When it comes to dealing with the ups and downs of the crypto market, “hodling” is the right way to go. No, you didn’t read that wrong. Hodling is a term created in 2013 in a Bitcoin chat forum by an investor who didn’t sell his tokens despite the sharp decline in its price. The investor meant to write “I am HOLDing,” but instead he misspelled it by writing “I am HODLing.”
This misspelling caught the attention of many investors in the Bitcoin community and they turned it into an acronym: Hold On for Dear Life. Similarly, investors who are HODLing are called HODLers, as they buy and hold their tokens despite their price. These folks are confident in the long-term value of the token and stay invested.
This acronym hits home for many investors who have watched Bitcoin’s recent volatility and if you are hanging in there with your token, you should know how you are going to get taxed or if you have to pay taxes at all.
When Don’t You Have To Pay Taxes?
First off, let’s get one thing out of the way, HODLing your tokens may not affect your tax bill at all. You have to concern yourself with taxes when you realised any capital gain when you sell them.
If you are thinking, is cryptocurrency taxed when you buy it and simply hold it without any other activity even if the value soars dramatically? In this scenario, taxes won’t be levied upon you.
Let’s take an example. Say you bought Bitcoin at $10,000 and after some time, the value shot up to $40,000. Here, you haven’t made any capital gains because you haven’t sold your digital asset.
Coinbase, a safe online platform for buying, selling, storing, and transferring crypto has mentioned some other scenarios where you don’t have to pay crypto taxes. The first one is receiving and giving cryptocurrency as a gift (up to annual IRS limits). Additionally, when you transfer crypto to your other accounts, you don’t have to pay taxes.
Quick Reminder: Always consult a certified tax professional if you are unsure about your tax circumstances.
When Do You Have To Pay Taxes?
There are plenty of scenarios where you owe tax to the IRS. Let’s see what those are:
- If you reinvest your gains into buying another cryptocurrency. When you sell your tokens, it becomes a taxable event even if the token you bought later tanks in value. You can lower your tax burden by realizing a capital loss to balance the previous gain.
- If you are earning interest on your cryptocurrency i.e, crypto savings account then it is a taxable event. Millions of crypto holders are earning a passive income by depositing their crypto and gaining interest.
- If you sell your tokens for a profit then it is considered a capital gain and hence a taxable event.
- If you convert your crypto asset into another type of crypto
- If you stake or mine cryptocurrency, it is considered as a taxable income. The same goes for airdrops.
- If you buy an NFT, you owe taxes on the crypto you bought the NFT with
How To Keep Up With Crypto Taxes?
Over the past few years, a myriad of different software has been launched in the market for individuals to calculate crypto taxes. Since you have to report your taxes to the IRS with the forms provided to you by your crypto exchange, you have to keep a tab on all your transactions.
This is where ZenLedger makes a massive difference. By using the ZenLedger software, you can conveniently import your trading history. From here on the software takes over and automatically calculates your capital gains and losses of the current tax year. Once you review all your transactions, the software will again automatically create your tax reports and file them with a click of a button.
The Takeaway
HODLers are often dismissed by conventional investors as they buy and hold the assets irrespective of the price. Since the market is highly volatile, HODLing seems to be a rational approach. However, to maintain a reasonable portfolio, HODLers have to maintain a reasonable portfolio and for that they have to sell high and buy low, keeping tabs on portfolio allocations.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
FAQs
1. What is a crypto HODLer?
HODL is a term that originated as a typo by an early Bitcoin investor in a Bitcoin chat forum. Since then it caught on with other investors and they turned it into an acronym: Hold On for Dear Life. HODLers buy and hold a cryptocurrency for a long time.
2. Is Hodling crypto good?
The Crypto market is highly volatile and for traders, it can provide opportunities to buy and sell frequently. However, if you want to play it safe then HODLing is a good strategy as the investor is not exposed to short-term volatility.
3. Why is Hodling the best?
HODLing saves you time for other activities. All you have to do is access an exchange, purchase the coins, and store them in an offline wallet for a long time. You can avoid short-term capital gains tax and at the same time costs incurred in trading.
4. What is a HODL strategy?
It is an investment strategy where you have to purchase cryptocurrencies and hold them for a long period of time. The opposite of HODL is short-term trading where a trader buys a coin when the price is low and sells it when the value increases.
