10 Simple Strategies to Reduce Your Crypto Tax Bill

Are you looking for an easy way to reduce your crypto tax bill?

There is no way to avoid crypto taxes completely. There are serious consequences for tax fraud and tax evasion.

There are strategies that can help investors minimize their tax burden, although it is not legal to do so. This article contains tips on how to reduce the amount of taxes you owe on your cryptocurrency earnings.

Cryptocurrency Taxes in the United States

Since the IRS treats cryptocurrencies as property, they are subject to capital gains taxes. If you earn money through cryptocurrency, you must report any capital gains or losses and pay the appropriate cryptocurrency tax rates. The amount of tax you owe on your cryptocurrency profits depends on how long you held the position (for example, the time between buying and selling) and your individual tax bracket during that year.

1. Short-Term Capital Gains Tax

If you held it longer than a year, then you’re subject to the lower capital gains rate. Short-term capital gains are subject to ordinary income tax rates, while long-term capital gains are subject to lower capital gains rates. tax rates for short-term holders are much higher than those for long-term holders

2. Long-Term Capital Gains Tax:

The tax rates for long-term holders of cryptocurrencies are typically lower than the rates for those who hold the currencies for a shorter period of time.

Crypto and Taxes: Determining if You Owe Taxes on Cryptocurrency

If you have spent your cryptocurrency and it has increased in value, you will owe taxes on it. The following are the many sorts of taxable events associated with bitcoin transactions:

Exchanging cryptocurrency for fiat currency
Buying products or services with cryptocurrencies
Trading various types of cryptocurrencies

This is only a taxable event if the value of your cryptocurrency has increased. You need to know the cost basis of your crypto in order to figure out if you owe any taxes on it. You compare the price you paid for the cryptocurrency to the price you sold it for, or the amount you received when you used it.

An Illustration

Suppose you bought crypto worth $15,000 last year.

Now if you sell it for $25,000, youâ??d have to report taxes on the $10,000 profit that you made
Alternatively, if you use your crypto asset to buy any product or service worth, for example, $22,000, youâ??ll have to pay taxes on $7,000
Also, if you trade the crypto for a higher sum, you will have to report the difference between the two amounts

Cryptocurrency taxes get tricky when coins are traded. A cryptocurrency transaction is a taxable activity. If you make a profit by exchanging one cryptocurrency for another, you must report that profit on your tax return in US dollars.

When you are trading cryptocurrencies, you need to be aware of how much money you have made or lost in US dollars. Formatting your cryptocurrency transactions in this way will enable you to correctly document your earnings and losses. Bitcoin stocks may be a preferable option for those who wish to keep things simple, as they make it easier to track profits and losses than purchasing and selling individual coins.

How Is Cryptocurrency Taxed?

The process of calculating a capital gain or loss involves determining the cost basis – the original value of an investment for each transaction. This means that you must take into account the cost of entering the trade when working out your profit or loss, as well as any other charges such as fees, commissions, or other costs expressed in US dollars.

The tax on cryptocurrency can be calculated by taking the purchase price in USD, adding any fees, and then dividing by the quantity.

You must record four pieces of information for each transaction:

The date and time each unit was acquired.
Your cost basis and the fair market value of each unit at the time it was acquired.
The date and time each unit was sold, exchanged, or otherwise disposed of.
The fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or value of the property received for each unit.

The gain or loss from cryptocurrency is calculated by subtracting how much it cost to buy from its current market value. For example, if you bought Bitcoin for US$500 and sold it later for US$600, you would have a $100 capital gain on the transaction. The transaction may be subject to a 15% capital gains tax rate, which would result in a $15 tax bill.

The order in which you sell your cryptocurrencies can either be “first-in, first-out” (FIFO), or you can specifically identify when the cryptocurrencies being sold were acquired. The best option depends on if you want to report a profit or loss from the sale. For example, if you have a capital loss, you may be able to take advantage of tax-loss harvesting to lower your tax bill at the end of the year.

10 ways to minimize your crypto tax liability

Let’s break down ten strategies that can help reduce your crypto tax burden.

1. Harvest your losses

If your cryptocurrency has lost value, tax-loss harvesting can help reduce your overall tax bill.

This is a method of saving on taxes by selling your cryptocurrency at a loss. Watch this video to see how it works.

When it comes to tax-loss harvesting, cryptocurrency has an advantage over other asset classes. This is because cryptocurrency is not taxed until it is sold, so tax-loss harvesting can be done more easily. If an investor buys a stock and then sells it later for a profit, they are subject to the ‘wash sale rule’. This rule states that the investor cannot claim the capital loss from selling the stock if they buy the same stock again 30 days before or after the sale.

