avoiding taxes
AOTB Mini-Series
When Jeff Bezos isn’t directing Amazon or flying off in an interestingly shaped space rocket, he usually relaxes by … avoiding some taxes.
The man is nearly the richest person on the planet, even after a $40 billion settlement with his ex-wife, and yet he managed to avoid paying any taxes for two years between 2006 and 2018. In fact, over that whole period, he earned $127 billion and paid just $1.4 billion in taxes, reducing his effective tax rate (relative to his wealth) to just over 1%.
When people read stories such as this, they usually assume some sort of nefarious activity must be at play–likely involving shell companies and off-shore accounts. But that’s not what happened in this case.
The truth is more instructive than fiction, and in this case more interesting too.
Jeff Bezos’ Way of Avoiding Taxes with Cryptos
In compensation for his work as CEO each year, Bezos made just $80,000, taking the rest in stock options. Then rather the realize those gains through selling his stock, he borrowed against his shares. To stay positive in his bank account, he would sell just enough stock to pay the interest on his loans. As long as Amazon stock continued to go up, and it did, he was always in a better position financially, since paying interest on personal loans–even at 9%–is better than paying taxes at between 25% and 44%.
Now the obvious reason people want to pay less in taxes is to keep more of their money. Bezos’ case, though, shows the deeper reason–it’s a real impediment to growing wealth. If you make 100% returns each year, but lose 30% of that to taxes, you’re down to 70% annually.
A quick trip to the compound interest calculator will show you the difference. With 100% annually, you’ll make 32x in 5 years. At 70% annually, you’ll make 14.1x. Still good, just a lot less. In fact, the Bezos way does better than 2x your earnings without changing anything about your investments.
Now, most of us don’t happen to own a Fortune 500 company with publicly traded stocks that could be used as collateral for a personal loan. Fortunately, cryptocurrencies fix that.
This AMA mini-lesson explains that point: how to use cryptocurrencies to serve the same role as Bezos’ Amazon shares did for him.
The origins of this question began in a discussion with a coaching client and it became obvious that it should be part of anyone’s portfolio strategy in preparing for the eventual crypto-winter. After all, most people can make money in a bull market if they just stay in it; keeping your money is what builds your wealth.
It’s exactly those down-turns that my algorithmic signals have done well in identifying historically, for crypto riders, bubble riders, and (of course) coaching clients. This will lesson will help everyone though.
The Crypto Way “to Bezos”
To get started with this, you need to have a coin that you’ve made some earnings on and that you are going to hold long term–something like BTC or ETH. Next, you are going to borrow only after a significant decline from an all-time high.
Most recently, Bitcoin did about 54% in its decline and Ethereum dropped about 63%. I wouldn’t think about borrowing against my coins unless it had declined at least 60% from its all-time high.
You need to remember that a mature market, like the S&P 500 in stocks, drops better than 60% in a crash, so you better believe crypos will do that.
Here’s the reason that matters: nothing runs on credit in the cryptocurrency world. Everything that you borrow, then, will need to be over collateralized. At most, you can borrow 50% of your deposit.
Now, your deposit is in a crypto-currency like ETH or BTC. If we’re in a crash, and you start by borrowing 20% of your deposit’s value and then the coin loses another 50%, you’re now at 40% of your collateral value.
Things to Consider for Avoiding Taxes with Cryptos
Here’s what matters: if the value of your portfolio drops too much, your position will be liquidated and you’ll lose all your funds. It would be stupid to lose everything because you were trying to avoid a 30% loss in taxes.
You can avoid all that by waiting to borrow after a crash.
Next, you’ll need to find a place to borrow. NEXO has really low rates–if you have enough of their Nexo coins. They’re also insured. Here’s an image of their process.
So, you can borrow at 6.9%, if you have enough of their coins and you stake them. If you do that, you’ll receive 6% on your BTC or ETH deposit.
That means your net borrowing cost might be as low as .9% a year, which is certainly a lot better than taxes. If you don’t have enough NEXO tokens (or any of them), then your worst-case borrowing cost is 13.9% a year.
Borrow for Avoiding Taxes with Cryptos
Right now, you could borrow and get paid to borrow. That’ll go away after a few months though. Likely, there will always be some distribution of ANC tokens, but the value distributed for borrowing will diminish.
Worst case scenario, the Anchor platform will require you to pay back 24.8% annually (still better than taxes) and for some time, it’ll be significantly less than that. It might still be free in the next crypto-winter for example.
A nice advantage of this approach is that you can use ETH for your collateral. Since the latter is likely to bounce back quite a bit, this might give you an advantage over NEXO.
Remember, the goal is to borrow against your asset (e.g. ETH) when its price is low. Then, when it goes up in value, you can sell a little bit of it to pay off your interest and thus avoid creating a taxable event.
Concluding Thoughts
There isn’t a way to avoid all taxes legally–at least not if you are a natural (not corporate) person living in the US. It goes without saying, also, that you’ll need to speak with a tax professional who knows something about cryptocurrencies to work out the details for your area of the world.
The big idea holds though.
What this strategy does is substitute an investment risk for the ability to defer tax payment for some period of time–ideally enough to grow your wealth to a sustainable level.
At that point, you can cash out your positions to eliminate your debts, create a taxable event and pay your taxes.
Unlike Bezos, you’re not going to be able to reduce your effective tax rate to about 1% because you’ll only be able to borrow against a portion of your long-term crypto-holdings while it is down a bunch. So, unless you have a whole lot of cryptos, that just won’t cover all your living expenses as you accumulate wealth.
The publicly-traded company is still better for that. But cryptos do democratize some of the tools that only the super-rich have had available to them for a long time.
It’s just another tool in your toolbox for growing your wealth since the right tax strategy can literally double your returns over 5 years. I discuss this with all my coaching clients and I’ll continue to note related ideas in the Crypto and Bubble rider plans.
This week I wrote a number of pieces that are related to this post, so you might want to have a look if you’ve missed them.
That’s it for this week. Remember to join us on Discord if you haven’t already.
Happy Trading!!
Disclaimers
General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.
