1st August 2024 > > Taxes.

tl;dr

It’s a bit of a dry one, but taxes on your cryptos need some attention right now.

Market Snap

Market Wrap

BTC firmly back to where we were a week ago despite seemingly relentless good news.

The Fed yesterday kept rates on hold at 5.25% in the mistaken belief that with inflation now at 2.5%, manipulating the very short-term end of the US yield curve will have an impact on commodity prices, the key driver of consumer goods inflation. Well, Mr. Powell, I have news for you. It means jack-shit. But if you must play the game as set out by your political masters, then at least have the decency to admit it.

Curious Cryptos’ Commentary – The second least surprising headline ever

Curious Cryptos’ Commentary – Cryptos and wealth taxes (UK only)

Putting aside the pointless debate about just how economically destructive it is to raise taxes on wealth (the options range from a score of “1: really, really, damaging to productivity” to “2: just very, very, badly damaging to productivity”) our collective democratic voice in the UK was in favour of this direction of travel, so travel it we must.

But it is probably better to understand more of the potential implications of the October budget before we get there, and take some appropriate action to maybe save a shedload of cash.

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The depiction of civil servant bureaucracy as Vogons in both the radio show and the book “The Hitchhiker’s Guide to the Galaxy” was inspired in many ways, too numerous to repeat here. But the film version really nailed it with a visit to Vogsphere, and its “annoying spatula-shaped bugs that slap beings in their face if they ever say anything having to do with ideas, thinking, or anything of the sort.” (https://hitchhikers.fandom.com/wiki/Vogsphere)

With one exception.

The civil service is a marvel at thinking up new ways of levying tax, and Reeves has set the Treasury mandarins their most favourite task. I cannot imagine all the fiendish schemes now in play that will penalise risk-taking investments, encouraging us to superfluously spend rather than save, but we do know two obvious lines of attack. Let’s focus on those.

Capital Gains Tax

CGT is a very bad idea.

Capital is only accumulated from one’s labour, which has already been taxed, or from inheritance of capital, which has already been taxed twice, once as income and then again as an inheritance. Or possibly even more than that, depending on how many generations the inheritance has passed through.

There is no consideration in GCT for the inflation of commodity prices, or the debasement of hard assets against fiat, the latter being a consistent policy willingly enacted by governments of all political hues to cover up their own inadequacies.

There is no doubt that tax rates for CGT will be aligned with income tax rates, with the marginal rate being determined by the combined total of income plus capital gains.

This means that for most people with an expectation of reasonably-sized rewards from cryptos are going to lose 45% (or more) of those gains compared to 20% today.

Ouch.

This is a prospect that is both a severe deterrent to risk-taking in the future (“you get all the downside and only half of the upside” is not a business pitch that would work on anyone) and a warning to take evasive action, if possible, today.

That is assuming that Reeves won’t introduce retrospective tax changes in October that will apply to capital that has been gainfully allocated today. It is possible she might do that, but if she does the capital flight out of the UK will leave a barren waste ground behind.

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I am no tax expert, and none of what follows can possibly be construed as advice. It is just

commentary on what I have learnt and what I understand to be the rules around crypto tax gains. Please do not simply rely on my inadequate knowledge.

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The most important point to recognise is that the exchange of one crypto for another is a taxable event.

I know, I fell off my chair the first time I was told that (thanks Martin, I still have the bruise).

This is just so ridiculous I don’t know where to start with all of the obvious objections to this approach. So, I won’t list them all, but will simply comment “good luck with that one”.

However, I am of a conscientious nature, and I have to abide by that rule. I have spent many months this year (I found out about the rule in December last) painstakingly recreating a very accurate flow of my crypto investments from one to another.

BTC is easy – I have bought, and I have never sold, apart from just once for a beautifully timed yet limited excursion into CTSI that later went horribly wrong.

Alt trades on centralised cryptocurrency exchanges that simply stay there until sold for fiat are also easy to account for.

The problems start to mount with ETH.

Using ETH as the conduit for DeFi, ridiculously speculative alts, NFTs, et al, leads to a very confusing and complicated situation to try to present clearly to the taxman. One example might suffice.

Let us suppose you own ETH on Binance, and Coinbase. Some of the Binance stock is sent to a hot wallet, much of the rest to another cold wallet. Perhaps something similar happens with the Coinbase stock, with some left sitting there for a quick sale if needed.

The hot wallet sees some DeFi action. The cold wallets probably take advantage of three or more staking options.

For each individual action, the taxman wants to see a calculation that shows the collective weighted average cost of ETH in all wallets prior to that action, with an assessment of the “capital gain” immediately afterwards. Note that there does not need to be any fiat gain at all. You could buy an alt that later goes to zero but in that tax year you might have to pay CGT for a theoretical benefit derived from a temporary or otherwise increase in the price of your ETH.

When it comes to SOL, oh boy. How is it possible to even start to assess (from a personal or the taxman’s perspective) the flows into and out of memecoins, given that every single individual buy, and sell, is a taxable event not just with regards to the meme, but also your stock of SOL?

You have to do this across all wallets, and all cryptos.

This can get a touch complicated.

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There is one further wrinkle to this absolute nonsensical state of affairs.

Every time you use gas, that is a taxable event, another stupid and dumb rule that is again a reason to fall off your chair. I have tried to swerve it by stating clearly on my tax form that I have ignored this for it complicates matters ten-fold or more, and I hope my plea will be accepted. I will let you know how I get on.

Wealth taxes

This is probably not an issue that will affect many of us at first.

It will initially be introduced on those whose asset base is £10mm or more. Next year it will be £5mm. After that £1mm, and then on everything we own, including our family home.

It cannot be applied to assets owned overseas. It is a simple matter these days to get a bank account abroad, and it is undoubtedly a legal grey area as to which jurisdiction your cryptos fall into. The capital flight from an annual charge on gross wealth in the UK will be very scary.

Action to take

I most definitely cannot tell you what you should or might do. What I can elaborate on is my personal course of action.

Some time ago, Gordon Brown, when Chancellor of the Exchequer, removed the “bed and breakfast rule” which allowed investors to sell a stock one day to crystallise CGT and buy it back the next. Instead, an asset must remain “unsold” for a month. Brown, bless him, though fiercely more intelligent than all of his peers, never understood the mechanics of markets or capital flows.

Crystallising CGT now to incur an 20% tax rather than 45% later on is an easy thing to do, to get around Brown’s self-perceived tax-grab.

As an example, if you own one version of stETH you can move into a different one with virtually the same risk profile for minor transaction costs. The same is true for many other cryptos. You could move BTC cross-chain and you will own an entirely different security with the same financial prospects.

Though the old adage to never make financial decisions based upon tax used to make a lot of sense, the world is moving in an entirely new direction. Crystallising CGT at 20% now, whilst keeping almost the same risk profile, with nothing to pay until January 31st 2026, is my choice.

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The obvious downside to my decision is that if cryptos go to zero, I have lost all my investment, and I will have a large tax bill to boot. Governments just don’t do fairness.