What is An Aggressive Tax Stance, and Can it Reduce Your Crypto Taxes?
What is an Aggressive Tax Stance in Crypto?
Crypto is a young and evolving industry, and there is still a lot of legal grey area when it comes to reporting taxes on your crypto profits.
Awaken defaults to a conservative approach - our priority is keeping you safe - but it is possible to take a more aggressive stance to reduce your tax bill. In this article, we’ll detail what is meant by a conservative vs. aggressive stance on your crypto taxes, and explain each choice you can make if you want to take a more aggressive approach.
Conservative vs. Aggressive Crypto Tax Stances
Conservative Stance
Taking a conservative tax stance involves assuming that any potentially taxable crypto transaction is indeed taxable. If you take a conservative approach, you have little reason to fear ever getting in trouble with your country’s tax authority.
Aggressive Stance
Adopting an aggressive stance means deciding that certain ambiguous transactions do not constitute taxable events. Consequently, you opt not to report income or capital gains associated with these transactions. This potentially lowers your tax bill, but it significantly increases your risk if you get audited.
Transactions Where an Aggressive Stance Might Apply
Airdrops
Airdrops are generally considered taxable income at the moment tokens are received. However, if you didn't actively claim or control the tokens initially, you may have a valid reason to claim this wasn’t income, and it’s taxable until the tokens are sold.
In some cases, such as LayerZero’s airdrop in June 2024, users are required to pay or donate a small amount of another token in order to claim their airdrop. In cases like this, the transaction is actually more like a swap than a traditional airdrop, and it may be more accurate to treat it as a swap rather than a traditional airdrop.
Bridging
Technically, bridging assets from one blockchain to another involves swapping two different tokens, creating a taxable event. However, since most bridging involves sending and receiving equivalent tokens (ETH on Arbitrum to ETH on Base, for example) an aggressive stance would argue that this is more accurately characterized as a wallet-to-wallet transfer, which is a non-taxable event.
See our full guide on how crypto bridging is taxed.
Wash Trading
Wash trading involves selling a token at a loss and quickly repurchasing it. Although generally disallowed in traditional finance, the IRS has actually verified that wash trading in crypto is an acceptable practice for tax purposes, making it a legitimate aggressive strategy for tax-loss harvesting in the United States.
Even if you're not in the US, you can take advantage of wash trading on L1 tokens and token derivatives by swapping tokens that are underwater for a similar token (such as JitoSOL for mSOL, or stETH for rETH).
We recommend leveraging this advantage annually to maximize your tax benefits while this legal loophole remains open.
Liquidity Providing (LPing)
If you receive a placeholder token that represents your deposit when you provide liquidity, this could technically be viewed as swapping your tokens for a new asset, thus creating taxable events upon both deposit and withdrawal.
Aggressively, investors argue that these placeholder tokens represent the original deposited tokens, and thus, no actual taxable exchange occurs until a sale outside the liquidity pool.
Best Practices for Taking an Aggressive Approach
Consistency is Crucial: If you classify bridging as non-taxable when it would normally result in gains, you must also treat bridging as non-taxable when it would result in losses (foregoing any potential tax write-offs).
Detailed Documentation: Meticulously document every transaction and your reasoning for taking an aggressive stance. Ensure your records clearly reflect your strategy and rationale.
Strong Rationale: Be prepared to defend your aggressive stance clearly and confidently, both verbally and in writing. Understand your arguments fully to convincingly articulate them if audited.
Legal Support: Ideally, if you take an aggressive tax stance, you should have a legal letter from a lawyer and a plan of action in case you get audited. But this option is expensive, and only really available for high-net-worth individuals.
Ultimately, an aggressive tax stance may yield short-term financial benefits but also carries higher audit risk. Always carefully weigh the benefits against potential drawbacks before deciding which strategy aligns best with your risk tolerance and financial goals.
