10 Simple Strategies to Reduce Your Crypto Tax Bill

What is the process of cryptocurrency taxation?

Let's review the foundations of bitcoin taxation before moving on to tax minimization options.

Like stocks and real estate, cryptocurrency is classified as property by the Internal Revenue Service (IRS). As a result, both capital gains and ordinary income taxes apply.

If you sell your bitcoin, you'll have to pay capital gains tax on the profit. When it comes to getting rid of your cryptocurrency, you may sell it for fiat, trade it for another, or use it to purchase products and services. If the value of your tokens has increased since you received them, you'll owe taxes on the appreciation.

If you're making money in cryptocurrency, you'll have to pay regular income taxes. It is possible to make money by staking or mining, referral incentives from crypto applications, or paying for your labor in crypto.

Let's look at ways to lower your cryptocurrency tax burden.

Harvest your losses 

To lower your tax cost, you can use tax-loss harvesting to reduce the value of part of your bitcoin assets.

When someone sells cryptocurrencies at a loss in order to claim tax savings, this practice is referred to as "tax-loss harvesting.”

Cryptocurrency has an advantage over other asset classes regarding tax-loss harvesting. The 'wash sale rule,' which specifies that investors cannot claim capital losses if they purchase the identical stock 30 days before or after the sale, applies to stocks.

Cryptocurrency is now exempt from the 'wash sale rule' since it does not exist. Investors may now sell cryptocurrencies like Bitcoin, claim a capital loss, and then repurchase their tokens.

Make long-term financial commitments.

To reduce your tax burden, you should wait until you have long-term assets before selling them. Remember that if you've kept your crypto for more than a year, you'll pay less in capital gains tax.

In the long term vs. in the short term

It's vital to keep in mind that the value of cryptocurrencies fluctuates. If you think the price of your home will fall over the next several months, you could be better off selling now rather than waiting. When making trading selections, you should consider the preferred long-term capital gains rate.

Take advantage of a low-income year to make money.

Be aware that your bitcoin disposal tax rate depends on your income bracket for the year you made the transaction.

Investors may opt to profit from bitcoin gains while their income is modest.

This might have a significant impact on your tax bill in some cases. Those who make less than $40,000 a year are exempt from paying taxes on the sale of cryptocurrencies. We go over why in this article.

Give cryptocurrency presents

Gifts of cryptocurrency have their tax advantages. Giving Bitcoin away as a gift is tax-free, so long as you don't use it yourself. A gift tax return is required for presents with a fair market value of more than $15,000. However, this form is largely for informative purposes.

This can appear to be an extreme measure. For those who wish to share their money with loved ones, crypto gifts are an excellent method. Note, however, that they include a crypto gift tax!

Tax benefits are also available to recipients. Getting a cryptocurrency as a gift is not a taxable event.

But the receiver must maintain track of the cryptocurrency's value at the time of their donation. The recipient must record any gain or loss based on these numbers when the cryptocurrency is sold.

Use Your IRA or 401k to Buy and Sell Cryptocurrencies

The goal of a retirement account is to provide a tax-free way for investors to accumulate money. Consider that you won't be able to cash out until you reach a specific age.

However, all profits and withdrawals from traditional retirement funds are taxed. Taxed income can finance a Roth retirement account, but all profits and withdrawals are tax-exempt.

Selling assets in a Roth IRA, for example, will not trigger capital gains tax until the proceeds are taken out of the account.

Most IRA providers, even some of the most well-known, do not directly allow users to invest in cryptocurrencies. Fortunately, other options exist.

With self-directed IRAs, you may put your retirement funds into other assets, including real estate, gold, and cryptocurrency. All IRAs, including self-directed IRAs, can be contributed $6,000 a year if you are under 50.

Self-directed IRAs can invest in cryptocurrencies through a variety of means. iTrust Shares, Bitcoin IRA, and Coin IRA are among the most popular options.

Hire a CPA that specializes in cryptocurrency (Certified Public Accountant)

When you're on your own, figuring out the tax law may be daunting. As a result, you may want to consider working with a specialist.

For many investors, the cost of hiring an accountant is well worth the investment. A cryptocurrency-savvy accountant can illuminate tax-saving methods for you. Set up a free one hour consultation now.

Make a monetary donation

Donating cryptocurrency to worthy charities may be a rewarding experience. Additionally, the IRS permits crypto investors to take advantage of a "double-dipping" tax benefit when donating in the form of cryptocurrency.

Donating bitcoin is one of the few times when cryptocurrency disposal is not taxed. It is also possible to deduct the fair market value of bitcoin contributed after a year of holding it. Read our article on the crypto gift tax to learn more.

Take out a bitcoin loan

Let us know how we can help you with your bitcoin withdrawal needs. Use your cryptocurrencies as collateral instead of cashing out. We’re always open for a free one hour consultation.

Borrowing money to buy bitcoin, on the other hand, does not constitute a taxable event like selling your bitcoin.  Based on the interest rate and the circumstances of your financial status, getting a loan might wind up saving you money over the long run.

Relocate to a low-tax jurisdiction

It may seem a drastic move, but some investors prefer to migrate to locations with lower tax rates to save money on their investments.

Little to no income taxes are imposed on residents of the following states: Alaska, Florida; Nevada; New Hampshire; South Dakota; Tennessee; Texas, Washington, and Wyoming (though New Hampshire taxes interest and dividends).

In certain cases, investors migrate their entire families to a new country. For the time being, bitcoin sales are not taxed in Portugal. El Salvador, on the other hand, has stated that all Bitcoin profits would be tax-exempt.

Avoid Tax Crypto Tax Pitfalls

With the 2020 tax year coming to a close, more and more people are realizing that their crypto investments are going to be an issue. Since the federal government has set its laser sights on documenting and taxing crypto assets, many retail investors are simply finding that they haven’t properly prepared to pay their dues. Crypto tax pitfalls seem inevitable, but there are many solutions available if one knows where to look… or who to ask.

Learn more about crypto tax pitfalls here.