From the dawn of Bitcoin, concerns were raised over tax compliance due to the decentralized nature of cryptocurrency and their pseudo-anonymous characteristics. And once the price of cryptocurrencies exploded, efforts to collect tax from crypto really started gaining momentum. This has seen a number of countries passing new laws and regulations regarding crypto in order to tax them properly. The IRS (Internal Revenue Services) classify cryptocurrency as a capital asset, and recently some clever people have found out a way to the loopholes in existing laws to avoid paying tax using crypto 100 percent legally.
Reduce tax burden
As said before, in the US, the IRS considers crypto as capital assets just like a home or a car, and one has to pay tax after the sale of such an asset. In the vent of such a sale, the original price is deducted from the price at which the asset was sold and the difference is taxable under capital gains. So basically the profit that a person gets from selling Bitcoin or other crypto assets. The tax code is never so simple and other factors like how long the asset was held and the tax bracket of the individual are also taken into consideration. But instead of selling the asset, how about taking loans against crypto assets? This way, one can access the funds necessary while at the same time avoid paying capital gains.
On a side note
If you are planning to take money from a cryptocurrency lender there are some things to be kept in mind. Cryptocurrency lenders are also not subject to the same level of oversight by the US Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). This is especially worrisome in the case of offshore entities, in the event of fraudulent activity customer are at the mercy of the lender with no means of resolution. Also in order to reduce the tax burden, one has to wait a longer period and apply for long term capital gain which is substantially lower compared to short term capital gain. The lender only gives away a maximum of 60 percent value of the cryptocurrency as loan and the rest is kept as collateral, this is done to protect the lender against volatility in the crypto market. And if the price of the asset which is pledged for loan fall below a certain value the lender sells part of the asset in a margin call in order to maintain the ratio of collateral to debt.
Let’s be clear, there are two distinct terms, tax evasion, and tax avoidance. While tax evasion is the illegal means by which a person or company avoids paying taxes, tax avoidance is the legal use of tax laws to reduce one’s tax burden. Tax avoidance is not a new phenomenon, it has always been a part of modern economics as lawmakers around the world started seeing tax as an incentive to stimulate growth they also gave tax breaks, tax rebate, and tax exemptions, and companies were keen on using these loopholes to reduce tax breaks. Amazon paid zero corporate tax in 2019 but yet they got 129 million in tax rebates. Blaming crypto for tax avoidance is pointless as it is not a new phenomenon and its perfectly legal.
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