Q&A Q on Borrowing Against BTC is VIP (Patreon)

The Q I had from patreon today - inspired me to share more. Borrowing against Bitcoin to reduce your tax burden, similar to what some of the super-rich are known to do with other assets, involves a strategy that leverages the value of an asset without selling it, thereby avoiding capital gains tax. Here's a simplified breakdown:

1. Holding Assets Without Selling:

• Avoiding Capital Gains Tax: When you sell an asset like Bitcoin that has appreciated in value, you typically owe capital gains tax on the profit. However, if you borrow against your Bitcoin, you don't sell it, thus you don't trigger a taxable event.

2. Using Borrowed Money for Living Expenses or Investments:

• Living Expenses: Instead of selling Bitcoin to cover living expenses or investments, which would incur taxes, you borrow money using your Bitcoin as collateral.

3. Interest Deductibility:

• Tax Deduction on Interest: In some tax jurisdictions like USA, the interest you pay on loans can be tax-deductible.

Important to be familiar with this for the future.

The image above ...

• Normal (High Tax):

  • Earn Salary: A CEO earns a $1 million salary.

  • Taxed at 40%: They pay 40% in income tax.

  • Keep $600K: After tax, they're left with $600,000.

• Less Tax:

  • Stock Compensation: Instead of a high salary, the CEO gets $1 million worth of company stock.

  • Sell Stocks: When they sell these stocks, they're taxed at 25% capital gains tax.

  • Keep $750K: After tax, they keep $750,000, which is more than if they took a salary.

• No Tax:

  • Borrow Against Stock: The CEO uses $1 million of company stock as collateral to borrow money from the bank.

  • Spend Borrowed Money: They live off this borrowed money, which is not considered income for tax purposes.

  • No Income Tax: Since borrowed money isn't income, no income tax is paid.

  • Stock Appreciation: The stocks continue to grow in value. They only pay capital gains tax if they sell the stocks, which they might not need to do if they keep borrowing.