Selling Assets Is a Really Stupid Financial Decision
Many of you reading this do it. There’s a powerful alternative.
Sometimes, I’m financially stupid.
Last year I sold a large amount of stocks to take some profit. The mantra “take profit on your investments” has always been buried deep in my brain. I realized yesterday this advice might be totally wrong.
Investor Mark Moss changed my thinking with his recent personal finance class. He might change yours too. This Youtube comment is exactly what I thought right after watching his video (twice).
The Stupidly Simple Idea to Get Your Head Around and Become Obsessed With
There are many assets you can own. The best assets are scarce assets because they go up in value over time. U.S. dollars for example aren’t scarce — a currency is like an ice cube that melts over time. When you add inflation to the equation it starts to become apparent why your purchasing power decreases over time. Nothing new here for most of you.
So what you do is buy assets to retain the financial energy you wish to store.
You gain access to financial energy through the work you do. So financial assets are a way to store your time. If you don’t understand financial assets you have to give away more of your time in return for financial energy aka money. Mark Moss blew my mind with three words:
Buy — Never Sell.
I’ve known this to be true amongst real estate investors. If you speak to anyone who has done well in real estate they will likely tell you one of the most important investment tips is to buy a property and never sell it.
But why? When you sell an asset there are costs you encounter. Selling real estate requires an agent and some online marketing to get rid of it.
The worst part about selling an asset is the taxes. If the asset you are selling goes up in value then you have to pay capital gains tax. Nothing new there. You probably knew that already and taxes are part of life.
Here’s where it gets interesting. When I sell an asset my tax bracket is somewhere between 35%-45%. That means selling my stocks, gold, Bitcoin or Ethereum is instantly going to take away a huge amount of money.
What if there is a way to defer tax or pay a much smaller amount? This is where Mark’s philosophy comes in.
The Beautiful Flip Side to Debt
If you’ve read my work before you’ll know I’m critical of debt. I love to be exposed to another way of thinking, though. Let’s say you need money to put a deposit on a house. You have two options:
- Sell some of your assets to get the cash for a house deposit.
- Keep your assets. Take out debt against your assets to get you the deposit.
The second option is one that changed my thinking. If you take option one you instantly have to pay tax on your gains and you lose possession of your financial asset, meaning you lose any upside gains that asset may earn in the future. Or you can consider “asset-based lending.” This is where you keep your assets and borrow money against them.
This isn’t a new idea. Real estate investors have been borrowing money against their properties, to buy more properties, for years. Stock investors have been borrowing money against their stock portfolios to buy stuff too.
What has been missed is why investors borrow money against their assets. The reason investors borrow money against their assets is so they don’t have to sell them and can defer capital gains tax.
Mark also says “debt is not taxable.”
The Financial World Has Turned Upside Down
Investing geniuses like Michael Saylor argue that inflation globally is approximately 15% per year.
His rationale for this high number is that current inflation numbers governments put out don’t factor in asset and commodity inflation. When you factor in the rise in prices of real estate, Bitcoin, stocks, lumber, etc you start to see the usual “2% inflation” theory is nonsense.
So what has happened? In order to protect your purchasing power you can no longer put money in the bank and earn interest to stay ahead of inflation like the old days. If you invest in stock market index funds the average annual growth is still not enough to protect your purchasing power.
If you invest in bonds then you’re in even more trouble. With interest rates so low, you have to look for other assets to get ahead of inflation. Scarce assets like Bitcoin and Ethereum 2.0 have become part of the solution for beating inflation (regardless of whether you like them). Both assets have performed well, therefore, there are lots of you reading this who, if you sell your crypto, will need to pay a high amount of capital gains tax.
The thinking I had is, “When I want to spend the profits, I’m going to need to sell my crypto.” Mark’s refreshing idea changes that. Financial apps like Fidelity and BlockFi have recently introduced asset-based lending products where you borrow money against your crypto, just like you can with real estate and stocks.
The appeal of this strategy is you get access to cash when you need it at lower interest rates than typical credit. All you need to do is put up your Bitcoin or Ethereum as collateral. (Collateral is a fancy word that means you give access to your asset to a financial institution that lends you money. If you don’t pay the money back then they keep your collateral.)
When you borrow money against your crypto assets you get the cash you need to buy stuff in dollars, but without having to pay tax right away. And the debt is tax-free. Plus, you hold onto your Bitcoin so if it keeps rising by the current 200% per year, then your investment portfolio benefits.
The danger with this strategy can occur when you borrow too much money against your assets. If the crypto asset goes down in price then you might be forced to offer more crypto to the lender as a form of top up. If crypto goes to zero then you could be in trouble — although that’s highly unlikely given how embedded crypto is in the financial system now through the likes of PayPal, Goldman Sachs, Fidelity, and Coinbase’s listing on the Nasdaq.
As always, too much risk combined with too much debt is a recipe for disaster. Mark uses the 5% figure in his Youtube video to demonstrate how one can safely borrow against their assets without risking too much, while still avoiding the tax issues.
I’ve seen many investors misunderstand another tax issue. When you go from one type of cryptocurrency to another, it’s considered a taxable event and capital gains tax applies. So try to stay in the same cryptocurrency when you can, otherwise what I’ve just shared with you is pointless.
A Parting Thought
I hate debt. Debt makes me feel like a slave who has to work a job and report to the man in order to avoid a good ol’ fashion sacking, followed by bankruptcy. I can thank my childhood, where we lost our family home, for those nightmare financial thoughts.
But even though I hate debt, I hate paying huge taxes even more when it’s completely not necessary. Optimizing taxes is a secret many of us aren’t taught in life and so we pay way more than we need to, while billionaires pay hardly any tax because they have the financial education/advisers.
Instead of cashing out your investment gains — research asset-based lending as an alternative, so you can keep your assets and their future increases in value, and get access to cash from your investment gains.
This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.