Dennis Wohlfarth of Accointing and Clinton Donnelly of Donnelly Tax Law join Stephan Livera to talk about Bitcoin tax treatment, and strategies to employ to minimize tax. In the full podcast, we chat about:
- Current Bitcoin tax treatment
- Capital gains Bitcoin tax treatment
- Bitcoin tax record keeping
- Bitcoin tax strategies locally
- Bitcoin tax strategies for those willing to go overseas
- International crypto competition
These podcast show notes are about Bitcoin tax treatment and Austrian economics today for episode 183, and Stephan Livera’s guests are from the company Accointing and Donnelly Tax Law.
We’re going to talk about Bitcoin and tax strategy.
Tax is not something people want to discuss. At the same time, it’s one of those things where a lot of listeners may be interested in understanding some of these different issues and some tax strategies they could employ.
Introducing Bitcoin Tax Strategy Experts: Dennis Wohlfarth and Clinton Donnelly
Dennis Wohlfarth:
My name is Dennis. I officially co-founded Accointing in 2018. We had a system running before that as a group of investors in the market for many years. At some point, we faced the problem of keeping track of all our investments. Especially back in the days of (Initial Coin Offerings) ICOs and all the things that were happening back then. So we decided to build a tracking tool for ourselves, as a backend tool. In 2018, we went public to support the crypto market in keeping track of everything and creating tax reports for different countries. And we’re now at the point where we support the US, Austria, Switzerland, UK, and Germany for specific tax reports and other countries with general health performance.
Clinton Donnelly:
My name is Clinton Donnelly, with Donnelly tax law. We do tax preparation and defend people with tax audits of their cryptos. I do tax preparation in the United States, but I have a very international experience. I have an advanced law degree in international financial regulation, including taxation, from the University of Liverpool in the UK.
I have clients in 48 different countries who are mainly:
- Americans exploring crypto tax implications of doing business with the US
- Americans living outside the US.
I have a practice focusing on cryptocurrencies, cryptocurrency return preparation, and tax amnesty (related to crypto).
I have authored four books in cryptocurrency, and I do a lot of speaking about it.
Stephan Livera:
That’s fantastic. Let’s get started. I think the naive person is first thinking about Bitcoin, but depending on how they’ve acquired that Bitcoin, they might think I am super private.
What are some things people need to be thinking about in the world of Bitcoin taxation?
Current Bitcoin Tax Treatment
What’s the reality in terms of Bitcoin tax treatment?
Clinton Donnelly:
The international community has decided that Bitcoin is considered a virtual asset. It’s property. It’s not currency, and it’s not a cryptocurrency from a global perspective.
Taxation occurs when you sell or exchange that Bitcoin. So merely buying a Bitcoin is not going to be a taxable event. If you're hodling that Bitcoin, for a couple of years, there are no taxes involved. When you sell it or exchange it, you are going to incur taxes on the gain.
If Bitcoin hits the moon this year, what sort of thinking would your listeners want to have in terms of taxes?
The one thing about taxes, it’s usually a percentage of your income.
On the one hand, I’d wish all your listeners to have incredible tax bills, which means they made incredible amounts of money.
That said, how do we minimize what we have to pay and not give the government or any government more than they need to get legally?
Depending on your jurisdiction, they're going to take 25 to 50% of your hard-earned money toward taxes. So your tax strategy is just as important as your investment strategy.
Stephan Livera:
It’s almost like the tax agents and the tax law of the land encourage people to hodl, right? That’s kind of the encouraged position because it’s only when you sell or spend that Bitcoin that you have to even think about these taxes, right?
Clinton Donnelly:
That’s exactly right. Most countries in the world want to encourage investment.
Capital Gains Bitcoin Tax Treatment
When does investing happen?
Investing can happen:
- when you buy it and hold it for a long time or
- when you’re a day trader, you’re in and out, in and out
But corporations cannot grow a business if they are just day traders investing in their company. They want somebody to invest and leave that money for a year, two years, or “whatever amount” of time. That way, the corporation knows that they can bank on that investment.
Governments incentivize that by having one or having extra tax tiers for capital gains. Capital gains are what you call selling property.
Which countries have long-term capital gains incentives?
Most countries have long-term capital gains incentives. In the US, your tax rate goes down to 15%. It goes down to zero or some minimal amount or after so many years at zero in certain countries. This holding is an incentive, and that is a significant reward for the hodlr to be aware of and ask if they hit that long-term capital gains mark.
In most countries, the most natural and most legal thing to do is to go for the long-term capital gains incentive on your taxes.
How is crypto income treated from an Australian position?
Stephan Livera:
At least from the Australian position, my understanding is that it matters whether your income is treated as if your business is one of “trading,” or your business is one of “investing and speculating.”
So if you’re in the trading world, it is seen as if you are trading income like you had one hundred thousand dollars, and that’s your income for the year. But for most people, it’s in the capital gains world of being an asset. And when you made a gain, you’re taxed on the gain.
