The world of cryptocurrency has unfolded a new realm of financial opportunities, yet amidst the excitement of potential gains, the complexities of tax implications often go unnoticed. Depending on your jurisdiction, there exists a hidden potential of an extra 50% to 100% gain in crypto investments that most individuals overlook due to insufficient structuring of their trades. Delving into tax optimization strategies akin to those utilized by affluent individuals in traditional finance (tradfi), here are essential methodologies to navigate the labyrinth of crypto tax and maximize your gains:
1. Prioritize Spot Buying Over Derivatives
Opting for spot buying over derivatives might seem inconsequential at first glance, but it lays the crucial foundation for subsequent strategies. While this strategy alone might not offer substantial savings, it significantly influences the effectiveness of the following tactics.
In Portugal, spot trading is exempt if the token is held for more than 365. On the other hand, Derivatives may always be liable for a 28% taxation.
2. Embrace Borrowing Instead of Selling
Engaging in derivatives trading or selling spot to capture value often creates taxable events. However, in numerous jurisdictions, such as in Portugal, borrowing loans against your assets doesn’t trigger such tax events. When considering selling, consider securing your assets in platforms like AAVE or, marginfi and borrowing fiat against them. This strategy unfolds two potential scenarios:
- A) If the price depreciates, you repurchase at a lower cost to repay the loan.
- B) If the price appreciates, the increased asset value offsets the loan.
3. Diversify Hedge with Different Assets
In scenarios where you anticipate a market downturn, refraining from selling the spot is advised. Instead, employ a strategy of borrowing crypto from platforms like the ones mentioned above to sell. However, taxation rules based on accounting methods in various jurisdictions could complicate matters. To mitigate potential tax events, consider borrowing a different yet correlated asset for selling. For instance, borrowing and selling ETH when having Bitcoin can prevent immediate tax implications on the Bitcoin’s capital gain until repurchasing cheaper ETH. Especially when crypto-to-crypto transactions are not a taxable event, such as is the case in Portugal, strategies that involve non-fiat transactions should be favored.
4. Incorporate Your Crypto Ventures
For individuals with sizable crypto assets for example, if they exceed six figures, operating as a business entity presents a compelling opportunity. Many jurisdictions offer lowered tax rates and enhanced write-off benefits for corporate entities. By legitimate incorporation and careful planning, leveraging these tax advantages could potentially add an extra to your earnings. For Portugal, if your trading turnover is not higher than € 200.000, you may apply a simplified version of accounting using a coefficient of 15% on the total turnover and pay taxes at the rate of 21% (17% for the first € 25.000,00) on it.
5. Prudence in Lending Ventures
While generating yield from assets typically incurs ordinary income, the landscape differs in the crypto sphere. Yield generation often results in payment in the same asset, which could complicate tax implications based on your jurisdiction’s accounting methods. Tokens like Aave’s aToken or Lido’s stETH, along with changing internal value tokens like Coinbase cbETH or Compound’s cTokens, may trigger various tax events. However, one of the biggest advantages of the Portuguese crypto taxation system is, not taxing yield generation (staking) and only consider the taxable event when the investor sells the token.
Seeking advice from a knowledgeable tax lawyer specific to your jurisdiction will aid in selecting the appropriate lending market structure, potentially saving a significant amount of money.
Understanding the nuances of tax optimization in the ever-evolving realm of cryptocurrencies is pivotal. Engaging in these strategies, tailored to your jurisdiction’s regulations, could unlock hidden gains and ensure a more efficient and compliant approach to managing your crypto investments. As always, seeking professional advice is strongly recommended to navigate the intricate landscape of crypto taxation successfully.
This article was written inspired by the tweet of Adam Cochran and it is for informational purposes only and is not intended to be exhaustive in relation to the matters covered here and all requirements/applicable law and rules or exceptions, and it includes hypothetical situations in order for the client to better understand the taxation in any way it contains guidance or advise to any regime or particular situation. However, if you still need to be completely clear and continue with doubts, or if you want our help, feel free to contact us through geral@fslegal.pt.