One question corporations and the super rich know the answer to is how to avoid paying capital gains taxes.
As the Bitcoin price soars higher and most investors realise gains in their investment, the one thing most don’t like to think about is the tax man.
Of course the tax man wants some of your newly earned wealth. Why wouldn’t he? After all, capital gains on any investment is a necessity unless it’s in a tax free investing account like a 401K, Roth IRA, or an ISA in the UK.
But Bitcoin is a new asset and there aren’t many tax free investing options just yet, so how can one go about avoiding paying tax on your Bitcoin gains?
Take Out A Collateralised Loan With BlockFi And Avoid Paying Capital Gains
If you take any profits from a trade you made, unless it’s in a tax free account, you will have to pay capital gains on your earnings.
You can get around that, however, if you take out a loan on your Bitcoin instead of trading it for fiat currency.
There are several crypto companies offering cash loans for collateralised Bitcoin, but the only company we would recommend is BlockFi.
BlockFi is the leading Bitcoin to USD lender in the US, with the most affordable rates on the market. There are other reputable companies offering similar products, but they require you to hold a certain amount of their crypto token to get better rates.
The problem there is, you have to buy a shitcoin to get better rates, the value of which could plummet massively during the loan term. BlockFi doesn’t use any token.
Applying For A BlockFi Loan Takes Minutes
If you want to use some profits but want to avoid paying capital gains tax, simply apply for a loan with BlockFi, and they will tell you within minutes of your application if you’re successful.
The BlockFi loan service is as global as the company is, so if they operate in your country, you will be able to take out a loan with them.
You can apply for a loan in less than 2 minutes, and be funded in USD, GUSD, or USDC directly into your bank account or crypto wallet in as little as 90 minutes.
There are no credit checks, because everything is collateralised. And you apply through the BlockFi website.
To apply, simply input your requested loan amount, fill out a KYC/AML form, and you will get your answer within minutes.
You will pay back monthly interest payments, and be expected to pay the full amount back within the 12 months of your successful application.
However, your Bitcoin is at risk if you don’t pay back the loan at the end of the term.
The interest rates differ from 4.5% to 9.75% depending on your loan to value (LTV), meaning the amount of money you’d like to borrow compared with the amount of Bitcoin you will back it with.
There’s also an origination fee of 2% added, so any loan with a 4.5% APY would be 6.5% total, whereas a 9.75% loan would see the total interest rise to 11.75%.
This might seem a lot more, and some of BlockFi’s competitors are as low as 1% origination fee, but their interest rates are as high as 16% in some cases, and you have to trust their shitcoin will hold its value.
You can borrow up to 50% of the amount of Bitcoin you collateralise with. For example, at today’s price of $35,0000 per BTC, you could borrow up to $17,500 for 1 BTC.
Actually, according to the BlockFi interest rate calculator, you would need 0.92 BTC collateral for that. For this LTV rate, you would be charged 11.75% overall and required to pay $164.06 a month for 12 months.
You can borrow as little as 20% of the collateral you wish to use, ensuring you get the best interest rates of 4.5% and of course smaller monthly repayments.
If you applied for a $17,500 loan but wanted the best interest rates, you would need to back your loan with 2.3 BTC at today’s rate.
At this rate, it would mean you only having to pay $65.63 a month in repayments. A big difference!
BlockFi’s loans are interest only loans, so the repayments are for the interest only. At the end of the 12 months you will be required to pay off the remaining value with either cash or the Bitcoin you used.
You can make over payments to bring your collateral LTV down, and you can even pay it off early if you choose to.
There will be no early repayment penalty, and you won’t have to pay the full interest agreed for the 12 months.
Possible Scenarios
Because the price of Bitcoin is volatile, the value of your LTV will fluctuate. So, let’s look at 2 possible scenarios of taking out a loan for 12 months:
If the Bitcoin price doubles, and sometime before your 12 month loan is up, each BTC is worth $70,000 then your LTV will be cut in half.
Remember, in the above examples you borrowed $17,500, which at today’s price is about 0.46 BTC. If Bitcoin doubles in price and you choose to pay back the loan, then you would only need to use 0.23 BTC (or you can pay back in USD).
If Bitcoin price was to crash by 50%, however, your LTV would rise. If your LTV was to rise above 70% BlockFi would ask you to top up your collateral and keep it at a maximum 50%. To do this, you would have to send some Bitcoin to your loan account.
Worst case scenario is you can’t afford to top it up. If this was to happen, then some of your collateralised BTC would be liquidated to pay the loan down.
