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Is It Possible To Profit From Crypto Trading Without Considering Tax Implications?

Is It Possible To Profit From Crypto Trading Without Considering Tax Implications?

Traders buy the dip and sell at the peak. The ultimate premise for profitability. Investors, however, need not apply the golden rule at all times. Different horizons and projections determine divergent optimum investment strategies, due to tax-related purposes. Cryptocurrencies are an interesting investment tool that all investors shall consider, due to its unique tax regime.

Let's sum up basic crypto tax fundamentals and taxable events:

  • Cryptocurrencies are classified as property.
  • Cryptocurrencies are considered as capital assets, yielding capital gains, and losses.
  • Taxable events constitute: income derived from earning cryptocurrencies, using crypto as a means of transaction, (purchasing or acquiring goods and services) crypto trading, and exchanging your cryptocurrency for fiat currency.

One can infer that transactions and trades are taxable only if there is a realization of capital gains or losses. Depending on the classification of your transactions and trades there are other tax repercussions. Furthermore, diversifying in terms of holding period- that is allocating proportions of your portfolio to different time horizons- increases compliance of year-end profitability objectives. For the purpose of this article, we are not going to inquire about said topics as they can seem confusing; however, there are incredible services that can solve all of your crypto tax-related problems

Rather, let’s look at an example of incorporating crypto taxing analysis in your trading strategy: For instance, if Bitcoin was bought at times of a low Spent Output Profit Ratio (SOPR) coupled with upward pressure on the Glassnode Network Index (GNI), indicating solid on-chain and network fundamentals, as an investor you should consider materializing your profit in the long-term; since tax conditions are more favorable for investments held over a period of one year.

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Let’s consider a different scenario: as a diligent investor, you have established profit targets for the year-end, but due to COVID-19 and the economic deterioration, and an ongoing sideways trend, it seems that your profit targets are not in reach. If you decide to cut losses, avoiding further expenses and risk, and implement a prudent taxing strategy (that is, deciding to liquidate your crypto investments prior to the fiscal year-end) there will be less profit deterioration. Said losses shall be favorable for tax purposes given a decrease of your year-end taxable gains.

In the end, it is a matter of understanding short-term and long-term implications and the repercussions it has on your profit objectives. Maintaining a balance between your crypto assets' holding periods is the key to profitability. Depending on your local taxation policies, investment strategy, and time horizon, you may want to hold a greater proportion of your investment for a longer period or vice versa. 

Photo by Stanislaw Zarychta on Unsplash


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