Do you invest (or trade) in cryptocurrencies? If so, does your accountant help you decide what’s the best investment strategy to MAXIMISE your AFTER-TAX PROFIT?
When you lodged your tax return, did your accountant reveal that you could have paid significantly less tax if you did ‘X’? It’s too late to do anything now. You can’t go back in time and change your strategy. If only you had thought about tax in the beginning… you would’ve done ‘X’ instead, and have a much larger wallet!
You should not be waiting until year end to do your tax return. You should be thinking about tax in every decision you make. Your accountant should be proactively advising you, instead of waiting until the year is over and simply lodging your tax return.
What strategies can you use to minimise your tax?
Here’s 2 examples:
- Did you make substantial gains earlier in the year, AND make losses later on, AND are you holding any cryptos that are currently priced below what you purchased them for? If so, you can reduce the tax you pay on your gains with your losses. This assumes that you don’t expect the cryptos to rise above your purchase price.
- You’ve purchased coins 11 months ago. You want to sell it. Should you wait another month so you pay 50% less tax, or sell today and pay 100% tax?
How tax affects your investment decisions
Let’s say you have the below portfolio, divided into three strategies:
- BUY $10,000 → SELL $20,000. STRATEGY = Personal use.
- BUY $50,000 → SELL $250,000. STRATEGY = Long-term investment. Sell after 12 months, and buy back at low point if it’s still reverting to an uptrend.
- BUY $20,000 → SELL $200,000. STRATEGY = Active trading, which may involve buying or renting bots. These bots place hundreds of trades per day, taking advantage of market volatility to multiply your returns while minimising your drawdowns.
- BUY $10,000 → SELL $100,000. STRATEGY = Long-term investment of ICO (Initial Coin Offering). You hold it for more than 12 months.
Taxable Gains on Portfolio = $10,000 × 0% + $200,000 × 50% + $180,000 × 100% + $90,000 × 50%= $325,000
Assuming your average tax rate is 40%, then you’d pay tax of $130,000.
Wow, that’s a lot! Was the extra return from short-term trading even worth the effort and risk? Or should you have simply held onto your crypto coins and keep them in cold storage?
Is this calculation on point, and what issues haven’t we considered? Do you need to pay tax for exchanging Ethereum for Bitcoin, or other cryptos? How does the tax law distinguish between “personal use” (tax-free) and “profit-making undertaking” (taxable)? Are there scenarios where you’ll be taxed 100% even if you held onto your crypto coins for more than 12 months?
I’m not a practicing accountant, so I don’t have the answers. These are the questions I hear from other crypto investors.
If you want to improve your after-tax profit, seek advice from a professional accountant with expertise with cryptocurrencies, such as the ones below:
DISCLAIMER: The above does not constitute tax advice, and you should consult further professional tax advice before making major investment decisions.
Originally posted on LinkedIn.