 I think it might be a good time to do a down-the-rabbit whole. Now, for those of you who don't know a down-the-rabbit whole segment is a segment where I ask you the question that you didn't ask me or I ask myself the question that you didn't ask me or that you didn't ask me in the way I wanted you to ask me so that thereby I can pretend to be answering a question But in fact, it's me asking me and then answering me Which is really also known as a strawman argument But let's not get into the details of how ridiculous this whole topic is and go straight to down-the-rabbit whole All right, the topic of this segment of down-the-rabbit whole is Capital gains taxes and more in general Marginal taxes now. Okay. Hang on some of you started snoring already. No. No, please wake up. This is important Now if you were not in crypto, you probably have no idea what the hell capital gains taxes are I certainly didn't know much about capital gains taxes before I got involved in cryptocurrency and that's because in most everyday life Even when you're dealing with foreign currencies due to something called the de minimis exception and various other little Facilitations for the middle class. You don't really get exposed to capital gains taxes in order to get exposed to capital gains taxes You have to be an investor in crypto. Of course, there are no de minimis exceptions Meaning that there is no amount below which capital gains don't need to be accounted for you have to account for it In general in the u.s. Other countries may differ Almost all countries have some form of capital gains taxation. And so therefore it's important to understand these things If you live under a rock, you may have not noticed that two or three days ago the new administration's plan for capital gains taxes was announced in the united states and that plan includes a 39.6% marginal tax for long-term capital gains for people making more than a million dollars a year and Well, the markets freaked out the traditional markets freaked out and the crypto markets freaked out And then they mostly recovered because as is always the case in Markets, there's a lot more reaction to the news than to the reality of the situation And a lot of people react not because they see fundamentals have changed But because they think other people will react and that creates a cascade effect So we saw that happen at least that's one of the possibilities of why the markets reacted But then again, you can never tell so let's discuss this topic because I think it's very important to understand These things and understand where the risks lie So are you about to pay 40 tax on all of your beautiful crypto gains? Probably not Probably not and if you do congratulations, that means you're doing really really really well really well But for the most part. No, you're not Here's a couple of important things to understand about how capital gains taxes work in the us I'm going to give you this information based on my own personal experience and what I've learned I'm not an accountant I'm not a lawyer and I'm speaking primarily about the us because that's the tax regime I understand better because that's the tax regime. I operate in please consult your financial advisor your accountant your CPA your attorney in order to understand these things better But the bottom line is this capital gains or capital losses are taxes that you pay On the difference in value in an investment That occurs when you do something with that investment That triggers a taxable event. So let's say you buy crypto and then you sell crypto that Sale of crypto is a taxable event It triggers the assessment of capital gains meaning that at that point you have to estimate How much gain or loss you achieve from the moment you bought that crypto until the moment you sold it Now there are two categories of capital gains and capital losses short term and long term in the us Short term is anything held less than a year long term is anything held over here Short-term capital gains really are taxed as income in the us So the standard rules for income apply meaning that you have a series of rates that apply as a marginal tax rate So you'll have zero 10 15 25 28 30 37 Whatever, uh, I don't remember the exact marginal tax rates I can't remember them off the top of my head and these Basically increase as you go up in your earnings, but they only apply to the amount over That threshold you're only taxed for your marginal value over the threshold So short term capital gains work like that income taxes work like that and now And long term capital gains also are marginal taxes based on an income threshold But they're being aligned more closely with income earned income taxes Whereas until now historically in the united states capital gains taxes have always been taxed much lower than income so investment income is taxed much lower than income from labor And this is now likely to change this hasn't passed in law It's not applying to 2021 These things will get passed into law if you want to watch the documentary How a bill becomes a law and Once they become a law, they're not going to apply retroactively so Don't need to worry about it for this year But in any case let's understand how marginal rates work a lot of poor middle-class people Myself included when I was younger do not understand marginal rates If the marginal rate for people making over I don't know $150,000 a year is 30% That does not mean that you're going to pay $50,000 in taxes That means you're going to pay 30% of every dollar you make above 150,000 So marginal rates only apply above the threshold Usually you have a series of thresholds. So for example with capital gains today Let's say a married couple with a couple children and You make $70,000 a year purely