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Introduction
Are you a crypto enthusiast who loves to Hold On for Dear Life (HODL)? You should know that HODLing isn’t just about waiting for the “moon” (aka a big price increase). It can also offer some pretty good tax benefits that can help you keep more of your hard-earned crypto profits.
Let’s dive into the world of crypto tax advantages and explore how HODLing can be your secret weapon for maximising your returns.
Avoid crypto tax by HODLing
You pay no tax on any crypto you HODL – most of the time, anyway.
For example, if you simply buy and HODL your crypto, you don’t have to worry about paying any Capital Gains Tax (CGT) on it. This even applies if the value of your portfolio increases. This means you keep a lot more of your profits when you lock in than if you jump in and out, panicking in the face of volatility.
When it’s Time to Sell: Understanding Capital Gains Tax
While HODLing offers tax advantages, there will likely come a time when you want to sell your crypto for fiat currency (traditional money) or use it for purchases. This is the point where you’ll need to consider CGT. CGT applies to the profit you make when you sell your crypto, similar to selling stocks or other assets.
The amount of tax you pay depends on how long you hold the crypto before selling. In most countries, assets held for over a year (long-term) typically qualify for a lower CGT rate compared to short-term holdings (less than a year).
Remember, tax laws can vary depending on your location, so it’s always wise to consult a tax professional familiar with crypto for specific advice.
Risks of HODLing
While HODLing offers the potential for significant long-term gains and tax advantages, there are a few potential drawbacks you should be aware of. One key risk is missing out on short-term gains, as the cryptocurrency market can be incredibly volatile.
By only HODLing, you might miss opportunities to capitalise on price increases that happen within shorter timeframes. For example, if you had purchased a specific cryptocurrency at a low price point and then sold it during a temporary peak before a market downturn, you could have locked in those profits. However, by HODLing, you would forgo those potential gains and rely solely on the asset’s long-term appreciation.
Another risk to consider is the possibility of a market downturn. The cryptocurrency market is still relatively young and prone to fluctuations. If the market takes a major plunge, your crypto holdings could lose substantial value, and it might take a long time to recover.
Diversifying your portfolio with other asset classes, such as stocks or bonds, can help mitigate this risk. By spreading your investments around, you can lessen the impact of a downturn in any one particular market.
Additional Tax Considerations
Depending on your location and how you interact with the crypto market, there might be other tax implications to consider:
- Staking Rewards: Some cryptocurrencies offer rewards for holding their tokens for a set period, AKA ‘staking’. These staking rewards can be a great way to generate passive income. However, it’s important to be aware that these rewards may be considered taxable income in some jurisdictions. The tax treatment of staking rewards can vary depending on the specifics of the staking program and your local tax laws. Researching the relevant regulations in your area can help you understand your potential tax liability for staking rewards.
- Mining Income: If you participate in cryptocurrency mining, the income you generate by validating transactions and adding new blocks to the blockchain may also be subject to income tax. Mining rewards are typically treated as ordinary income for tax purposes. The specific tax implications of mining income can vary depending on your location and the scale of your mining operation. Consulting with a tax professional familiar with cryptocurrency can help you understand your tax obligations related to mining.
Don’t like HODLing? We can help
Even though HODLing sounds appealing from a tax perspective, it isn’t everyone’s favourite way to do crypto. It takes a really long time to make a profit from HODLing, and it can mean you miss certain opportunities from short-term fluctuations in the market. If you want to make a 1% profit, it might not take too long, but realistically you’ll have to wait years to see a notable difference in the value of your investments.
If you don’t like the sound of waiting around for years or enjoy the thrill of interacting with the market fluctuations, you’ll need crypto tax advice.
Join the Crypto Tax Degens community to get the best advice from the best minds in the crypto tax world.