They are probably talking about on chain borrowing on Ethereum using Maker or Compound or one of many other similar contracts. In this case, if the price of crypto drops to the point that the amount you borrowed is more than the crypto you put up for collateral, you either need to put more crypto into your position to keep it collateralized, or the position will be liquidated, losing you the crypto and triggering the capital gains taxes you were trying to avoid.

It'll get liquidated if it drops by say 30%, but that's what you would have paid in taxes anyways. You get the same amount of cash either way.

Well, now you have to pay 28% in taxes on the liquidated value rather than 30% on the full value. You don't actually get the same amount.

If you had X, you would pay 0.3X in taxes - if you got liquidated at 0.7X, you pay (0.7X * ~0.28 = 0.2X in taxes). So in this case your net goes from 0.7X to 0.5X, not stays the same.

What you can do is get a hedge (short via futures or options) on your long position to flatten yourself against the market (or part of your position) - basically creating synthetic dollars, and then take out a loan against that. The only problem is margin maintenance on the futures position or rolling the option for however long you need the loan for (Likely you would do this option if you want to spread out liquidating your crypto over multiple years for more favorable tax treatment).

>It'll get liquidated if it drops by say 30%,

Doesn't this trigger a taxable event? If not it seems like it's pretty easy to bypass taxes by borrowing against your bitcoin and then liquidating it if it drops 1%. In addition to that, since it's a loan, you're theoretically stuck paying interest on it forever. Assuming 5% APR, you'd reach break-even in about 5 years.

Well if you use something like maker, you can keep the loan open for pretty much forever and not pay a single dime of interest as long as you don't want your collateral back and make sure to not get liquidated. Ideally, you borrow a little conservatively to avoid liquidation.

This whole thing only really works if you're a crypto bull. If you think crypto is here to stay and will go to the moon then yeah, there's no problem borrowing against it, since you expect its value to go up. However, if you're a crypto bear or want to derisk your holdings, this is a terrible idea because you still have exposure to the price of crypto. Selling on the other hand, eliminates your exposure entirely.

If you made 1000+% holding on to crypto (and not selling at any earlier point in time), you're presumably a crypto bull, right?

It eliminates your exposure at the cost of ~25-35% (depending on where you live and potentially up to ~45% if Biden's plan passes), so it only makes sense if you're certain that the market will drop by more than that.

>It eliminates your exposure at the cost of ~25-35%

No it doesn't. Eliminating the exposure would mean your net worth would stay the same regardless of whether it goes up or down. That's the case if you sold your bitcoins, but not if you took out a loan.

The super annoying thing about the Biden plan is that it retroactively affects stuff that happened this year that people weren't planning for. It should be a law that any changes to tax policy kick in the fiscal year after the law is passed.

That's not an annoying thing, that's the whole feature. The point is to prevent people from avoiding the tax - if the tax was announced and not applied retroactively, people would change their behavior to avoid it (or sell right before the tax was raised). That's precisely what you want to avoid to be fair to everyone.

The point of a tax is to redistribute the money a government thinks should be redistributed to account for externalities in the market (and support social / infrastructure programs).

yeah but most taxes don't change from year to year. Moreover, if your year zero advantage is "the point" then, why isn't biden announcing the tax changes in november and ramming them through?

> The point of a tax is to redistribute the money a government thinks should be redistributed to account for externalities in the market

That is not the point of a tax. The point of a tax is to raise revenue for government programs. That includes bombing children on the other side of the world, financing explorations to space, bailing out boeing and goldman sachs, etc. Nowhere in tax law does it say "redistribute to account for externalities in the market". Just because you dream something ought to be so, does not make it so, now or ever.

Well, even more technically, the point of taxes (and QT) is to remove liquidity from the system when inflation gets overheated (since we can print money / have the FED monetize the deficit to pay for our spending if we need to).

Isn't that a bit defeatist? It's like admitting that people will find ways around it. It'll only work in the first year when it's introduced.

Why would you be in crypto if you're a crypto bear?

wouldn't you have to pay taxes on the 70% left over and you wouldn't have enough to service the debt?

Yes, so ideally, you wouldn't borrow so much to be margin called, it's over-collaterized, so you'll always have enough to service the debt.

Would you go 3x Margin Long on the S&P 500 and then take out a loan against that to buy things? Because that's basically what you are doing if you take out a long against your crypto holdings. I would be very, very careful about touching it.

This strategy, but applied to developing nation currencies and the dollar has ruined many an economy (ruble crisis, euro crisis, Asian currency crisis, etc). When your obligations are in a different currency than your assets, it's danger zone. People become blind to risk in a bull market - crypto can certainly drop 90+% and wipe out anything you have borrowed against it.