Everything you need to know about cryptocurrency taxation by Michal Hanych

In short, investing is not just about analysing, buying and selling an asset. Another important aspect is, for example, taxes. But what is the fundamental difference in taxation between shares and cryptocurrencies? Is there any legal way to avoid taxation? Michal Hanych reveals this and much more today.

Michal Hanych is a strategic director, investor, attorney and tax advisor at SimpleTax&Law. In today's interview, we focus on cryptocurrency taxation and everything you need to know 👇

What is the basic difference between taxation of stocks and cryptocurrencies?

If we're talking about taxation of individuals, there is no time test for cryptos that leads to an exemption. Crypto is taxed as a residual category of movable intangibles whereas shares are a security.

Do you think a time test could be introduced?

I don't believe that given the current macroeconomic situation and political mood, there could be an extension of the exemption to crypto.

At what point am I subject to crypto tax?

When you sell crypto, purchase goods or services with it, or exchange it for other crypto. The price at which the sale was made is then compared against the cost price, which can be claimed as an income-related expense. You can also deduct related expenses, which are typically exchange fees.

On the SimpleTax website you have listed - We can no/tax crypto. I wonder how to not tax it then? Is there any way that I can legally avoid this obligation?

For example, the crypto can be put into a company that will further dispose of it. The deposit itself is not taxable and if the company sells the crypto, it will only tax the difference between the current price and the price at the time of the deposit.

The second option is, for example, for individuals who acquire crypto as stock for further business - the purchase itself is then a deductible expense and can be set against the income from the crypto sold during the year.

How does the taxation of cryptocurrencies work if I am a trader trying to trade on leverage? Is there any fundamental difference?

The difference is primarily in the number of transactions recorded. When leveraged trading on a perpetual contract, there will be a fee in the statement every 8 hours. And of course each trade will probably consist of partial order fills. So you really need to use an automated tool, otherwise it's impossible to calculate efficiently with a large number of trades. We mainly use cointracking.com and we are the official partner for the Czech Republic.

How does it generally work with such staking with taxation?

We distinguish between whether the client runs its own node and therefore verifies the transactions, or if it just delegates its coins. In the first case, we treat the staking as mining with all the consequences, in the second as interest income.

Of course every investor will look for loopholes and relief options, is there any way to legally pay less in the case of cryptos being taxed?

Of course, a suitably set up structure, the chosen legal form of the entity trading the crypt, timing, spreading the tax burden for example for the use of derivatives helps. The options are many and it really is always up to individual judgement as to what is best to do.

Are there any complexities or ambiguities in the taxation of cryptocurrencies in general that clients often approach you with?

Crypto is still a fairly new field, so we don't agree on all areas between tax lawyers and attorneys, let alone with the tax authorities, for whom it's something completely marginal. The actual complexity is mainly in the multitude of transactions. In reality, we have a dedicated team, with really deep experience, just to calculate taxes for crypto-clients.

In the second part of the interview, I would like to discuss your investment approach, where I would like to know your strategy. Do you focus solely on equities, cryptocurrencies or some combination of assets?

My investments are built from the bottom up. I started a business and reinvested everything that made money. Then with real estate, by having our own offices, so even if the business itself fails, there will be real estate left over. The larger investment apartment building came later. After 2017, our consultancy went into cryptos a lot, so logically I got exposed as well. And then trading started.

In terms of stocks, I feel I have an edge in technical analysis, but not in analyzing individual titles. At the end of 2021, I called our biggest clients and told them I thought we had tanked. And I was right on target. So far, I've recommended incremental purchases of up to 50% of planned exposure to the U.S. stock market. But I'm still waiting to get back into stocks.

When do you foresee an improvement in the markets in general, in terms of Bitcoin but also cryptocurrencies?

I have predicted a bottom for BTC around $15,000 in 2022. I based the model on the realized price and CVDD. We've already looked there. For 2023, I expect a smaller green annual candle. As for altcoins (shi*coins), I trust Ethereum. Conversely, the vast majority of the others are doomed to steadily decline relative to BTC or ETH. Predicting which coin will not be a pure degen but an oscillator makes no sense to me at the moment.

If there is a recession this year, how badly could cryptocurrencies be hit? There has never been such a scenario in the history of cryptocurrencies, could some cryptocurrencies disappear in such an environment?

Bitcoin was created in a very similar mood to what it is today. Famous introduction in Genesis Block referring to The Times 03/Jan/2009 Chancellor on brink of second bailout for banks -Satoshi Nakamoto. That's why I would mainly distinguish the differences between BTC and the rest.

With any other cryptocurrency, the realised capitalisation, real utility and resilience based on decentralisation is mainly something to think about. The vast majority of them will disappear regardless of a bad macroeconomic situation.

Do you see Bitcoin's $BTCUSD+2.2% price as adequate for entry at this time? In the current market environment, is it a good idea to buy BTC on a regular basis or wait for a larger drop?

Historically, the zone below the realized price of BTC (about $19,700 currently) has been very good for entry. If the market offers a price starting at one again, this is a reasonable time to buy.

• Addendum - Actual price varies as the interview was conducted in December 2022.
  

What does Bitcoin represent for you?

It represents money of a kind to me.

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Please note that this is not financial advice.