No ones likes to pay taxes, right? The real question is… what investments can we choose in order to minimize our costs and optimize our profits?
Taxes In Your Country May Be Different From Mine
As you know, I’m not a financial advisor, and everything I say on this blog is merely my opinion based on past experiences.
Therefore, the first thing to know about taxes, is that you should verify how they play out in the country you are registered in the moment you want to start investing.
For instance, Cryptocurrencies are taxable in many countries already, but not in Portugal, the country I live. If you’re an advocate of this kind of investment (or should I call it speculation), then you might even consider moving to Portugal!
Taxes in Crowdlending/P2P
Let’s start by discussing how it works out in P2P (again, please feel free to correct any mistakes I do along with the post).
For each payment that you receive from a borrower, the profit you made on that transaction must be declared to your financial authority in the time to do IRS.
Unless you have a person who takes care of this for you, this process can be cumbersome and might take a while.
Depending on where you live, the taxes can even “eat” 1/3 of your profit.
Would you feel comfortable with this type of investment?
Taxes in Cryptocurrencies
Cryptocurrencies are very recent – they are around for 12 years as of 2021 – and their regulation is still vague in some places of the world.
Despite being a very speculative asset (that’s a story for another post), some countries are still figuring out how to make it taxable. Probably seeing how things roll out, as many countries are starting to adopt it even like legal tender – El Salvador was the first one!
Meanwhile, if your country is paying attention to these kinds of transactions, then you have to pay some percentage of your gains to your government.
If you’re in for the long-term investment, then holding your cryptocurrencies might be a good idea, as you’re avoiding paying taxes for each buy/sell trade in case you want to time the market (generally only a very few people are able to do it and I wouldn’t recommend it).
Taxes in Stocks/ETFs
Now… when it comes to dividends, some countries allow you to not pay taxes up to a certain amount per year. If that’s not your case (like mine, in Portugal I must pay 28% of what I earn in dividends) then an accumulating ETF might be an excellent solution.
In an accumulating ETF, the dividends are automatically reinvested in the ETF you hold, meaning you can significantly empower your compound interest, a “secret” anyone in the world of investment should know!
Taxes are a very broad topic and differ from location to location. What you should be aware of though, is that your main goal should be to pay fewer taxes, choosing the smartest strategy you can get.
If you live in a place where you are taxed for your dividends, it means that you are losing 28% of them yearly. Why not changing those investments to one that pays fewer taxes? If your goal is to become financially free, then all cents matter!
So, answering the first questions of this post, an investment that reinvests on itself without the need to pay yearly taxes is the best option in my opinion – like an accumulating ETF or distributing ETF (the latter depending on your country’s rules).
Feel free to comment if I missed some important topics that should never be skipped.