Lately, I have been going home and watching YouTube videos on crypto and money. Particularly, I have been watching interviews with Raoul Pal of Real Vision and Michael Saylor of MicroStrategy. They appear on several of the channels to which I subscribe. Of course, I also watch Ivan on Tech, The Crypto Lark, Digital Asset News, Crypto Zombie, Chico Crypto, and Mr. Kristof among several others. This dive into crypto has brought me to the conclusion that I should accumulate crypto and hold it forever rather than buy it for trading. This became very clear in one interview with Michael Saylor in which he explains that tax treatment is the deciding factor on what you should do with crypto. Let me explain.
The Tax Problem
In the United States, the Internal Revenue Service, our taxing authority, treats crypto as a commodity. As such, we need to track the price of assets when we bought them and sold them to determine the capital gains or losses. I don't recall if we have a choice whether to use FIFO or LIFO accounting. I've selected FIFO. Part of the problem of using crypto as currency is that we do not spend it in the same quantities we bought it. This makes the accounting a nightmare. Yes, there is software and websites that will do it. However, there is another problem that makes all this even more troublesome, realizing gains and losses.
If every transaction is a taxable event, then I am getting hit with a drag on my finances whenever I spend money. Let's say that Coinbase finally issues a debit card that allows us to directly spend crypto. If I spend $1, then I also have to budget for the capital gains tax. I didn't just spend $1, I spent $1.20. The additional amount will need to be paid later in taxes. Therefore, there is a premium when you spend in crypto that isn't obvious when you go around swiping your card. If you've had a very good year, the tax bite can be considerable.
If you live in a country where crypto is not treated as a commodity, your thinking may be different. For me, spending crypto comes with an administrative and financial overhead. Fortunately, the IRS has clarified that if we buy or hold crypto, we do not have to report it. We only have to report transactions that realize gains or losses, such as selling, airdrops, swaps, or income paid in crypto. This is still challenging to track. However, it is not as challenging as figuring the taxes every time you buy a coffee or lunch. There is a disincentive for U.S. citizens using crypto as currency.
The Remedy
Between Michael Saylor and Celsius CEO, Alex Mashinsky explaining it, the best option for me is to hold BTC forever. Tax policy makes hodling the most cost effective means of using crypto. Any crypto transaction should be for the purpose of acquiring or transferring crypto to another wallet. The best way to liquidate the value in crypto, therefore, should be as collateral for loans. Loans are not taxable as they are not income.
This is why corporations are starting to see the benefit of having BTC on their balance sheets. Holding cash is like standing on a melting iceberg. Holding gold has inherent costs for keeping it in your custody. Stocks are volatile and overpriced, even with the recent market dips. Bonds are a promise to pay back less value than is received by the holder. Real estate, even with all its financial advantages, is taxed for merely holding it. There are many advantages that BTC and crypto have that are not possible in other assets that a corporation could keep on its balance sheet. Corporations can use BTC as collateral to acquire capital for their operations.
Why Transaction Fees Won't Matter
I have written a few posts regarding transaction fees. Some of the lowest fees are for Monero, XRP, Dash, LTC, and BCH. These projects have put a lot of effort in making their tokens fast and low cost. This makes them the closest thing to fiat in the crypto world. I am a big fan of Dash in particular. However, the tax implications of spending Dash (or any of the others) completely destroys the low transaction fee advantage. No matter how low the fee is, there will always be a loss or a capital gain to factor to each transaction. This, for me, is what is most irritating about all this.
Not Your Keys, yada yada
In order to use crypto as collateral, I will have to transfer my crypto into the custody of companies such as Celsius. In future, I expect banks will also offer custodial accounts and lend against crypto. I can hear it now, "not your keys, not your crypto". I get this.
On the flip side, I can't lend myself money. If I had a business, it would be a business because I'd have people working for me. If I didn't have people, then I would just be self-employed. We can't do everything ourselves. We need other people to help us achieve great things. Keeping your crypto on a private wallet all the time is like sitting in your basement and expecting to achieve greatness. Howard Hughes was rich before he locked himself away, not the other way around.
If I become a gazillionaire, then it would make sense to stash some BTC away. In the meantime, I must rely on institutions like Celsius and BlockFi to help me leverage my assets. You won't see me guarding my Ledger Nano like Gollum with his precious. Yes, there's an element of risk to handing my crypto over to somebody else. However, I will have achieved nothing if I just sit on my crypto. It's an asset that must be put to work in some other way than spending it. Until tax laws change, I may very well need to hang on to my BTC forever, leveraging it to conduct business in fiat. Accumulating BTC over a lifetime is not taxable, just like borrowing against it is also not taxable. Rinse. Repeat.