Sure about that bit? This may be the perception – that holding your assets in 'the crypto system' avoids tax issues – but the taxman will disagree.
Swapping $BTC for $USDC or whatever your tether of choice is is a 'taxable event'. You've sold one security in exchange for another. It doesn't matter that they're both crypto.
Now, it might be harder for the taxman to detect this event, which is a different thing.
But be careful! Actually read what your local tax office puts out. Assume nothing: it can be very easy to get yourself in to trouble.
For example:
- You buy BTC @ $1
- You exchange BTC @ $11 for $RANDOM
- You just made $10 :-) and you owe the taxman ~$3 (if you're in Australia)
- $RANDOM falls to ~$0
- So you didn't actually make a material profit
- But you still owe the taxman $3! (though you might be able to claim some sort of offset on your material loss of $RANDOM; IANAA)
- Now multiply all amounts by 10,000 and be sad
It's analogous to selling any asset. You buy gold, you sell gold at a profit and buy silver. You owe tax on the sale of the gold; you assume you'll pay this from the value you now hold in silver. The price of silver plummets. You still owe the tax on the sale of the gold.
>- But you still owe the taxman $3! (though you might be able to claim some sort of offset on your material loss of $RANDOM; IANAA)
From what I understand, you have to actually realize your losses/gains if you want to claim tax on them. So if $RANDOM drops to ~$0 then you can't use it for capital losses until you trade it to another crypto (or cash). You could probably just trade $RANDOM to something else and then back to realize the losses.
You handwave away $RANDOM falling to zero as something which doesn't count as a capital loss that you can carry forward to offset all future gains?
As another Australian you should really speak to an accountant if you ain't going to claim that massive loss because this is either comically wrong or intentionally misleading advice.
It's just like any other capital gains event and very simple to grok.
If this is true, it simply means your tax code has a giant loophole that allows people avoid paying tax on capital gains by simply swapping an asset for another.
Why?
You eventually have to pay it when you cash out (or buy service, goods with crypto).
If you wait you loose tax returns for the amount you invested in crypto (with each year you have it halved). Basically this is the same as in case of stock market.
You don't pay taxes until you sell stock. And here stock is whole crypto market.
I buy 100 USDC. I use these to buy some crypto-currency. 6 months later, I sell the crypto-currency for USDC, making a 10% profit. I sell the USDC for USD. Notice that I have made no profit from the sale of USDC, which is (supposedly) the only taxable event in this series of transactions. I bought 110 USDC worth $1 each, and sold 110 USDC worth $1 each. And I don't even have to sell the USDC for USD, I can buy stuff directly with USDC.
No no, you pay not the gain of transaction, you pay tax for the whole amount.
And then deduct the amount of fiat you used to buy crypto.
So, you buy 100 USDC for $100 - you report that in your tax information (for use in following years tax deduction).
Then some time ago, you sell 110 USDC for $120, you pay tax for the amount $120 - $100 (unless the $100 was used year earlier, then you can use just $50 as a cost).
If you didn't report any costs (meaning buying crypto) you pay tax for the whole $120 amount.
I poked around on Google and it looks like it is similar to France where crypto swap is also not taxable. (but I don't pay taxes there so it might be more complicated).
You still have to pay taxes when you convert back to fiat though. And eventually you have to do this because you don't want a significant portion of your wealth in stablecoins that might collapse overnight.
So it seems from the outside that stablecoins exist primarily to take advantage of grey areas in taxation legislation - and possibly also KYC/AML legislation - which allow investors in certain jurisdictions to avoid taxable events which would otherwise occur when trading.
Building a business model on dodging taxes isn't a great look, is it?
That makes no sense. You pay taxes on realized gains (i.e. when you cash out), not unrealized ones... otherwise people like Elon Musk would have to pay tens of billions of dollars in taxes and sell off part of their stock to even be able to pay the tax (and probably ruin the company in the process). The same applies to crypto, and even though it's mostly not needed (you pay tax on realized gains in most countries and it makes common sense crypto would be similar), some countries alredy explicitly codified this, just to be crystal clear: You pay your taxes when you convert back to cash. That's the "taxable event". Same as when you sell your stock.
You do pay taxes on realized gains, but they are realized when you sell the asset, not then you "cash out", and it makes perfect sense.
