Letter 69: Death and Taxes

How you can save a lot of money & time with a little bit of planning

“In this world, nothing is certain except death and taxes”
- Benjamin Franklin

I probably couldn’t have chosen a less sexy topic for Letter 69 than Tax, but here we are. Tax has been front of mind lately for me as the Australian financial year ends on June 30th (yeah Australian’s do things weird, go figure), and it is an extremely important topic, so I figured now was as good a time as any to write about it.

I doubt I can make you fall in love with the topic — my hope is simply that by the end of reading this, you have a better understanding of how Tax works for crypto, and are armed with some tools and strategies that will benefit you moving forward.

The main difficulty with writing about this topic is that the answer to just about every tax related question well-and-truly is: it depends. It depends on where you live.

The laws and rules vary wildly depending on your country for tax residency purposes. Because of this, I can’t possibly put together an all-encompassing and comprehensive guide for everyone… however! Fortunately there are many themes that apply to most countries, so we’ll focus on those.

If you happen to reside in a place like Dubai where there are no taxes on crypto (or just about anything), well, then, I envy you. Feel free to read on and bask in some glorious schadenfreude thinking of your fellow readers. It wasn’t that long ago that I was one such lucky person (living in Dubai); alas, I am now back in Australia and completing my first tax year here while being in crypto. It’s been one hell of a rude awakening, I’ll tell you that.

Also please note that I AM NOT A TAX EXPERT and THIS IS NOT TAX ADVICE. Please please please seek your own advice and speak to a professional about your personal situation.

Do you even really need to pay tax on crypto?

Let me address this question right away, since I hear it asked so frequently. The answer is unsurprisingly: yes. Most people think they can get away with just ignoring their crypto tax obligations — and for a while that has probably worked just fine, and might continue to work just fine for a while longer.

But do I have to remind you that practically everything we’re all doing is either on an immutable, permanent, decentralized and oh PUBLIC blockchain? Or on a centralized exchange where you had to KYC and they most likely share information with your local tax authority?

I’ve heard way too many horror stories from friends who stuck their heads in the sand and ignored the issue, only to basically wind up bankrupt and on payment programs with their government because they didn’t plan for tax.

So yeah. You probably wanna be paying your taxes (but that doesn’t mean we can’t find ways to legally pay the least! we get to that soon).

In what situations do you have to pay tax in crypto?

The unfortunate answer here is that basically everything you do within crypto that has a financial outcome will be considered a taxable event. Selling for fiat, swapping one token to another, staking, mining, creating a liquidity pool, earning rewards, etc etc.

Generally speaking, taxes on crypto are separated into two categories:

• Capital Gains Tax

• Income Tax

Cryptocurrencies are treated as property in most places (Australia, USA), and so disposal of them is considered a capital gain. This includes when you swap one token for another — so if you’re swapping ETH for REKT, that’s a taxable event. If you swap REKT for MOG, that’s another taxable event, and so on.

The income tax portion comes when you’re not strictly swapping one token for another, but are doing income-generating activities such as utilizing DeFi to receive rewards/income.

Set up a liquidity pool and earn a % of the trading fees? That’s likely going to be treated as income, rather than capital gains.

This is a simplification and — again — does not take into account every single country and their rules. But that’s the gist of it for most places.

There are all sorts of edge cases and new situations popping up because of how new and evolving crypto is, so once again, I will always urge you to get some professional advice and/or do your own further research.

Can software help?

YES! Fortunately, Crypto Tax Software is actually pretty damn good at helping people these days. Rewind a few years and all tax software was shoddy — and even today, you’ll often need to do a bunch of manual work to get to the bottom of your situation. But for the most part you can now load up some tax software, import all your wallet addresses (and exchange accounts), and it’ll load your transactions and compile reports for you (and even create packages you can hand to your accountant).

The dream for me is to just do the above and have it work perfectly. We’re not there yet, but every year I feel we get closer and closer.¹

There are several competing tax software companies out there and they’re all pretty good at what they do, and have nice and reasonable pricing models.

If all you do is fairly basic, you’ll be very happy with them. If you’re doing 100,000 transactions a year, airdrop farming on 50 wallets, in-and-out of DeFi protocols all the time, and hopping to the latest chains and L2s to experiment as soon as they’re launched… they’ll still help tremendously, but you’ll also need to put in a bunch of work on top to get to the bottom of things.

I personally use CryptoTaxCalculator, but have heard great things about a bunch of others. Here are a few options for you to compare:

1. CryptoTaxCalculator (bonus points for being Aussie owned)

2. Koinly

3. AwakenTax

4. There’s like a dozen others, google/AI is your friend to find more

One nice thing about them all is that they have great resources for learning about tax on their websites, a lot of which is country specific. So if you simply can’t get enough tax content — go check the sites out!

