Bull market vibes
Congrats on BTC 57k and ETH 3.2k 🚀
I have mixed feelings whenever I see a spike in ETH or BTC value as denominated in fiat. On the one hand it's exhilarating to watch what might be an increase in demand that comes from more people taking an interest in crypto. And while I wouldn't be surprised to see either (or both) go lower, it does feel different and maybe the rally will continue.
Even as I celebrate though, there is another calculation that happens in the corner of my mind. Something that can dampen the enthusiasm of any rally and make me become more cautious in using crypto, grinding my on-chain activity to a halt.
TAXES.
It goes without saying that this is not-financial-advice territory, and these are merely observations. But what I have observed is that in many tax jurisdictions, capital gains on crypto are taxed when they are realized. This does not necessarily mean when they are converted to fiat; rather, it means when they are converted into anything else.
Buy an NFT with ETH? Taxable event. Send ETH in exchange for a service? Taxable event. Swap ETH for BTC or other alts? Taxable event. The details depend on the jurisdiction, but each of these would generally be seen as a taxable event where any unrealized gains are, well, realized.
The mechanics
Unrealized gains are the difference between the value at which you acquired something (your cost basis) and the value at which you sold (or exchanged) it.
The cost basis of your crypto may be calculated various ways, but it is generally derived from the market value at which it was acquired. This means if you had acquired your ETH when the price was, say, $1k, your cost basis would be $1k.
When you have a taxable event such as buying an NFT with ETH, your ETH value is deemed realized at the current market value in fiat when the transaction occurs. So if you spend 1 ETH today which you bought when price was $1k, you just realized a capital gain of $2.2k, on which taxes must be paid to your tax authority.
A different view
Now you start to see things differently. That NFT that you were thinking of buying for 0.1 ETH? Add the capital gains tax on top and it could very well cost twice as much. It makes you think. It makes you pause. What can you do?
One approach is to buy more ETH at current prices to even out your cost basis and reduce the impact of the gain when you do spend ETH. Another approach might be to borrow against your ETH holdings, but this has risk if prices deteriorate. Or, you may choose to do nothing at all, which is a choice in itself.
I don't mean to rain on the parade. This is a very specific pain that does not come without a gain. The prices are soaring, the devs are building, the frames are moving, and the excitement is palpable. Let's all enjoy the ride.
But don't forget to calculate those taxes.😃
