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Understanding Lowest Tax First Out (LTFO)
Understanding Lowest Tax First Out (LTFO)

Learn how to save tax by applying Syla's exclusive LTFO tax optimisation algorithm.

Updated over a week ago

Syla's Lowest Tax First Out (LTFO) is a tax-optimised parcel selection method that is designed to help you save tax.


Parcel dilemma

Let's look at a quick example to understand what parcel selection means, and why it's important.

Imagine the following scenario:

  • You buy 1 bitcoin for a cost of $5,000.

  • You then buy another 1 bitcoin for a cost of $20,000.

  • A bit later on you decide to sell 1 of your bitcoin for $30,000.

The question is, which 1 bitcoin did you sell?

That answer happens to be very important, as the tax outcomes are significantly different depending which one you choose.

Parcel matching

Each time you purchase crypto it gets recorded as an acquisition parcel. In our example, there are two acquisition parcels.

  • Acquisition parcel 1 - contains 1 bitcoin with a total cost of $5,000

  • Acquisition parcel 2 - contains 1 bitcoin with a total cost of $20,000

Each time you sell crypto, that gets recorded as a disposal parcel. In our example, there is one disposal parcel.

  • Disposal parcel 1 - contains 1 bitcoin that was sold for proceeds of $30,000

When the disposal occurs, we have to pick which was the corresponding acquisition parcel.

  • If you pick the first parcel, then you'll have a capital gain of $25,000.

  • If you pick the last parcel, then you'll have a capital gain of $10,000.

I know which one I would prefer!


Parcel selection methods

Parcel selection methods are an answer to the problem of which asset did I sell. They formalise a strategy for choosing which crypto was sold when there are multiple options available.

The following parcel methods are supported in Syla:

  • FIFO - First In First Out

  • LIFO - Last In First Out

  • HIFO - Highest (cost base) In First Out

  • LTFO - Lowest Tax First Out

Each of these methods describe a different strategy for selecting which parcel was sold.


Practical example

Let's run through an example to demonstrate the difference between each parcel selection method.

Imagine the following scenario:

  1. You buy 1 BTC for $5,000

  2. Then, you later buy 1 BTC for $20,000

  3. A year later you buy 1 BTC for $25,000

  4. Then, you buy 1 BTC for $15,000

  5. Finally, you sell 1 BTC for $50,000

This scenario of purchasing multiple parcels of crypto is very common. For example, if you are Dollar Cost Averaging (DCA), or through regular trading, you'll often end up with multiple parcels of the same asset that has been purchased for a different cost.

Here's the illustration of the same example.

Let's analyse the outcomes for each parcel selection method.

FIFO

  • The first parcel for $5,000 is sold.

  • This results in a capital gain of $45,000 (50,000 - 5,000).

  • This parcel was held for longer than 12 months, so it will be eligible for the CGT discount.

  • Final assessable income of $22,500.

LIFO

  • The last parcel for $15,000 is sold.

  • This results in a capital gain of $35,000 (50,000 - 15,000).

  • This parcel was held for less than 12 months, so there is no CGT discount available.

HIFO

  • The parcel for $25,000 is sold, resulting in a capital gain of $25,000 (50,000 - 25,000).

  • This parcel was also held for less than 12 months, so there is no CGT discount available.

LTFO

  • The parcel for $20,000 is sold, resulting in a capital gain of $30,000 (50,000 - 20,000).

  • This parcel was held for longer than 12 months, so it will be eligible for the CGT discount.

  • Final assessable income of $15,000.

Comparison

In this specific example, LTFO resulted in $20,000 less assessable income compared to the worst option and $7,500 less assessable income when compared to the next best option.

This demonstrates why the parcel method can have such a big impact on the final tax outcomes.


Which parcel methods are allowed by the ATO

For an investment activity undertaken by an individual, the current ATO guidance is:

The taxpayer can adopt almost any parcel selection strategy for identifying which units of the asset were sold, provided adequate record keeping is maintained and parcels can be tracked and matched.

To put it more simply: just about any parcel selection method can be used.

This is a really valuable tax advantage that is specific to Australian taxpayers. Many other tax jurisdictions around the world instead require that FIFO is always used and investors don't even get a choice.

The reason LTFO exists in Syla, is because it's been designed specifically for Australian tax law, to deliver better tax outcomes for Australian investors. :)

Note: Parcel selection methods in Syla will not have any impact on Non-Fungible Tokens (NFT's). This is because NFTs can be specifically identified. i.e. you know exactly which NFT was originally acquired and later sold, so it can't be matched to a different NFT. The only exception to this would be in the rare case of trading in units of partially owned NFTs.


How to apply LTFO

You'll have access to use LTFO if you are on a Tax Saving or Private Wealth plan. When you upgrade your plan, LTFO will automatically be applied to your account.

You can also select which parcel selection method is being used from the Settings page:

  1. Go to the Settings page.

  2. Find the setting called Parcel Method.

  3. Click Edit.

  4. You can now select which method you would like to apply for each financial year.

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