Sunday, November 7, 2021

Yes, swapping cryptos is taxable in most countries. Know your countries tax rules - it may help you HODL.

We always see a lot of comments on tax rules and regulations on here when people mention things like “cashing out” and “swapping” one crypto for another. This is not about thinking that these rules are fair or unfair. Or even if I believe in taxation or not. This is about learning to use these rules to your advantage.

Taxable Events - Most countries like the US, Australia and the UK count any swap/exchange or trade of one crypto to another as a “taxable event”.

Example - You own 1ETH. You “swap” that ETH for the equivalent value of BTC. The exchange you use will sell your ETH. Convert the ETH into FIAT and then purchase the equivalent value in BTC (minus any fees). You have sold an asset for FIAT. This is usually all that the tax regulators look for to determine a taxable event.

IRS - The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.

Australian Taxation Office - A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. A disposal can occur when you: sell or gift cryptocurrency, trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency), convert cryptocurrency to fiat currency (a currency established by government regulation or law ) such as Australian dollars, or use cryptocurrency to obtain goods or services.

Source IRS - Virtual Currencies

Australian Tax Office - Transacting with Cryptocurrency

Being a resident of Australia I know that the same is true here as per the link above. I’ve been informed that the same is also true in the UK. Even a swap counts as an event that you will need to report come tax time and may be eligible to pay Capital Gains Tax for.

Tax Benefits for Long Term Holding of an Asset - In most countries where the above rules apply, there are usually also tax benefits in place for those who hold an asset for a certain time period _. In most countries with the above rules this period of time is 12 months. Here in Australia if you hold an asset (including crypto) for 12 months or longer you will qualify for a 50% discount on the Capital Gains Taxes for the sale of that asset. That’s right. _You’re rewarded for holding.

Example (Australia) - You purchase 1ETH on 1st January 2021. You add to this position over time and decide to sell your initial 1ETH on 10th January 2022 after an overall increase in the value of ETH (therefore making a gain on investment) - just over 12 months from your initial purchase of this 1ETH. You are liable for the CGT on this sale however in Australia you are granted a 50% discount on the tax for holding the asset “long term. It’s worth noting that this discount applies 12 months from the purchase of the 1ETH and the additions to your position if sold will not attract a discount until they have also been held for 12 months. You could theoretically stop adding to your crypto positions and sell out 12+ months after you stop adding and get a discount on cashing out completely.

Source Australian Taxation Office - CGT Discount

Example (US) - You purchase 1ETH on 1st January 2021. You add to this position over time and decide to sell your initial 1ETH on 10th January 2022 after an overall increase in the value of ETH (therefore making a gain on investment) - just over 12 months from your initial purchase of this 1ETH. You are liable for the CGT on this sale however in the US a “long term investment” holding an asset for 12 months or more attracted a generally lower rate for CGT.

A short-term capital gain results from the sale of an asset owned for one year or less. While long-term capital gains are generally taxed at a more favorable rate than salary or wages, gains that are classified as short-term do not benefit from any special tax rates. Long-term capital gains are derived from assets that are held for more than one year before they are disposed of. Long-term capital gains are taxed according to graduated thresholds for taxable income at 0%, 15%, or 20%. The tax rate on most taxpayers who report long-term capital gains is 15% or lower. Short-term capital gains are taxed just like your ordinary income. That’s up to 37% in 2021, depending on your tax bracket.

Source: Investopedia - Long Term vs Short Term Capital Gains

Wherever you are in the world look into your taxation laws and try to get familiar with them. Instead of working to beat tax or avoid it make the tax regulations your bitch and play the same game the 1% play. Holding long term can be a step towards that.

This isn’t financial advice. Get an accountant.

I don’t know shit about fuck

Edit: Formatting. On mobile and tired plus it’s getting late here.


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