Tax Loss Selling - Unqualified Opinions

don't add insult to injury, think about your taxes NOW

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Some thoughts on tax loss selling in crypto (this isn’t tax advice, but you should ask a professional if this is worth doing given the 2018 markets carnage).

Most of you are are probably sick of and sickened by looking at your crypto portfolio amidst the downdraft, but you might want to take one more look in the coming weeks at what was in your 2017 and 2018 crypto portfolios, unless you want to screw yourself out of thousands of dollars in additional tax liabilities.

Let’s talk about tax loss selling...selling your bags at year-end in order to offset your capital gains.

For illustration, let’s go back to sunnier times in 2017. You bought your first bitcoin and, on a hot tip from a crypto youtuber, a little bit of mooncoin. You spent $21,000 in total, a pretty hefty chunk, but worth speculating with given your conviction on magical internet money and your hot tipz.

You’re a buy and hold guy, and are patient, so you set it and forget it until year end when the hype cycle is in absolutely bonkers high gear. You think, “Shit man, my bitcoin is up 20x, but Mooncoin is up 200x! I knew I was an f-ing prodigy!”

“I’m taking my girlfriend(s) to Cabo. (I can afford to have two girlfriends now btw.) Good run Mooncoin, but Imma sell you for bitcoin and be conservative. (I wonder if the hotel uses BitPay?)” You’ve got a $199k realized short-term gain (go you!), so about $80k in likely taxes.

After returning from Cabo in early January, you remember those Mooncoin gains were taxable. Uncle Sam is going to bite a big chunk out of your ass in April, and so you scrambles to sell some of that bitcoin to cover the $80k in liability, because you don’t like that the BTC price is starting to come back down to earth.

Well, well, well. You settle up in a timely manner with the IRS, which is great. You’ve got a higher average cost basis on your bitcoin now from the December 2017 Mooncoin sale, but now you’ve also got a taxable gain on this new sale in 2018. Nearly $50k in additional capital gains that you forgets about until December, when TBI gently reminds you of your situation.

Your cost basis is now above the holding value of your bitcoin. You don’t want to pay $10-15k in additional taxes next April (in case the bottom completely falls out of the crypto market), and are content to sell another batch of bitcoin…selling $90k will offset most of your gains liability, and ensure you came out WAY ahead in this crypto experiment while still holding 10 BTC for the long-term.

This is a really, really rosy projection by the way.

For many, it will be much worse, and they may already owe more in taxes than they currently hold. The sensible option in that case would be to offset as much of your cash liabilities as possible, by selling bags and offsetting any remaining gains you have from the last bull run.

(And no, you can’t go back and offset this year’s losses against last year’s gains, unfortunately. The IRS is mean like that.)

You can, though, mitigate further damage, and I recommend using something like TokenTax (not a sponsor, that’s just what I used this past year) in the weeks ahead to figure out what your best strategy is before we ring in the new year, and you miss the opportunity.

Don’t say you weren’t warned.

Here’s to a brighter 2019!


P.S. Share. Subscribe. Spread the (rational) crypto love. Tweet at me or Messari for requests, feedback, comments, or questions.

Best of the Rest - What We Missed Last Week

Every weekend, we dig through the past week’s posts from crypto’s other great sources of content to see what we missed in our own weekend reads.

Here’s us curating the curators:

On bonding curves and charitable giving - David Truong
(h/t Token Economy)

How can charities create viral network effects that lead to more engaged participants? David Truong believes dynamic bonding curves could hold the answer. Dynamic bonding curves are smart contract-based mechanisms that create and redeem tokens with a price determined by how many tokens a user already holds. Using this system, contributors would receive special tokens whenever they made a donation. As more individuals donate, the value of these tokens increases along with the amount of funds held by the contract, and existing holders get new tokens for each donation. Tokens can be sold back to the contract at any time giving people financial incentives to donate early and evangelize to others as well.

The four horsemen of centralization - Ali Yahya
(h/t Token Daily)

Decentralization means different things to different people. Ali Yahya defines as “the degree to which power and control over a network is distributed across a large, representative base of independent human actors.” In understanding decentralization it is important to first understand those that can exert centralized power over a network or as Yahya calls them, “the four horsemen of centralization.” Gatekeepers that restrict access, Enforcers that enforce rules, Architects that set those rules, and Profiteers that make a profit from the network rules all lead to some degree of centralization. While the goal of decentralization would be to remove these forces there will always be some influence from one or more of these actors and only by clarifying our trust assumptions will we be able to build better crypto networks.

Unpacking Bitcoin’s social contract - Hasu
(h/t NLW)

In part two of The Skeptics Guide to Bitcoin, Hasu explores the social contract that surrounds Bitcoin. Bitcoin is a novel social and economic concept and therefore it is important to not only question it, but to create theories and frameworks to help understand it according to Hasu. One way to view it is as a social contract. In Bitcoin this is defined by the rules that lead to confiscation, censorship, inflation, and counterfeit resistance. Leveraging technology Satoshi attempted to prevent the ability for powerful entities to gain control over Bitcoin as it became more valuable by ensuring that the rules of the social contract were automated and agreed on by consensus. The only way to change the rules is to propose a new social contract, which must be agreed upon by all participants or those that do not agree risk being unable to transact with the network. The protocol is therefore only in place to automate the social contract created by participants and events like forks or reorganizations are only impactful if they are reinforced by the consensus of the users.

Did I miss something?

Send me the link, your twitter handle and your best imitation compression algorithm write up. If I like it, I’ll include your bit next issue (with attribution).

Podcast Recap

🎧 ICYMI on the Messari podcast, Katherine discussed decentralization with Zcash Foundation executive director Josh Cincinnati. Josh shared his thoughts on what it means to be decentralized and the utility of non-profit foundations in the cryptocurrency space.

Listen and subscribe to all of our podcasts— on Apple Podcasts here, Spotify here, and Google play here.

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