When should you hire professionals to help?

This again comes down to where you’re at individually — if you’re not dealing with significant sums of money, and/or you’re not making a lot of transactions each year, then it’s not too difficult to do yourself.

As you start to deal with more money though or a lot more transactions, it starts becoming more and more reasonable to get some assistance.

I’m on a pretty extreme end of the spectrum with all my activities, so I have an accountant who has a very strong understanding of crypto, a tax lawyer who helped give some advice on business and trust structuring, and then an expert who is helping reconcile all my onchain crypto transactions.

That’s overkill for the average crypto enthusiast — but finding a good accountant and/or finding someone to help with your transaction reconciliation would go a long way for most people.

If you’re looking for help reconciling transactions, I’m a big fan of Crypto Tax Made Easy by my friend @CryptoTaxSucks. I’ve been using them for over a year and they’ve made my life immeasurably easier, and the cost is very reasonable. Can’t recommend them highly enough (give him a follow if nothing else — he’s always posting excellent content on the timeline for tax stuff).

While all these professionals can help you, nothing will help you as much as you helping yourself. The lowest hanging fruit is to get set up on some tax software and learn how it works, and also do some manual tracking for any wacky/complex/novel transactions you might be making that wouldn’t easily be picked up.

After that, doing a bit of strategic planning can go a long way.

Strategic Planning, Tips, and Tricks

This all might seem a bit tedious, but if we can agree that you should be paying tax, we can also probably agree that you should try and optimize your tax strategy so you are paying as little as (legally) possible.

Here are three things to think about and keep in mind that I think all can make a huge difference to your tax bill and bottom line at the end of the day:

1. Most countries will offer a significant discount on capital gains taxes if the asset being sold/disposed of has been held for a “long term”, which is usually 12 months. You can use this to your advantage in a few ways — the most obvious is to simply keep an eye on how long you’ve been holding things, and if you’re anywhere close to the 12 month mark, consider delaying until after then to sell.
   
   The other is to plan your strategy around it and do less short-term trades, and focus on longer-term holds. Unsurprisingly, that’s almost always gonna be a better strategy anyway. HODL some Bitcoin, it won’t kill you.
   

2. Making sure to tax loss harvest before the end of your financial year. In most places, you can offset capital gains if you realize capital losses in the same financial year (and in many places, you can carry losses forward to future years too). But if you’ve passed the EOFY deadline, you’re kinda out of luck and can’t apply losses retroactively. This is one of the biggest “an ounce of preventation is worth a pound of cure” things in crypto tax.
   
   Basically: sell all your dust bags, your NFTs and meme coins and trash that you are down 99% on.
   
   You can either do this on the open market, but if there’s no liquidity, there are websites you can use where you can sell your tokens for a miniscule amount to realize your loss too. A couple of examples are Harvest for EVM and Tax Sol Incinerator for Solana.
   

3. Understand how airdrops work! This is a big one, and is also one of the things that varies significantly from country to country. In some places, it is considered a taxable event at the time you receive or claim an airdrop. Many a person has been rekt by receiving a large airdrop, selling none of it, watching it go to zero, and still owing a large chunk of tax based on the initial airdrop value.
   
   Other places have nicer rules where the airdrop is treated as a cost basis of zero when you receive it, and only once sold is it considered a capital gain.
   
   Regardless — brush up on your local airdrop rules, and plan accordingly. If you’re in the first category (which I believe the USA is), a good practice is to immediately sell a % of your airdrop to cover any tax obligations (and send the funds to a safe place you will never touch, and not some easily accessibly wallet that you’ll likely dip back into to degen into random shit). Another good practice is to delay claiming if the claim happens to be close to the EOFY.

Speaking of airdrops, check out my ultimate guide to airdrops below 👇👇👇

Letter 58: The Ultimate Guide to Airdrops

These are just a few of the many ways you can plan and optimize for tax. As mentioned, there was a loooooot I couldn’t possibly cover here — in large part because of the differences in rules based on people’s location; but hopefully all of the above is a good start.

Some of the stuff I didn’t cover are: presales, charity donations, wash trading (don’t do this), mining crypto, spending it on day-to-day purchases, and setting up a business or a trust structure to trade/invest through.

Go google or rather ChatGPT your heart out if you want to learn more — or, better yet, go check out the educational materials on the tax software websites.

I’m telling you, they’re really good!

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Disclaimer: The content covered in this newsletter is not to be considered as investment advice. I’m not a financial adviser. These are only my own opinions and ideas. You should always consult with a professional/licensed financial adviser before trading or investing in any cryptocurrency related product. Some of the links shared may be referral links.

1. Note that the closer we users get at this, the closer tax agencies around the world also get. If it’s simple to use software to calculate the taxes you owe (or the deductions you might have), eventually the other side is going to be using the same type of software.