Our weekly crypto newsletter is here! We know you’ve probably incurred some losses this past week, so you can read more about tax-loss harvesting and the LUNA fiasco in this issue. Also, learn more about why DeFi taxes are the next big topic and what DEXs are.
Crypto Tax-Loss Harvesting
The past few days have been very turbulent, and numerous cryptocurrencies have suffered massive price losses. The sale of beloved projects is often difficult, and so are the taxes they incur. However, it is paramount to realize the losses at the right time in order to save money. In Germany, for example, this means selling the coin within the one-year holding period.
In principle, realized capital losses can be offset against each other in the same calendar year, although it should be noted that this only applies to gains and losses from the same type of income. To see exactly which coins you can currently sell for tax-loss harvesting purposes, use our Trading Tax Optimizer!
Losses can be carried forward or backward
If, at the end of the year, more taxable losses were realized than taxable profits, these losses are carried forward by the tax office into the next year and offset against future profits. In some countries, upon request, losses can also be offset against already taxed profits of the previous year.
A tip from Erik, our DACH region crypto tax expert: To, at least somewhat, benefit in terms of taxes from the total LUNA/UST fiasco, you should try to sell the cryptocurrency, as long as it is still listed on the trading exchanges, and within the holding period.
TerraUSD: The Not-So-Stable Stablecoin
Regardless if you’ve invested in LUNA or UST, its recent price crash nevertheless affected your portfolio. So, how come a stablecoin is worth less than the coin it’s pegged to, and what really happened with the LUNA project? UST, created by Terraform Labs, is an algorithmic stablecoin, which means that instead of using cash and other assets as collateral, it uses a complex mix of code and LUNA to stabilize its peg to USD.
Though, in the past week, UST lost its peg, collapsing at one point to less than 20 cents. This also affected its sister project, LUNA, whose price plummeted from almost $120 to $0.00004 at the time of writing this.
What made the situation more complex was the fact that the Luna Foundation purchased around $3.5 billion worth of Bitcoin in the previous months to support its stablecoin in the case of an emergency. In a tweet, Terra’s creator, Do Kwon, announced that Terra had withdrawn some 37,000 BTCs (worth more than $1 billion at the time) to repurchase back its stablecoin so that UST could start to repeg to the dollar. The prospect of dumping so much BTC crashed its price and, effectively, the prices of all other cryptocurrencies.
Crypto 101: DEXs
One of the main tenets of crypto is decentralization but the exchanges you can purchase crypto on are regulated. As such most of them now require their customers to do a KYC check and even provide other details. This not only goes against one of the main ideas of crypto but also puts off a lot of potential customers. Thankfully, there is an alternative in the face of a decentralized exchange (DEX).
They have almost no obvious downsides when compared to regular centralized exchanges. Users can still swap coins freely and the best part is you can do everything anonymously. This makes the whole process much easier. In order to function properly, a DEX needs liquidity pools where investors provide the necessary tokens for all operations on the platform. As a reward, these brave investors are rewarded accordingly with a portion of the fees.
Read more about DEXs in this article on our blog!
Fitting the Crypto Elephant in the Bathtub
One of my most overused phrases to describe crypto taxes is “we are trying to fit an elephant in a bathtub.” The problem is that our current tax systems were created for the golden days of Centralized Finance (CeFi), not for DeFi – they rely on a third party collecting information on taxpayers’ transactions and later sending you a tax form, which was also sent to the government.
The problem with crypto is that we are no longer in need of third parties to facilitate the transactions. We can now transact peer to peer which leads to the inherent problem of not having a third party to provide you with tax data, but the whole tax filing burden falls on the taxpayer. Add to this new transactions never before seen in CeFi, such as mining, staking, and liquidity pools, and new technologies that emerge and see adoption at a faster rate than our tax systems can evolve, and there lies the problem.
Furthermore, seeing the huge deficits that nations all over the world continue to run, makes me wonder if our current tax systems work to fund government expenditures. Perhaps we live in an age where due to inflation, government spending, and higher concentration of wealth among the elite, the economics of our current tax systems simply just don’t work. What will happen as we move on to play to earn economies or even UBI? How will the tax systems evolve?
Regardless of the issues with today’s systems, this is all we have, and we must remain compliant and play by the rules. Fortunately, ACCOINTING.com has the best tools to help you fit that elephant in that bathtub.