
- Firstly, you’ll have to choose a trustee who will manage your trust according to the terms specified in the trust deed.
- Then you’ll draft a family trust deed and settle your trust
- Then stamp duty will be paid to establish your trust
- You will then apply for TFN (Tax File Number) and ABN (Australian Business Number) for your trust
- A bank account for the trust will be required
- Then you’ll have to look for an Australian crypto exchange allowing you to create an account for the trust.
Remember, a trust that’s established to integrate tax strategy for crypto may be more complicated to set up than a regular discretionary trust.
Your family can enjoy several tax benefits with a discretionary trust, and when it comes to crypto tax, it can offer a wide range of tax advantages. Even though the taxes for cryptocurrency are relatively new in Australia, the relationship between crypto and family trusts is very clear, so you shouldn’t have any problem setting up your trust.