You will be given plenty of time to prepare for such a scenario, but with this a possibility, it is recommended not to take out a 50% LTV. A 20% LTV would give you a lot of room for the Bitcoin price to fall, without having to top up.
*All the above calculations are estimations. Also, Bitcoin Maximalist is an affiliate partner of BlockFi and we might earn commission if you take out a loan with them.
Invest In Bitcoin Companies And Avoid Capital Gains Tax
You might not be able to hold Bitcoin in a 401K, IRA, or an ISA but you can buy stocks. And there are some stocks that allow investors to gain exposure to Bitcoin and avoid paying capital gains tax.
If your broker has access to the US, UK or Canadian markets, then it’s easy to get exposure to Bitcoin. If your broker doesn’t have access to those markets, get a new one.
MicroStrategy (MSTR) is a Nasdaq-listed company with almost half of its $5.357 billion market cap dependant on the value of Bitcoin.
The business analytics firm was a relatively unknown company this time last year, but with about $500 million on its cash balance sheet, its CEO Michael Saylor decided to invest $475 million of it into Bitcoin.
MicroStrategy has since issued corporate notes, raising $650 million, all of which was invested in Bitcoin. To date the company has invested $1.125 billion in Bitcoin, which is now worth more than $2.53 billion.
Since announcing it was adopting a Bitcoin Standard in August 2020, the $MSTR price has shot up from $123 to today’s price of $578.
Many people might think they missed the boat with this one, but investment bank Morgan Stanley recently announced it had bought a large stake in the company.
Invest In Bitcoin Mining Companies
Investing in Bitcoin mining companies is another way to get exposure to Bitcoin and get around the burden of paying tax, as long as it’s through a tax free investing account.
The Bitcoin mining industry is only just getting going, but there are several publicly traded companies that are growing exponentially and investing billions in mining equipment.
Marathon Patent Group (MARA), Argo Blockchain (ARB.L), and Hut 8 Mining Corp. (HUTMF) are three of the biggest mining firms and are listed on Nasdaq, London, and Toronto respectively.
Like everything related to Bitcoin the value of each stock has shot up in recent months, but if we are right about Bitcoin, then the mining industry is in its youth and will grow exponentially.
All companies are making huge investments in acquiring the latest mining equipment, as they try to pull the Bitcoin hash rate away from China.
It is a highly competitive market, but one that I believe is going to grow a lot over the next decade.
And as long as you have a tax free investing account, you can get around paying capital gains on each of these stocks if they are to appreciate in value.
Investing In Bitcoin Doesn’t Have To Mean Large Tax Bills
Investing in Bitcoin has meant huge gains for some, but no matter how little your matured gains are, the tax man will demand his cut.
Unless you play it savvy. Some will say its unethical to try and avoid paying taxes on your capital gains, but corporations and the rich know exactly how it’s done and do it, every year.
Do your best to avoid paying taxes in a legal manner of course. You can do this by either taking out a Bitcoin-backed loan with BlockFi, or invest in a Bitcoin company in your 401K, IRA or ISA.
Author: Tommy Limpitlaw
Bitcoin FAQs
Bitcoin is a peer-to-peer money that nobody can manipulate. It’s all set in the Bitcoin codebase which is secured by hundreds of thousands of computers all around the world. Bitcoins can be sent by anybody and no third party is need to verify the transactions, and nobody can stop Bitcoins being sent.
There are many ways to make money with Bitcoin. The most obvious way is to mine Bitcoin. Bitcoin mining is the process of verifying transactions, and helping to secure the Bitcoin network. Bitcoin miners are rewarded with bitcoins for their work.
There are many great places to buy Bitcoin, and it all depends on your preference. You can buy on typical cryptocurrency exchanges, such as Binance and Kraken. Or you can buy from peer-to-peer Bitcoin marketplaces, such as Paxful and LocalBitcoins. You can also buy Bitcoin from Bitcoin ATMs. It all depends on your location and preference.
There is no exact science for the cost of mining a bitcoin, because the price will change every two weeks maximum. This is because there’s a Difficulty Adjustment that ensures it takes about 10 minutes to mine a block. And with other costs, such as your mining equipment, electricity, and other costs, it’s estimated that the average price to mine a bitcoin is around $12,500.
A Bitcoiner since 2017 and a Bitcoin Maximalist since 2018, Tommy is our main writer and editor at Bitcoin Maximalist. Other than researching and writing about Bitcoin, Tommy loves spending time with his family and supporting his beloved Leeds United.
