Traders Buy the Dip and Sell at the Peak–What About Taxes?

Bitcoin continues to fluctuate in a sideways trend

It seems that Bitcoin’s consolidation phase is squeezing, indicating that the price can pivot upward or downward. The bulls are likely to come out victorious as solid on-chain fundamentals and increasing pressure propelling the price towards the next target, serve as evidence that there is room for higher prices. 

Exceptions to the “rule”

Even though low volatility deters investors from increasing positions in the leading crypto asset, there are several ways to profit from the ongoing oblique trend. The most common being the “golden rule” of buying the dip and selling at the peak. Yet, depending on your time horizon and investment strategy you can integrate an efficient taxing strategy to surpass your year-end profit objectives. 

First, let’s take a look at basic crypto tax fundamentals and taxable events:

  • Cryptocurrencies are classified as property.
  • Cryptocurrencies are considered as capital assets, yielding capital gains, and losses.
  • Taxable events constitute: income derived from earning cryptocurrencies, using crypto as a means of transaction, (purchasing or acquiring goods and services) crypto trading, and exchanging your cryptocurrency for fiat currency.

These axioms are not fixed in stone, and depending on the nature of your operation other conditions may apply. In fact, they may vary depending on your local tax policies.

Smart crypto money

The average investor will likely consider that the “smart money” is constantly buying at the dip and selling at the peak. That is because the average investor doesn’t include tax-related strategies to their own. If an investor, for instance, is in need of decreasing current expenses, a useful strategy may be buying at the peak and selling the dip, especially if the investor’s horizon is short-termed. Yes, losses will be incurred, but said losses decrease the taxable mass. Thus, you save money and reserve cash.

Short term and long term positions

Knowing the dates of your operations and the current holding period is essential. It enables you to determine which positions shall be liquidated and vice versa. For instance, if you hold significant short-term capital gains, you may be better off implementing a buy-and-hold strategy to avoid a more intrusive tax regime.

The process of creating a tax-optimized strategy may come off as puzzling, especially since tax regimes and the basic concepts may vary depending on your habitual residence. However, automated software services make suggestions on which coin to sell, depending on your holding period and capital gains, to decrease your taxable gain.

In conclusion

Trading, tracking, and taxing might not be something you like to hear often together. Especially, if you’re a crypto trader or investor. However, it is worth noting that with the right set of tools and a basic framework you can surpass your year-end profitability objectives. Take benefit of the continuing sideways trend and buy the peak and sell at the dip. Reduce your short-term taxable gains and optimize your overall portfolio.

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