Given that selling your crypto at a net profit is likely to incur a tax cost, you want to consider a different approach to unlocking its value. There are now a huge number of crypto banking services that will offer instant loans against crypto collateral.
There is a separate knowledge base article on the subject of CEFI, but the headline message is that borrowing against crypto to release value isn’t taxable. It isn’t without risk, but it can enable you to receive a credit line of stablecoin or fiat to pay off a loan or mortgage, without involving the taxman or crucially, you having to sell your crypto. Interest can be paid from any increase in value, but be aware that if the loan to value ratio (LTV) falls below a certain level, your collateral will be sold.
What should you do now?
If you are reading this and worrying that you have completely dropped the ball regarding the tax you might owe on your crypto trading and investing, take a breath.
Depending on the rules specific to where you live you may have no action to take if:
- Any tax owed is below the specified allowances
- Trading losses may even mean that you get a tax refund rather than a bill
What you shouldn’t do is put your head in the sand and hope that the issue goes away. It was inevitable that the benefits crypto hodlers have felt in terms of value would catch the attention of tax authorities.
The IRS - America’s tax authority - now asks the
following question at the top of Form 1040:
“[a]t any time during 2020, did you receive,
sell, send, exchange, or otherwise acquire any
financial interest in any virtual currency?” This clearly demonstrates a zero tolerance policy and tax authorities are catching up in terms of sophistication, utilising blockchain analytics internally, or buying in services like Chainalysis or Elliptic.
Authorities are also working directly with popular exchanges who are sharing details of customers trading above a certain threshold. (See the image below).
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