Increase in Italian Capital Gains Tax: What Should You Do?

A Look at the Markets: Performance - November 2024

November was a positive month for the markets, as they responded favourably to the resounding reelection of President-elect Trump as the 47th President.

Vanguard FTSE all-world UCITS ETF (Accumulating)

The Vanguard FTSE All-World UCITS ETF experienced a positive month, registering a substantial increase of 6.44%.

Bitcoin

Bitcoin’s performance was even more remarkable, with a positive return of over 37%.

On the 5th of December, Bitcoin passed an important milestone by surpassing the $100,000 mark in response to Trump’s nomination of a new crypto-friendly SEC chairman, Paul Atkins. As anticipated, this resulted in some profit-taking and Bitcoin currently hovers around the 98,000$ mark as this newsletter is published on the morning of December 6th.

Increase in Italian Capital Gains Tax: What Should You Do?

From 2025, the capital gains tax on cryptocurrency investments in Italy is set to increase from 26% to 42%. One financial advisor suggests selling your crypto before the end of 2024 to pay the lower tax rate and then reinvest the balance.

But is this strategy the best choice for every investor? Let’s explore this question with an example.

An Example €10,000 Portfolio

Imagine you own a €10,000 cryptocurrency portfolio. Let’s examine the most unfavourable scenario (in tax terms) and assume that you acquired your crypto at a negligible cost. If you decide to sell it now:

• You will pay 26% tax on the entire amount: €2,600.

• This leaves you €7,400 to reinvest.

The proposed strategy seeks to avoid paying the future higher tax rate of 42%. The maximum amount you can save is the difference between paying capital gains tax at 42% and 26% on your current portfolio size. In this example, the maximum savings would be €1,600.

However, let’s consider what happens if you hold your investment.

Breaking Down the Breakeven Point

You have a potential saving of €1,600 in future capital gains tax but you have reduced your portfolio size by €2,600 to pay the current capital gains tax.

If you were to leave this €2,600 in the portfolio, what would it have to grow to so you no longer saved money with the sell and reinvest strategy? The €2,600 needs to grow by the maximum capital gains saving of €1,600. In other words, €2,600 needs to turn into €4,200 which is a gain of 61%.

A return of 61% is your breakeven point, after which the sell and reinvest strategy becomes unprofitable.

Is a 61% Return Likely?

Cryptocurrencies are renowned for their high growth potential. In the current market cycle, Bitcoin has already returned nearly 700%. By comparison, a 61% increase seems relatively modest in the long term (although it may not be this cycle, but time will tell).

On the other hand, Bitcoin can have huge pullbacks of as much as 80%. However, for this newsletter, we are considering a long-term investment strategy and not trying to time the market. We only need to consider future possible gains and future all-time highs.

For long-term investors who believe in the growth potential of cryptocurrencies and are prepared to hold them for the long term, selling to pay a lower tax rate might not be a wise decision. However, there are several other valid reasons for selling an asset, such as profit-taking or portfolio rebalancing. If you’re considering rebalancing your crypto portfolio soon, it might be a good strategic move to do it before the increase in capital gains tax.

Additional Considerations

1. The Uncertainty Factor

Tax laws and governments can change. What seems like a good strategy today might not remain favourable in the future.

2. A Personalized Approach

Every investor has unique financial goals and risk tolerance. Consider your:

• Long-term investment strategy.

• Confidence in the market’s growth potential.

• Need for flexibility in your portfolio.

Final Thoughts

This isn’t advice to avoid selling your cryptocurrency portfolio before the end of the year. Instead, it’s a call to carefully consider your decision to sell, hold, or sell and reinvest.

The decision to sell and reinvest isn’t simple. It depends on your expectations for growth, your financial goals, and your risk tolerance. While the numbers provide a helpful framework, your strategy should also reflect your personal circumstances and market outlook.

Stay informed, think strategically, and align your choices with your long-term vision.

As always, none of this constitutes financial advice, which would be beyond the scope of these newsletters.

Key Differences Between Buying Bitcoin and Bitcoin ETFs

1. Ownership:

   • Buying Bitcoin directly gives you actual ownership of the cryptocurrency, allowing you to store it in a wallet and use it for transactions.

   • A Bitcoin ETF or ETP is a financial product that tracks the price of Bitcoin but does not give you ownership of the asset itself.

2. Storage and Security:

   • When you buy Bitcoin directly, you're responsible for its storage (e.g., a hot wallet, cold wallet).

   • With an ETF, the provider handles the storage, often with institutional-grade security, eliminating the risk of losing private keys.

3. Ease of Use:

   • Bitcoin ETFs are traded on stock exchanges, making them easier to buy and sell through traditional brokerage accounts.

   • Directly buying Bitcoin may involve setting up a cryptocurrency exchange account and navigating wallet options.

4. Costs:

   • ETFs typically charge an expense ratio (TER), a small annual fee for managing the fund.

   • When buying Bitcoin, fees may include exchange trading fees, withdrawal costs, and wallet expenses.

5. Tax Implications:

   • The tax treatment for Bitcoin and Bitcoin ETFs may differ based on your jurisdiction. ETFs may simplify tax reporting compared to direct crypto transactions.

Considerations:

Bitcoin ETFs can provide exposure to cryptocurrency markets without the technical complexities of managing digital assets. However, they may not fully capture the benefits of holding Bitcoin directly, such as the ability to use it in decentralized finance (DeFi) or for peer-to-peer transactions. It's also worth noting that ETF performance may lag behind Bitcoin's price due to management fees and tracking errors.

One reason for holding physical Bitcoin may well be political instability in the country where you live. Additionally, you may want to use Bitcoin to conveniently send funds to friends and family in politically unstable countries.

Always research the specific ETF or ETP you're considering, including its expense ratio, liquidity, and how closely it tracks Bitcoin’s price.

Word of the Day - Milestone

Milestone - noun - countable - a stone at the side of the road that shows the distance to various places. For example, the nearest village or nearest large town or capital city.

Milestone - noun - countable - an important event in a child’s development or a person’s life. For example, learning to walk or getting married.

Milestone - business - noun - countable - a stage in a project that can be used to measure progress towards its final goal.

What have been the important milestones in your business or life?