- Robinhood trading app allows investors to buy crypto, but they can't transfer it out.
- Cashing out can trigger capital gains taxes.
- Users looking to switch to another service should time their moves, says CPA Shehan Chandrasekera of CoinTracker.
Robinhood caused quite a kerfuffle last week after it temporarily suspended trading of several popular stocks, including GameStop and AMC, and then limited cryptocurrency purchases as well.
While the moves can plausibly be explained by cash constraints and/or technical issues from the popular trading app, they highlighted the limits of using centrally controlled applications to purchase decentralized digital assets.
But US residents looking to transfer their crypto out of Robinhood into something a little less centralized face two challenges. The first is that Robinhood doesn’t support withdrawals; you have to cash out. The second is that, when you cash out, you’re on the hook for capital gains tax, even if you intend to just put that cash into another exchange.
According to Shehan Chandrasekera, head of tax strategy for crypto tax software firm CoinTracker, there are five ways of reducing, or even eliminating, your cryptocurrency taxes.
The first option is perhaps the least attractive: Sell the dip. Essentially, in this scenario, said Chandrasekera, when you’ve spent more on crypto than the current market value of the coins, you don’t have to pay capital gains because you haven’t made anything. “By cashing out at this moment, you also get to tax loss harvest,” he tweeted. “You can then invest the cash in another crypto exchange.”
Second, you can wait. If the coins have been there longer than one year, they’ll qualify for long-term capital gains, which lowers the maximum tax rate from 37% to 20%.
“The US tax code rewards patient hodlers with long-term time horizons,” Chandrasekera told Decrypt. He pointed out, “Long-term capital gains can even be subject to a 0% rate if you meet certain income criteria.” In other words, those maximum rates are for big earners, not smaller traders.
Can’t wait for a bear market and/or 12 months? The third route is to just start trading elsewhere and leave your holdings in Robinhood. “If you incur any crypto losses outside of [Robinhood] anytime in 2021, exit [Robinhood] at a profit,” Chandrasekera wrote. “You can use those outside losses to offset [the Robinhood] exit tax bill (vice versa).”
As a fourth option, wrote Chandrasekera, you can also wait until after you file taxes to determine if you have any capital losses to carry forward into 2021. “If yes, you can use these losses to offset your gains when exiting.”
Last, you can hold off and just keep an eye on crypto and stock losses. Both count for capital losses and gains. “Exit when the timing is right so you can minimize your exit taxes by using losses coming from stocks,” wrote Chandrasekera.
Chandrasekera told Decrypt, “Option 1 and 2 are the most user friendly, especially if you do your own taxes.”