There are many true horror stories of amateur traders going from in the green to losing more than they own.
I don't know any place where what you describe is legal.
If this is your strategy (as in method to cheat with taxes) now is probably a good time to calculate how much you owe and put that aside into something less volatile, not to accidentally ruin your life.
so when you buy 1 btc for $30k, trade the btc for 100 of bscoin, bscoin rises to 50 bscoin pet 1 btc, you change back to btc, now you have 2 btc, but the next day big crash occurs and 1 btc is worth just 10k... you cash out and there you have it, a $10k loss... but, you're supposed to pay the tax man on the bscoin -> btc trade? That makes no sense. And then what, you'll want that tax back because of the loss? More BS paperwork for no reason? And all this for what?
That's correct, but under US tax law, in certain cases you are able to realize the loss on the BTC to offset the gains you made earlier (tax-loss harvesting)
This is also what happens when you buy and sell stocks or bonds, FWIW. Each sale is a taxable event, even if you receive payment in the form of a different stock or bond.
That's nice and all and I don't live in the US, but just imagining the way you would track all of this makes me shiver. Anyways, from my point of view (and also many countries point of view), the entire point of realized gain tax is to be the income tax for stock traders... i.e. income is what the government typically collects taxes on... when I convert BTC to DOGE (or whatever), there is no income, so there is nothing to tax. Otherwise you're getting into a dangerous territory of soft banning crypto trade by way of purposefully obtuse tax code. Ban on a good by abusing the bureaucracy instead of properly dealing with it through the voters and their representatives.
It's the same as stocks. Let's walk through an example.
You have 1 share of Stock A and I have 1 share of Stock B. We both paid 1 USD for each of our different stocks.
Now I want Stock A and you want Stock B, so we'll trade with each other, and lucky us, both stocks are now valued at 2 USD per share.
After performing this trade, ask yourself these questions (from my perspective, or swap A and B for yours, it's the same either way):
* Have I held Stock B?
* What did I pay for Stock B?
* Do I now hold Stock B?
* Why not?
* What did I sell it for?
* And how much was that valued?
* So then how much did I gain?
* How much is owed in tax?
Unless your local tax law specifies "cashing out" not only as a taxable event, but the only taxable event, which I assure you it does not for stocks, the correct answers are as below. The equivalent to what you seem to describe for crypto would be transferring money in and out of the exchange where you trade stocks, and it would be ludicrous if this was the taxable event, which it isn't - but this is a common misconception among amateur crypto traders.
* I did hold 1 Stock B.
* I paid 1 USD for it.
* I don't hold it anymore.
* My dog did not eat it, so I must have sold it, which I did.
* I sold it for 1 Stock A and it was valued at 2 USD at the time of the transaction.
* 1 USD of value was gained at the time I sold from the time I bought.
* I owe a percentage of the 1 USD of value gained, depending on the capital gains tax rate, which differs.
I'd ask the local tax office anonymously. Not knowing doesn't fly as an excuse, everyone says that and it doesn't matter if it's true. Where is this place, if you don't mind?
Bonus question, what if we trade 1 DOGE for 1 Stock C? Is that different? What about 1 DOGE for 1 USD? What about 1 DOGE for 1 token backed by 1 USD? What about 1 Stock C for 1 token backed by 1 USD? Somehow it seems to get more complicated with "cashing out" laws, not less. Also I don't believe they exist, but I'd like to know too if they do anywhere.
In the Netherlands you pay tax yearly, based on an estimated profit for your total holdings on January 1st. Taxing every stock trade seems insane, is it really how it works elsewhere?
> when I convert BTC to DOGE (or whatever), there is no income
That conversion is the sale of property. The IRS doesn't care whether you receive payment for your BTC in DOGE, USD, or corn futures; you divested funds from BTC, and the difference between what the BTC was worth at the time of acquisition VS sale is a capital gain or loss.
Sure about that bit? This may be the perception – that holding your assets in 'the crypto system' avoids tax issues – but the taxman will disagree.
Swapping $BTC for $USDC or whatever your tether of choice is is a 'taxable event'. You've sold one security in exchange for another. It doesn't matter that they're both crypto.
Now, it might be harder for the taxman to detect this event, which is a different thing.