Do you know that if you keep your crypto for the long-term, you’ll pay less taxes?
This is true in the US and in other countries due to long-term holding benefits, offering a reduced tax rate for crypto holders.
Let’s explore it.
- Holding Bitcoin for more than 1 year sets you tax-free in Germany
- Adopting a long-term holding strategy (>1 year) puts you in a more favourable long-term capital gain tax in countries like the United States.
- Bitcoin’s long-term price gain potential goes hand-in-hand with forward-looking crypto tax laws.
Crypto tax laws support long-term crypto’s potential
It probably comes as a surprise to claim that taxes can prove to be beneficial for investors. Investors worldwide seek countries that may be tax-free or tax-reduced.
Bitcoin’s unique characteristics raise challenges for regulators and market participants to find common ground on how to comply with legal restrictions. At the same time, investors want to take advantage of the investment benefits from a new asset class.
At its essence, Bitcoin should be looked at as a long-term call option on the development and widespread adoption of a new revolutionary technology that affects individuals’ independence.
Your goal of investing in Bitcoin should be to generate consistent long-term returns instead of falling into the “altcoin of the day”, FOMO, or in quick profit schemes. A study found that 80% of day traders lose money in one year and quit in less than two years.
Adopting a long-term investment mentality allows taking advantage of Bitcoin’s future growth, while crypto tax codes across the globe can incentivise long-term holding from a legal perspective.
Positive news and crypto tax laws aren’t often in the same sentence, but we found some tax details in different countries that might change your mind on the benefits of crypto tax laws.
So, how does crypto tax work for long-term holding in different countries?
Bitcoin’s classification in each country severely impacts the way regulators and governments draft tax laws, influencing not only the regulatory procedures but the final taxes you’ll end up paying as an investor.
In Germany, cryptocurrency is classified as a legal financial instrument. If you hold any cryptocurrency for more than one year, regardless of your gain in the transaction, you aren’t eligible for tax.
However, this is not true if hold it for less than a year, encouraging investors to think of crypto as a long-term investment.
Malta also encourages long-term holding by not taxing capital gains or VAT, unless you’re a business (taxed at 35% corporate income rate). Benefiting from the absence of capital gains taxes in Singapore, long-term holders find there a haven for crypto trading.
Holding crypto for long periods leads to a more favourable tax setting in different countries across the globe. In the crypto community, enthusiasts coined the term “hodl”, referring to holding Bitcoin in the long-term, indicating that its real advantage relies on its long-term price appreciation instead of chasing short-lived gains.
Are the same long-term crypto tax laws in place in the United States?
Following the new IRS guidance in the U.S., updated in late-2019, virtual currencies are defined as:
“property and general tax principles applicable to property transactions apply to transactions using virtual currency”.
Holding Bitcoin for >1 year “before selling or exchanging it” is taxed at a long-term capital gain tax setting in the U.S. However, holding crypto for less than one year classifies as a short-term gain tax setting.
A long-term capital gains tax rate in the US can rage from 0% to 20%. On the other side, a short-term capital gains tax rate ranges from 10% to 37%, depending on other factors.
A key point to navigate the nuances of short-term versus long-term capital gains besides deduction alternatives is to determine your holding period. According to the IRS guidance, the holding period:
“begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency.”
Besides accessing the holding period for each transaction, you have to be aware of the basis cost and the profit/loss from each crypto purchase, especially if investing at different price points.
The go-to solution to easily infer the cost of each trade, your gain/loss based on historical prices, and its respective holding periods is with CoinTracking.info.
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Why is it so important to bet in the long-term?
Tax benefits encourage investors to set long-term target sell dates, given the belief that Bitcoin’s price will increase considerably following mass institutional adoption and its healthy network state (hash rate), among other technical factors.
As it matures, Bitcoin is more often characterised as a reliable store of value in comparison to the U.S dollar, stocks, or precious metals. Bitcoin’s programmable scarcity, topping its future circulating supply at 21 million units, suggests a future price appreciation due to supply and demand dynamics, surpassing gold and other common reserve assets.
Having in mind Bitcoin’s connection to gold scarcity features, a notorious analyst predicts Bitcoin at over $55K with the Stock-to-flow model before December 2021, while newer iterations of the model suggest a higher price after being declared the best performing asset of the decade.
Looking at the HODL Waves, the percentage of people who hold their Bitcoin is increasing (e.g., percentage of holders who haven’t moved their coins in over ten years), showing the strong belief in Bitcoin’s future.
Bullish long-term price potential amid distinct tax codes
The acquisition of more than 38,000 Bitcoin ($425M worth) by MicroStrategy, a publicly-traded company, reflects the on-going purchases of Bitcoin by corporate entities, reflecting Bitcoin’s future potential.
In an interview, Michael Saylor, the CEO of MicroStrategy, hinted at the benefits of holding Bitcoin for longer periods amid possible tax implications:
“Why would you tell the average person to trade this? It’s complicated. The tax code is hostile. The most intelligent thing you can do is just buy and wait for 10, 20, 30 years. I can’t tell my father to study up for 20 hours a week.”
However, countries such as the United States, Germany, or Malta are shifting investors’ location preferences for conducting investment activities due to favourable crypto tax laws, going hand-in-hand with Bitcoin’s long-term appeal instead of chasing short-lived spikes or giving in to panic selling.
We know that hovering through the different crypto tax nuances can prove to be difficult when dealing with investment challenges at the same time.
If you need help automatising all your tax reporting, sign up for an account with Cointracking.info or reach out to certified tax experts who benefit from our solution.