Are you frustrated by how much of your crypto gains are going to the IRS?
Unfortunately, there is no way to avoid crypto taxes. Remember, there are severe consequences for tax fraud and tax evasion.
That being said, there are strategies that can help investors legally minimize their tax burden. In this article, we’ll run through the basics of cryptocurrency taxes and share six simple strategies for reducing tax liability.
Before we get into tax reduction strategies, let’s go through the fundamentals of how cryptocurrency is taxed.
Cryptocurrency is considered a form of property by the IRS, similar to equities and real estate. That means it’s subject to both capital gains and income tax.
Capital gains: If you dispose of your cryptocurrency, you’ll be subject to capital gains tax. Disposal events include selling your cryptocurrency for fiat, trading your cryptocurrency for other cryptocurrencies, and buying goods and services with crypto. You’ll need to pay capital gains based on how your tokens have appreciated since you originally received them.
Income tax: If you earn income in the form of cryptocurrency, you’ll need to pay income tax. Income events include earning staking or mining rewards, earning referral bonuses from crypto apps, or getting compensated for your work in crypto.
Now, let’s break down six strategies that can help reduce your crypto tax burden.
If some of your cryptocurrency holdings have decreased in value, then tax-loss harvesting can be a great way to decrease your overall tax bill.
Tax-loss harvesting is the practice of intentionally selling your cryptocurrency at a loss to claim tax savings. Here’s how it works.
When it comes to tax-loss harvesting, cryptocurrency actually has an advantage over other asset classes. Stocks are subject to the ‘wash sale rule’, which states that capital losses cannot be claimed if investors buy the same stock 30 days before or after the sale.
However, the ‘wash sale rule’ currently does not apply to cryptocurrency. At this time, investors can sell cryptocurrencies like Bitcoin, claim the capital loss, then buy back their tokens.
Holding your cryptocurrency for the long run comes with real tax benefits. Remember, you’ll pay a lower capital gains tax if you’ve held your crypto for more than 12 months.
Of course, it’s important to remember that cryptocurrencies tend to be volatile. If you’re expecting a price drop in the next few months, it may be better to sell now than to wait. Still, the lower long-term capital gains rate should factor into your buying and selling decisions.
Cryptocurrency gifts come with their own tax benefits. If you give less than $15,000 of cryptocurrency away as a gift, you have no tax obligation.
This might seem like a drastic step to take. However, if you want to share your wealth with family and friends, giving a crypto gift could be a great way to accomplish this goal.
Recipients receive tax benefits as well. Receiving a crypto gift is not considered a taxable event.
However, it’s important for the gift recipient to keep track of the price of the cryptocurrency at the time they received it. If they dispose of those tokens, they will need to incur capital gains or capital losses depending on how the price of their tokens has fluctuated since they received the gift.
For more information, check out our blog on how cryptocurrency gifts are taxed.
Retirement accounts are designed to give investors tax benefits. For example, if you decide to sell your capital assets in an IRA, you will not be required to pay capital gains tax until you withdraw your earnings.
Unfortunately, many well-known IRA providers do not give investors the opportunity to invest in cryptocurrency. Luckily, there is an alternative.
Self-directed IRAs allow investors to store their retirement savings in alternative investments such as real estate, precious metals, and cryptocurrencies. If you are under the age of 50, you are allowed to contribute $6000 a year in total to all of your IRAs, including self-directed IRAs.
There are several options available for self-directed IRAs that allow investors to invest in cryptocurrencies. Popular choices include iTrust Shares, Bitcoin IRA, and Coin IRA.
Navigating the tax code on your own can feel overwhelming. That’s why you may want to consider enlisting the help of a professional.
Though it may be an expensive step to take, many investors find that a quality accountant is well worth the money. An accountant well-versed in cryptocurrency can cover their own costs by identifying strategies to minimize your tax burden.
If you’re looking for an accountant, you may want to check out our verified list of cryptocurrency tax experts.
Because you need to identify what the US dollar value was for every trade that you made throughout the year, crunching your gains and losses manually can quickly turn into a difficult task.
That means it’s harder to identify opportunities for tax-loss harvesting and harder to report your taxes at the end of the year. Luckily, there is a solution.
Cryptocurrency tax software like CryptoTrader.Tax can make filing your tax return stressfree. There’s no need to spend hours trying to calculate your capital gains. You can automatically integrate your transactions from exchanges like Coinbase, Kraken, and Gemini in minutes.
Once you’re sure your information is accurate, you can plug your generated reports into filing software like TurboTax or TaxAct for cryptocurrency.
Let’s cap things off by answering a few frequently asked questions about minimizing crypto taxes.
How can I avoid cryptocurrency taxes?
While there is no legal way to avoid cryptocurrency taxes, strategies like tax-loss harvesting can help investors reduce their tax liability.
Can the IRS track Bitcoin?
Yes. Transactions on the Bitcoin blockchain are publicly available, and it’s been reported that the IRS uses AI and data analytics to detect potential tax fraud.
Do you have to pay taxes on cryptocurrency if you spend it?
Yes. Spending cryptocurrency is considered a disposal event and may require you to pay capital gains tax, depending on how your tokens have fluctuated in price since you originally received them.
Looking for a platform that can help you identify tax-loss harvesting opportunities and legally reduce your tax bill? Try CryptoTrader.Tax. More than 100,000 investors from all across the world use the software to make tax reporting more stressfree than ever.
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