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2023-03-31

Yield farming or DeFi interest

Earnings from yield farming or lending crypto in DeFi platforms are taxed as income at the time they are received. However, depositing into and withdrawing from a liquidity pool may be treated as a disposal, which is a capital gains event.

  • Example: Earning £500 in interest from a DeFi platform is subject to Income Tax.

Payments for goods or services

Receiving cryptocurrency as payment for goods or services is treated as income at its market value when received. There are instances where the “value” of the work will be taxed instead of the value of the crypto received. Professional advice should be taken if you are unsure.

  • Example: If you're paid 0.2 BTC for freelance work worth £6,000, this amount is subject to Income Tax.

Receiving airdrops

If you actively participate to receive an airdrop (e.g., completing tasks), the tokens are treated as income at their market value upon receipt.

  • Example: Earning £100 in tokens from an airdrop after completing tasks is subject to Income Tax.

Mining rewards

Mining rewards are taxed as income. Those undertaking mining activities to an extent to which they are operating a business will be subject to additional tax obligations.

  • Example: Earning 0.5 BTC through mining worth £10,000 at the time of receipt is subject to Income Tax.

Staking rewards

Cryptocurrency earned through staking is considered income at the market value at the time of receipt.

  • Example: If you earn 0.1 ETH through staking worth £200, this amount is subject to Income Tax.

Providing liquidity

Adding liquidity: If adding assets to a liquidity pool results in a change of ownership or creates a new token (e.g., LP tokens), it may be considered a taxable disposal, with CGT applying to any gains. The answer to this can usually be found within the terms and conditions of the protocol.

Removing liquidity: Removing assets from a liquidity pool may also be a disposal, potentially triggering CGT based on the gain or loss relative to the cost basis.

Liquidity pool rewards are generally treated as taxable income upon receipt, subject to Income Tax.

Selling airdropped tokens

Selling tokens received through an airdrop is a taxable disposal.

Tokens received without any action (eg, unsolicited distributions) are not taxed as income upon receipt. Instead, they are subject to Capital Gains Tax (CGT) when sold, with the cost basis typically being zero or the fair market value at the time of receipt if explicitly stated by HMRC.

Tokens earned through performing tasks (eg, completing activities) are taxed as income at the market value in GBP upon receipt. When sold, the gain or loss is subject to CGT, calculated using the market value at receipt as the cost basis.

  • Example: You perform a series of tasks to qualify for an airdrop. You then sell that airdropped token for £500 and it has a cost basis of £200. The £200 cost basis would have been subject to income tax in the tax year in which it was received and the £300 gain is subject to CGT in the tax year in which the token is sold.

Selling NFTs

Disposing of NFTs is treated similarly to crypto disposals, with gains subject to CGT.

  • Example: If you bought an NFT for £1,000 and sold it for £3,000, the £2,000 profit is taxable.

Gifting cryptocurrency (excluding spouse or civil partner)

Gifting crypto to someone triggers CGT based on the market value at the time of the gift. Gifting to registered charities or your spouse or civil partner does not trigger a taxable event. Here, we have often seen individuals gifting tokens to others but keeping them in their own wallet. If this is the case, it is very important to document the gift. Consider speaking to a tax advisor if you are uncertain of your position.

  • Example: Giving 1 ETH to a friend worth £2,000 incurs CGT on any gains above its cost basis.

Using crypto to purchase goods or services

Spending cryptocurrency on goods or services is considered a disposal.

  • Example: Paying 0.5 BTC for a laptop is a taxable event. If the BTC had a cost basis of £5,000 but was worth £10,000 at the time of the transaction, the £5,000 gain is subject to CGT.

Crypto-to-crypto trades (swaps)

Exchanging one cryptocurrency for another (e.g., BTC for ETH) is treated as a disposal for tax purposes.

  • Example: Swapping BTC worth £5,000 for ETH creates a taxable event, with any profit based on the cost basis of your Bitcoin. The value of the BTC when swapping will be the proceeds and will also become the cost of the ETH that has been obtained.

Selling crypto for GBP

Any profit made when you sell crypto for fiat currency (e.g., GBP) is a taxable event.

  • Example: If you bought BTC for £10,000 and sold it for £15,000, you have a taxable gain of £5,000.

How Investing vs Trading impacts tax

In most cases of buying and selling cryptocurrency as a retail investor, you are participating in investing rather than trading. The two are treated differently for tax purposes.

  • Investing is subject to capital gains tax or income tax, depending on the nature of the transaction.
  • Trading in this case refers to self-employment which is subject to income tax and National Insurance Contributions.

The key difference between investing and trading – along with the different tax treatments, is how losses generated in the crypto-activity can be used.

In their guidance, HMRC have explicitly stated that they would expect it to be exceedingly rare that any crypto-activity constituting buying & selling crypto would be classified as “trading”.

If you are uncertain, speak to a tax advisor as there are always exceptions, including but not limited to, developing tokens and large scale mining.

How is crypto tax calculated in the United States?

