TAX efficiency with NFT backed loans.
Disclaimer: This is article 3 of 3 in a sub educational from main article and I would advise all to read it, before digesting into these.
We’ve just passed tax season, and it was indeed a mess to keep the paperwork or txs in order. Some of you have passports from a crypto friendly government, some not. Either way, this article will not go into depth or cover a broad perspective of crypto-friendly countries, but are based on a general rule: That a profitable NFT-sale to get liquidity, is considered as income, and taxable. Because income is classified as money that you earn, whether through an investment or a job, loans are not. You don’t make money from your loan; you borrow money with the intent of paying it back.
Why is this important to know?
As an investor, you need to know how this will affect you in the long term. Let’s do an example.
Person Y and X start with 10 $SOL each, and ape into two projects. Let’s call them A and B. Cost for project A is 3$SOL and project B costs 1$SOL. Both Y and X’s portfolio is now 2A and 4B.
After 1 week the price of project A and B is 5$SOL for both. Decent gains for both Y and X, but they are now thrown into a dilemma. A hyped project is minting and they both need liquidity for project C, at a cost of 1$SOL.
Person Y sells 1 unit of project B.
Person X takes a loan with 2A+2B as collateral with a 0.1AB fee.
Both buy 5C and decide to leave their bags for a year.
After a year, they both summarize their holdings to report for taxes:
Person Y’s portfolio: 2A+3B+5C
Person X’s portfolio: 1.9A+3.9B+5C
Now they need to calculate taxes.
Person Y’s need to pay 20% taxes on his 1B sale ∼ 0.2B
Person X has not sold any of his assets, but writes off his 0.1AB fee as expenses.
After they’ve sorted taxes, Y and X meetup at a bar to take a pint and compare their portfolios.
Person Y’s portfolio: 2A+2.8B+5C
Person X’s portfolio: 1.9A+3.9B+5C + 0.1AB in fiat.
I know who’s buying the pint’s that evening. Person X have taken the advantage of NFT-backed loans and have not sold his assets for a profit, yet. But got a tax deduction from his 0.1AB fee into fiat and has been more capital efficient than Y.
Remember that this is a simplified model and it varies from government to government. DYOR on behalf of your respective country.
Never ever have I had a dream to become a financial advisor. Therefore I am not a financial advisor and you should do your own research and not just listen to random people on the internet. Nothing contained in this publication should be construed as investment advice- its just for educational purposes.
