Follow up on the Ol’ Double Logris Alchemix play with some fresh alpha.
So, I have talked to tokentax… so when you originate the loan, that is not taxable because it’s a loan. But the debt repayments would be taxable as income… Now, when this gets taxed nobody really knows. Is it when you withdraw your collateral or is it every time there is a harvest? We don’t know. I honestly think if you try to explain Alchemix to your accountant their heads will just explode… I’m not a lawyer but I definitely think you could get away with a lot using Alchemix.
Let’s review the Double Logris play step by step, unpack this statement a bit, and review the tax implications and then I will outline how you can live on a $10,000 purchase made last year for the rest of your life, possibly tax free. I am indescribably enthusiastic on this system. Seriously, this is the coolest thing ever.
The Double Logris. I call it this because I’m riffing on the double Dutch, double Irish, etc and because it doubles your ETH yield. Also I’m vain.
1) Start with X ETH.
2) Flashloan X ETH from Aave. This is a loan, 0 tax obligation event.
3) Deposit 2X ETH to Alchemix. There’s no LP on your deposit for Alchemix; it’s just a value in the contract associated with your address. It’s like moving funds from Coinbase to your wallet or to dydx. 0 tax obligation.
4) Generate an X alETH loan. Again, loaned assets assume a cost basis at the time they are generated. 0 tax obligation.
4) Swap the X alETH for X ETH on Curve. This is a taxable event but the value of alETH ~= ETH so creates 0 tax obligation. You are now 1x short alETH and have a cost basis of your short at the time that of the transaction.
5) Repay the flash loan. Loan repayments are not taxable events.
Now, review the above and conclude for your own sanity.
1) X ETH was purchased using X alETH debt. There is a cost basis price and date on that ETH.
2) You are short 1x on X alETH. There is a cost basis price and date on that short position.
3) You are long 2x ETH and earning yield on double your initial principal. This income is realized as alETH repayment on your loan which closes your short position.
Given the above quote there are two possible ways to handle this.
Option 1: Income is earned when you reclaim collateral.
So, the time was Mar 2020. The world was scared. You were brave. You bought 100 ETH with $10k.
1) You initiate the Double Logris at an ETH price of $2500.
2) A year passes with the yETH vault earning 5%. You have 10 alETH in income on your 200 ETH vault @ 5%. The average price of ETH during the year was 5k. If you were to withdraw your 200 ETH you would owe this income but instead you just reup your loan with another 10 alETH, sell it for 50k, and live on it for the year. This is selling a loaned asset, and therefore not taxable. You live tax free on your 50k. As long as ETH remains at 5k and the interest in the yVault remains at 5% you can do this for the rest of your life.
Option 2: Income is earned every time harvest occurs.
Each time the yearn vault harvests it is repaying your loan with that transaction (closing your short). You earn alETH (income) and buy down some of your short position with the income (taxable trade). Given that the ETH price may rise the gains may be offset by closing your short position. If the ETH price has risen since you initiated the Double Logris you would be booking in a loss on your short position that may offset your income for the next decade or two until the cost basis of your short catches up with the price of ETH.
1) You initiate the Double Logris at an ETH price of $2500.
2) A year passes with the yETH vault earning 5%. You have 10 alETH in income on your 200 ETH vault @ 5%. The average price of ETH during the year was 5k. This is 50k in taxable income from earning 10 alETH but you closed out 10 ETH in short positions which is also a 25k loss. You owe 25k in taxable income. You can draw another 10 alETH from your vault and sell it for 50k to live on for the year. This is selling a loaned asset, and therefore not taxable. You have effectively halved your tax obligation while doubling your yield with the Double Logris.
3) Another year passes. We’ll keep the yETH vault at 5% interest. Another 10 alETH income. This time the average price during the year was 10k. This is 100k in taxable income and 75k in losses closing your short position. You draw another 75k to live on for the year and pay income on 25k in taxes. 1/4 tax obligation this year.
Either way you can be set for life off of a single 10k purchase made last year as long as the ETH price holds above your living expenses. Never sell your ETH, sell your income.