How To Avoid Tax Surprises On Your Crypto
Leveraged Yield Positions: Min Tax, Max Return, Low Risk
Disclaimer: The author is a tax resident of the United Kingdom with little knowledge and experience of the finer details of non-UK tax legislation. Readers should consult tax experts in their respective jurisdictions on reporting their crypto returns. This article is in no way an attempt to provide tax avoidance advice.
Paying taxes are a privilege for entrepreneurs earning money and/or cultivating value. One has to earn money to pay tax on it!
I have been ANGRILY building in the background.
Building product, relationships, community and profit generating schemes.
So focused in my ANGER that time has flown by and we are now at that period of the year when many of us in the UK have to report our financials and pay National Insurance and Taxes to HMRC.
With the upcoming launch of Blackmagic Money and nReserve on EnreachDAO, the so called “looping” events we are orchestrating on the dApps being built, got me thinking on how on every “loop” users are utilising a tax efficient process to increase their exposure to yield (revenue or profits that can be deemed income for tax purposes).
Capital Gains Taxes (CGT) are taxes applicable to profits taken when SELLING an asset. Let’s take an example that some of the EnreachDAO community can relate to.
- Stacy bought into the EnreachDAO presale with 20 Ethereum
- Stacy paid $2k per Ethereum; totalling $40k investment
- Stacy staked into the LGE event from the beginning
- Stacy realised 32,000 NRCH tokens after LGE period was complete
- Stacy paid $1.25 per NRCH token subject to initial $40k investment in ETH
- Price now of Ethereum is $4k and NRCH is $5
- Stacys tax chargeable capital gain is $3.75/NRCH ($5 — $1.25 = $3.75)
Stacys total asset value for 32,000 NRCH tokens is now $160k. For every NRCH Stacy sells at $5, Stacy is subject to a $3.75 chargeable capital gain upon which she will subject her tax calculation.
But that’s only if Stacy sells!
Getting a loan against your asset is a great way to “cash out” without being subject to a chargeable capital gain. Below we look at some interactions users would have with dApps and comment on the tax implications of such interactions.
Deposit Collateral, Borrow Loan
Depositing collateral on a dApp such as the upcoming Blackmagic Money platform and taking a loan in stable coin is not a taxable event.
Do you have to pay tax on the mortgage you got on your house?
No. Same rule applies here.
Spending or Investing the Loan
Spending or investing the loan is not a taxable event either whilst any expense incurred servicing the loan can be offset against applicable taxes.
Repay Loan, Reclaim Collateral
Repaying the loan to reclaim your collateral would not be subject to a taxable event even if the price of the asset used as collateral has gone up in value.
Liquidations Events
Now getting liquidated on your collateral will cause a taxable event.
Why?
Liquidation leads to the sale of the collateral in order to cover the loan outstanding that you took. Selling is a taxable event, and liquidation leads to a sale.
LOOPING
In the event of a “Looping” event the user must be aware of risk of liquidation. However, looping is a very tax efficient process in order for one to increase their exposure to yield generating positions.
The diagram below gives an outlook of looping steps one would take.
In an up only environment, looping your collateral can lead to a non-taxable cash out event as long as one is not liquidated. Hence platforms like nReserve and Blackmagic will enable users to maximise their return, minimise their tax with little risk.
Coming soon, we will explain how to mitigate downside risk as well as using your increased equity on collateralised assets to generate a passive income, which both could lead to taxable events.
