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.
You know which one you would prefer!
Parcel selection methods
Parcel selection methods are an answer to the problem of which asset did you 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:
You buy 1 BTC for $5,000
Then, you later buy 1 BTC for $20,000
A year later you buy 1 BTC for $25,000
Then, you buy 1 BTC for $15,000
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.
Net capital gain is $22,500.
LIFO
The last parcel for $15,000 is sold.
This parcel was held for less than 12 months, so there is no CGT discount available.
This results in a net capital gain of $35,000 (50,000 - 15,000).
HIFO
The parcel for $25,000 is sold.
This parcel was also held for less than 12 months, so there is no CGT discount available.
This results in a net capital gain of $25,000 (50,000 - 25,000).
LTFO
The parcel for $20,000 is sold.
This results 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.
Net capital gain is $15,000.
Comparison
In this specific example, LTFO resulted in $20,000 less gain compared to the worst option and $7,500 less gain 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 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.
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 (NFTs). 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:
Go to the Settings > Tax page.
Find the setting called Parcel Method.
Click Edit.
You can now select which method you would like to apply for each financial year.
Does the ATO allow LTFO?
The reason that methods like FIFO, LIFO and LTFO exist, is because it's often not possible to specifically identify which exact asset was sold. For example, if you have 10 BTC, and you sell 1 BTC, how do you know which one was sold?
If we go a little back in time and look at shares, you might recall the concept of a share certificate. This is where each share you purchased has a unique identification number assigned to it. If you own shares like this, they can be specifically identified, as each share has an identification number which tells you exactly which one has been bought or sold.
Step back to today, and share certificate numbers are not so common. The ATO clarified their position on what taxpayers should do in this circumstance in Taxation Determination 33 where the Commissioner of the ATO stated:
"where unidentifiable shares have been disposed of, the Commissioner has accepted 'first-in first-out' as a reasonable basis of identification. For CGT purposes, the Commissioner will also accept the taxpayer's selection of the identity of shares disposed of."
In a nutshell, if you can't tell exactly which shares have been sold, you can either use FIFO, or you can freely select your own preference (which means any other method is also acceptable). Methods like LIFO, HIFO and LTFO are simply approaches to selecting your preference of which CGT asset has been disposed of.
In the same ruling, the Commissioner also states:
"Taxpayers in this situation will need to keep adequate records of the transaction so that the decision can be supported should the income tax return be subject to Tax Office scrutiny at a later date."
Syla acts as your record keeping system and tracks which parcels have been disposed and which are remaining and can still be sold in the future. These reports are available for download in Syla.
Taxation Determinations, including Taxation Determination 33 are legally binding on the ATO, and can be safely relied upon.
While cryptocurrency are not the same as shares, they are both CGT assets, and similar considerations would apply when they are not uniquely identifiable.