Is that mostly a fair way to think about it?
Bitcoin Tax Strategies Vary Country-To-Country
Dennis Wohlfarth:
Yeah, it is. Like Clinton already said, it’s a bit different in every country. For example, after holding it for one year in Germany, you have zero taxable gains, or you don’t have to pay taxes on it because it becomes long-term. So, you need to be careful.
If you are margin trading or similar trading activities, you need to be careful not to be treated as an investment company because it changes the rules a bit.
You have to open a business for that, but most investors who may trade a few times per month don’t typically have a problem with that. And based on that holding period, there are also a few good parts that you can use.
If you buy Bitcoin or any other crypto assets at a high price, and the price drops, you can use that and tax plus harvest or sell the loss and use it as a loss for the coming years when you create some gains. It depends on how and when you invested in crypto.
Bitcoin Tax With Accointing
Importing Transactions With Crypto Tax Tool Accointing
One big part that we offer to our clients at Accointing is allowing everyone to import all the transactions and all the trades (for free). We also have different tools to monitor and display holding periods or assets.
Imagine that you trade on various exchanges, and hold in different Bitcoin wallets, you’d never know which Bitcoin is long-term. That means there is a lower tax rate on the Bitcoin in the short-term gains.
So you need to be careful here, and Accointing has a way of displaying that.
There’s also a little more for the optimization part. You can go deep into that, and there are different ways of tracking.
You can keep track of your investments in one single day depot.
That means you buy Bitcoin, and in most countries, they use a first-in-first-out (FIFO) method to calculate which Bitcoin or cost basis you have to use when you sell something.
There’s a single day depot where you put everything into one Excel file. You use the oldest one, like the oldest Bitcoin cost basis that you have and sell that. But in most cases, that’s not what you want to do, especially if you do more day trading.
A good way of optimizing a bit more of a micro field here is to track everything with multiple depot tracking. That means if you buy something in one exchange and you send it to your wallet. The cost basis gets transferred to the wallet, and when you buy something else, on another exchange in your day trade there with Bitcoin, you just sell the Bitcoin that is really on this exchange, and you don’t touch long-term investments.
With that strategy, you can trade a few percentages of your portfolio, and the rest you can keep separate and go for the long-term gains.
If in 2017, you had had an investment of say, ten Bitcoin, and at just six months, you hadn’t sold them, but Bitcoin price crashed, there would be a trade-off.
Would it be better to sell at that high price, or is it better to hold?
The answer is, it depends on what you expect the market to do in the future.
It’s good to optimize for taxes, but not all the time when you trade. So that’s the trade-off that you have to use in that situation.
For example, there are countries like Switzerland where you don’t pay any gains on your crypto trades, and it’s just a wealth tax at the end of the year. So, if you’re lucky to live in a country like this and want to day trade, it’s a little easier. But you can make that happen anywhere in the world.
Bitcoin Tax Practices
Tax-Loss Harvesting
Stephan Livera:
So the first point you mentioned was regarding tax-loss harvesting. My understanding of that is you purchase at a specific price, but now the price has fallen. And people sell and re-buy to lower their cost basis so that they’ll have a loss that they will be able to use against their future gains in the future. Is that right?
Dennis Wohlfarth:
Yes, that’s correct.
And if you do that, you always want to sell them in under a year, because you can use more losses for future gains since the tax rate is higher.
For example, in Germany, if you sell after one year, the tax rate for long-term holdings is zero. You don’t have any losses that you can subtract from your future gains because it’s no longer taxable.
Stephan Livera:
So the other point was regarding what you might call segregation.
For those people who are traders, they might have a holding amount created, and it is their long-term holding that’s going to get taxed as an asset at a capital gains tax (CGT) sort of style.
Whereas if they’re trading, that’s a separate portion of their Bitcoins. Let’s say they are a trader, then that is what gets assessed on a different basis because that’s more like regular income, right?
Dennis Wohlfarth:
Yes, exactly. You don’t want to mix those two depots up, and you can use different strategies.
If you buy Bitcoin every month, you can use different addresses and put the Bitcoin there from the beginning.
If you mixed them up and traded them over the past few years, you want to use this method.
You can use a tool that we offer at Accointing, where we tell you which day depot has long-term holdings and which has short-term holdings, and what the trade-off is between them.
You can go deep into that and analyze it. Then use the correct Bitcoin, maybe from your wallet, number 10, to sell because this would create a loss.
On the other hand, the Bitcoin that you hold in Coinbase would generate a gain, right? So, in the end, you sell one Bitcoin, but you can sell the correct one to create a loss with that trade.
Stephan Livera:
I’m also curious about how people typically deal with it when they have multiple wallets or multiple exchange accounts.
For More Bitcoin Tax Help
Stay tuned for part two of the Bitcoin Tax Strategies Podcast with our host Stephan Livera.
You can find out more about multiple wallets and exchange accounts and more in our upcoming post.
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