on investment income From capital gains you bought bitcoin you did well and you sell $70,000 worth of bitcoin This year long term you held it for more than a year. How much are you going to pay on that? Most likely zero The marginal rate for up to 77,000 this year I believe is zero for a married couple for singles I think it's something like 60 something or 50 something. I'm not sure Then for the next between 77 and 150,000 or something like that you pay 10% or 15% and then You pay 20 above 400,000 That means that if you sell $401,000 worth of crypto, you're going to pay zero for the first 77% 10 for the next 100 15 for the next 150 You're going to pay 20% according to the current capital gains for the $1 Over 400,000 you're not going to pay 20% of 400,000 so marginal rates important to understand it. So what we're talking about here is 39.6% On realized gains meaning that you actually earn these gains because you actually sold You created a taxable event or you bought another crypto Or you bought a house or you bought a boat or you plowed all of your money into beanie babies That's a taxable event if you buy anything with your crypto if you trade it for another crypto if you sell it For dollars or euro or whatever If you gain value from it you have created a taxable event and you're going to pay marginal taxes on that up to 39.6 for anything over a million dollars Of that income So you're not just going to pay 40% of all of your crypto gains And you're certainly not going to pay anything if you don't sell. So if you're just holding So a lot of people who freaked out over the idea that they're going to pay 40% on their crypto gains because they put in $100 and they now have You know $2,000 and they're like man, I was going to buy a car with this money But now the government's going to take 40% of my $2,000. That's not going to happen. You have nothing to worry about That's not the case. That's not how marginal taxes work but There is a danger and it's a very big danger and the danger that we saw happen again and again and again in 2017 is getting a whole bunch of taxable events from trading Back and forth and back and forth and back and forth between different cryptocurrencies Not realizing that you're creating taxable events not realizing that you're creating gains and then Pissing away those gains over a period of one to two years More than a year all short-term gains on which you owe capital gains taxes Now if you do it all within a year your losses will offset your gains It's not going to be a big problem, but here's where it gets really shitty. Let's say You sell bitcoin that you bought at 3,000 You sell it at 60,000 on December 31st to buy doge and You make a gain of a hundred thousand dollars worth because you had you know Two and a half bitcoin or whatever and you bought doge with it and on January 5th that doge goes to zero And you make a massive loss. So you've effectively lost 120,000. Well, the IRS is now going to come to you and ask you to pay For your capital gains of the previous year and you owe that you can't say well in january I had a loss. Can we count the loss in 2021 against the gain in 2020? No You owe that money and a lot of people did that in 2017 and got really badly burned They made a bunch of gains through trading back and forth and creating all kinds of taxable events in one year Then in the following year, they made a bunch of losses They still owe the gains. Sometimes they actually have to force sell their crypto at a massive loss because they have to pay the taxes and Then they can take those losses and you're sure they can roll those forward for future gains that they're never going to get Because they're now broke and or bankrupt and or all money to the rs or they can take a 3000 loss a year as the maximum loss they can take As a net loss. It's a really dangerous game to play If you are day trading crypto, especially if you're trading in the alt market because it's out season, isn't it fun? And you don't understand how capital gains work What taxable events are and how marginal rates work You could get yourself in a shit ton of trouble not because the scary marxist administration of Joe biden who is only a caretaker administration until donald trump comes back will tax you 40% on every dollar you make but because but because you didn't understand how the rules Work and the rules kicked you in the ass Here's one of the big differences between people who have and keep their money at any level of the economic scale Whether your working middle class like the family I grew up in Whether you've made some money on crypto and you want to keep it or whether you're super rich because you did really well with these investments or Shield some altcoin for influencer money and managed to avoid prison for that Then you need to learn how the rules work so that the rules can work for you Knowledge is power power And knowledge allow you to keep whatever money you've earned even if it's just a small amount so People get burned by the rules. They don't know and they can use to their advantage the rules. They do know Learn the rules use them to your advantage. How are we doing? Are we having fun? Oh, yeah follow up some states US states have their own capital gains people in california and new york are going to be paying even more than that There's also a 3.8 percent investment tax to fund the affordable care act which is Assessed on investment income. There's also other taxes surcharges and things like that that are changing But that's not what you need And that concludes Our rabbit hole. Thank you for watching this edition this segment of down the rabbit hole Thanks for watching. If you'd like to support me, please consider subscribing to my channel and supporting me on patreon.com