Bitcoin, index funds, and real estate are all excellent ways to hedge against inflation. I’m bullish on Bitcoin not only for inflation reasons, but also its portability, decentralization, and the fact that it’s still so universally under-adopted.
However, there is one major advantage the leading cryptocurrency has over all other options for inflation hedging.
Bitcoin’s Unique Tax Advantage
Unlike stocks or real estate, Bitcoin does not have to be exchanged into US dollars in order to be used. As time goes on, more and more vendors, individuals, and financial institutions will accept Bitcoin as payment.
Why does this matter? If Bitcoin does not need to be transferred into dollars, you do not ever incur a taxable event to spend it.
This bears repeating.
If you don’t exchange your Bitcoin for dollars, you won’t pay taxes on its appreciation.
Now, I’m not a lawyer, so this is definitely not legal advice. When the tax man cometh, you will not find me to bail you out.
Nevertheless, from a legal standpoint, this is valid. You don’t tax legal tender if it appreciates from just sitting there. Bitcoin does not have the status of “legal tender” except in El Salvador. If you’re in North America, selling Bitcoin incurs a standard capital gains tax.
Did you catch that? Selling your Bitcoin incurs a tax. AKA when you exchange Bitcoin for fiat. So just don’t exchange it for fiat.
Bitcoin as Medium of Exchange is Inevitable
You need to know about the lightning network.
The lightning network is a means of exchanging Bitcoin win a faster, less expensive way. It’s like instead of paying for your drinks at the bar every time, you open a tab and pay it off every once in a awhile. The “tab” gets settled on the normal blockchain every once in a while instead of every transaction, allowing things to stay fast and lightweight.
It’s more complicated than that, but that’s the benefit. Instant settlement and cheaper fees.
This network is already in use right now. As its use spreads, Bitcoin as a standard medium of exchange will be normalized. El Salvador will be the first big place this is tested out on a national level. When the entire country has normalized using Bitcoin and the lightning network, the infrastructure supporting this will only expand to other countries.
The Weakness of Index Funds
No matter how long you hold an index fund, if you want to capture your gains, you eventually must sell it. Not so with crypto. If you hold long enough, you won’t ever have to use dollars for day-to-day transactions ever again. At the most, you’ll only need to use fiat currencies for for official government payments like taxes and such.
It’s very likely Bitcoin becomes a global medium of exchange in our lifetime. This doesn’t require other currencies cease to circulate, but just that Bitcoin becomes universally accessible.
On top of this being the best-performing asset of the last 10 years, and the fact that you can avoid a heavy tax burden, this is personally a no-brainer for me.
How You Can Use This Now
You don’t have to just wait 10 years to avoid tax burdens of fiat. Next transaction you make, ask your seller if they accept Bitcoin.
This probably has to happen between trusted parties. If they don’t understand crypto, and also don’t trust you enough, then it won’t happen. If they trust you they trust how crypto works, then y’all can potentially avoid taxes and successfully perform an underground (but legal!) transaction.