You can be liable for both capital gains and income tax depending on the type of cryptocurrency transaction, and your individual circumstances. For example, you might need to pay capital gains on profits from buying and selling cryptocurrency, or pay income tax on interest earned when holding crypto.

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blog
31
 
Mar
 
2023
 - 
10
min read

How to survive in a crypto bear market

Read this article to understand the different strategies you can apply in a crypto bear market.

Key takeaways
This tax guide is regularly updated: Last Update  
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So, are we even in a bear market?

According to Investopedia, “a bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.” Stepping aside from this more technical definition of a bear market, a decision on whether or not we’re in one can come down to some as intangible as ‘feeling’. If you’ve noticed a reduction in enthusiasm in the industry, then it’s likely on an emotional level, we’ve dropped into a bear market. With this being said, it’s really up to you to determine whether we are or aren’t in a bear market right now.

Risk Profile Analysis

If you’ve come to the conclusion that we are indeed in the midst of a bear market, then it’s time to strategize how to get the most out of it. The most important first step to developing a bear market strategy is to evaluate your risk profile. A risk profile is a tool that investors use to identify if a particular investment falls within their appetite for risk.

Aggressive risk profile: This is a trader whose portfolio consists predominantly of small market cap tokens, maybe some BTC and ETH and no stablecoins. They’re open to using platforms that haven’t been audited and are likely to be among the first user groups. They’re likely invested in dozens of different projects.

Moderate risk profile: This is a trader whose portfolio consists mostly of BTC and ETH, with a smaller proportion of stablecoins and small market cap tokens. They likely only use protocols that they’ve put the work in to understand, and have a good reputation in the space.

Low-risk profile: This is a trader whose entire portfolio is made up of BTC, ETH, and stablecoins. They likely don’t invest more than 5-10% of their net worth in crypto.

Crypto Bear Market Strategies

Now that you can use the above as a high-level guide to assess where your risk profile is sitting, we can dive into relevant bear market strategies. As always, this is neither financial nor tax advice. Make sure to do your own research and talk to a professional if you’re ever uncertain.

Dollar-cost averaging

Dollar-cost averaging is an investment strategy that aims to reduce the impact of volatility on the purchase of assets. It involves buying equal amounts of the asset at regular intervals. An example of this would be to set a recurring buy on a monthly basis for 0.2 ETH. You can set and forget, and your accumulation of the asset will continue to grow in time for the next bull market.

Buying the dip

The first step in this strategy is to identify which assets you want to own. It helps to have a risk profile in mind when you make this selection. Ideally during a bear market, you’ll allocate a portion of your spend into typically low-risk assets.

Portfolio diversification

Portfolio diversification is the practice of spreading risk across your portfolio, and consequently limiting exposure to any single type of asset. By diversifying, you’re ensuring that the future of your portfolio doesn’t rest on the performance of a single asset.

Staking

If you’re bullish on holding your crypto assets for the long-term, then you could double down on this strategy by participating in staking protocols. By staking, you’ll be able to lock your crypto (that wouldn’t have been doing anything else!) into a program to generate a passive income. This means that regardless of what the market is doing, you’ll be increasing the value of your portfolio incrementally. For more information on staking, check out our blog here.

Margin trading

Margin trading is the practice of borrowing crypto funds in order to gain access to a higher amount of capital. As mentioned in our margin trading blog, this isn’t for the noob trader, so tread carefully. During a bear market, experienced investors can profit by shorting - by betting that the price of a particular asset will decrease. Read more about it here.

Tax-loss harvesting

Tax-loss harvesting, the bear market, and the tax world come together in one simple process. We go into more depth on how to tax-loss harvest in our blog here, but the main takeaway is that if you sell any crypto assets at a loss, you might be able to use these losses to offset any capital gains. Depending on your region’s guidelines, you might even be able to carry over these losses to consequential financial years!

Hodling (Holding on for dear life)

Quite possibly the most simple strategy to implement during bear marketing: hodling. Obviously, the onus is on the individual trader, but if you’re bullish on crypto in the long-term, then you can hold onto your assets regardless of the market action. This means regardless of if the value of your portfolio may shift up and down and all around, you let your assets sit tight.

How can Summ help in a bear market?

So, how can Summ (formerly Crypto Tax Calculator) help an individual in a bear market? The answer is twofold. First up, the platform’s dashboard acts as a portfolio tracker. This gives you a quick way to see an aggregate of all of your holdings and how they’re performing at any given time. Secondly, you can view your total value, cost basis and unrealized gains and/or losses as part of our crypto tax algorithm.

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Once you’ve imported your transaction history from any exchanges, wallets and/or blockchains you’ve engaged with, our software will be able to provide you with the insights you need to make informed decisions.

The information provided on this website is general in nature and is not tax, accounting or legal advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and seek professional advice. Summ (formerly Crypto Tax Calculator) disclaims all and any guarantees, undertakings and warranties, expressed or implied, and is not liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or Consequential Loss or damage) arising out of, or in connection with, any use or reliance on the information or advice in this website. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information in this website is no substitute for specialist advice.

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