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Hey DEFI TIMES community,
The bull market is on fire! Probably thousands (maybe millions) of people will become millionaires in 2021! We experience 2017 all over again, but this time a lot more capital will enter the market.
We see Elon buying Bitcoin, institutional investors FOMOing in, and retailers will follow very soon! This is a good thing, right?
Well, not so fast! Two things are certain in life: death and taxes. There is no way to escape taxes, and you certainly don’t want to evade them, especially when you make life-changing money!
Today, we want to give you a few tips on how you can avoid getting rekt by a significant tax burden. This is certainly not a pleasant topic to talk about, but it is one of the most important parts of every financial decision you make, especially in crypto!
First of all, we are not financial or tax advisers. We solely give you tips based on how experienced crypto traders handled taxes in the past.
With that said, let’s explore some useful crypto tax tips!
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Crypto tax tips
Always take out taxes
Every time to spend or swap your tokens, you have to pay taxes on your crypto profits. In most countries, even crypto-to-crypto trades are taxed. This can be devastating because when you sell one token for another, and the other token goes down in value, you still owe the same amount of taxes to the government.
For example, you make $1 million with bitcoin and sell your bitcoin for ETH. Given a tax rate of 42%, you owe $420,000 in taxes. However, when ETH goes down in value, your tax doesn’t get smaller but stays the same.
That’s why you should always take out some money for your taxes to make sure you can always pay back your taxes. If you make $1,000,000 and you have to pay $420,000 in taxes, take that money out and store it safely (in stablecoins or your bank account).
If you don’t do that, your position gets overly leveraged because taxes are a form of credit (a payment you have to make in the future).
Minimize taxable events
If you’ve been through DeFi summer 2020, your transaction history is probably pretty complicated. You made a lot of trades on Uniswap, provided liquidity on Aave, and so on. However, this can be too confusing, even if you write down every single transaction.
The more coins you own, the more complex your tax report will become. Try not to hold 50 different cryptocurrencies to keep an overview of what you are doing.
So, keep your portfolio small and try not to swap your coins too often. You will thank yourself later when you do your calculations.
Split gains between tax years
Suppose that it’s December 2021 and your portfolio just hit an all-time high. Now might be a perfect time to sell as the bubble could peak at any time.
However, you might want to keep your coins until January 2022. If you sell your coins in late 2021, you will have to pay your taxes in 2022.
On the other hand, if you sell in January 2022, you have to pay your taxes in 2023. This is a difference of a whole year even though you sold your coins only one month after December.
Ask yourself whether it makes sense to sell in December or keep holding until January. But be careful because January is often considered to be a bearish month for the same reason.
Loopholes in your country
There are many loopholes regarding cryptocurrency taxes that you can use to minimize your tax burden.
In some countries, giving cryptocurrencies as a gift is not a taxable event. In those countries, the gift receiver does not have to pay any tax if the value of the cryptocurrencies is the same or less than when they received it.
If you have a close relationship with some members of your family and you want to share some of your crypto gains with them, this might be a perfect option for you to consider! Countries without tax gift involve:
- New Zealand
There is a speculation period in other countries, after which the gains on cryptocurrencies are not taxed at all. For example, in Germany, you don’t pay any taxes on cryptocurrency gains if you hold the cryptocurrency for longer than a year.
Educate yourself whether such a law exists in your country and try to sell your holdings after the speculation period. It makes a difference!
If these options are not suitable for you, you can consider moving to a country where cryptocurrency gains are not taxed at all.
Some countries with extremely attractive crypto tax laws include:
- Portugal —> no crypto tax
- Germany —> no crypto tax for people who hold coins longer than a year
- Malta —> also no crypto tax for people who have coins longer than a year
- Switzerland —> only pay annual wealth tax, and it’s hard to relocate to
- United Arab Emirates —> no capital gains tax and income tax
- Singapore —> challenging to move to
- Malaysia —> high entry requirements
- Hong Kong —> uncertain political situation
- Puerto Rico —> especially interesting for US residents
- Belarus —> no crypto tax until 2023
If you consider all these tips, you will reduce your crypto tax to an absolute minimum. Of course, it’s hard to move to any of those places in uncertain times like these.
Some of the countries are also extremely hard to move to. For example, if you are a non-EU citizen, you will have a hard time moving to Portugal. There’s also a high entry barrier for Singapore, and there might be many different hurdles to overcome.
However, it’s safe to say that tax heavens will be the place to go for many new crypto millionaires in 2021.
All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.