This means that if you sell your crypto and buy it back within 30 days, you can still deduct the loss on your taxes. The ‘wash sale rule’ does not currently apply to cryptocurrency, which means that if you sell your crypto and buy it back within 30 days, you can still deduct the loss on your taxes. Cryptocurrency investors can sell their tokens, claim the capital loss, and then buy them back.

2. Invest for the long term

Discarding your assets when they are considered long-term property will help lower your taxes. You will pay less capital gains tax if you have held your cryptocurrency for more than 12 months.

Cryptocurrencies are known for being volatile, so it’s important to keep that in mind. You may get a better price if you sell now rather than waiting for a potential price drop in the next few months. You should still keep the rate of return in mind when making future investment decisions.

3. Take profits in a low-income year

You will be taxed based on your income bracket for the year when you dispose of your cryptocurrency.

Some investors choose to sell their cryptocurrency when their personal income is low in order to take advantage of the profits they’ve made.

This means that in some cases, you could end up paying less in taxes. The tax rate for cryptocurrency sold after one year is 0% for those who earn less than $40,000.

4. Give cryptocurrency gifts

Cryptocurrency gifts come with their own tax benefits. If you give cryptocurrency away as a gift, you will not have to pay any income taxes. If the fair market value of a gift is more than $15,000, you have to submit a gift tax return, but this is mainly for information purposes.

This might seem like a drastic step to take. 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. If you receive a cryptocurrency as a gift, it is not considered a taxable event.

It’s important for the person who received the crypto currency as a gift to keep track of the price at the time they received it. The amount of Bitcoin or other cryptocurrency received as income is used to calculate any gain or loss when the crypto is sold.

5. Buy and Sell Cryptocurrency Via Your IRA or 401-K

Retirement accounts are created to assist individuals in growing their riches without having to pay taxes. You will not be able to access your savings until you reach a specific age.

Tax-free income is used to fund traditional retirement accounts, but all gains and withdrawals from these accounts are taxed. While Roth retirement accounts are funded with taxed income, the gains and eventual withdrawals are tax-free.

This means that if you sell your capital assets in a Roth IRA, you will not have to pay any capital gains taxes until you withdraw your earnings.

Many IRA providers do not allow investors to directly invest in cryptocurrency. Luckily, there are alternatives.

Self-directed IRAs allow investors to store their retirement savings in alternative investments such as real estate, precious metals, and cryptocurrencies. This type of account gives the investor more control over how their money is used, as well as a broader range of options for how to grow their savings. If you are under the age of 50, you are allowed to contribute $6,000 a year split between any number of IRAs, including self-directed IRAs.

There are a few different ways to set up a self-directed IRA that will allow you to invest in cryptocurrencies. Some popular investment choices for IRAs include iTrust Shares, Bitcoin IRA, and Coin IRA.

6. Hire a Crypto specialized CPA (Certified Public Accountant)

The tax code can be overwhelming to deal with on your own. You may want to consider enlisting the help of a professional if you need assistance.

Many investors find that accountant is a quality step to take, even if it may be expensive. An accountant who knows a lot about cryptocurrency can help you save money on taxes by finding ways to reduce your tax burden.

7. Give a cryptocurrency donation

Donations of cryptocurrency can be a great way to help causes that are important to you. Not only does donating crypto allow you to get a tax deduction, but it also allows you to avoid paying capital gains tax on the appreciation in the value of your crypto.

Cryptocurrency donors can enjoy a tax break when they dispose of their cryptocurrency.

This means that if you donate cryptocurrency that you have held for more than a year, you can deduct the fair market value of the coin at the time of the donation.

8. Take out a cryptocurrency loan

Looking to cash out some of your cryptocurrency profits? If you are considering taking out a loan, you may be able to use your cryptocurrency as collateral. This could give you access to better loan terms and may be a better option than using traditional methods.

If you take out a loan using your cryptocurrency as collateral, it is considered a non-taxable event. The IRS has not yet provided explicit guidance on loans taken out using cryptocurrency as collateral. If you are in a high income bracket and the interest rate is low, taking out a loan may help you save money.

9. Move to a low-tax state/country

Some investors choose to relocate to different regions with more favorable tax rates.

There are ten states with no income tax- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Out of these, New Hampshire taxes interest and dividends.

Some investors will go as far as to relocate themselves to different countries. Portugal currently does not have any taxes in relation to income received from cryptocurrency disposals. El Salvador has announced that it will not tax profits made from Bitcoin.

10. Leverage crypto tax software

Manually calculating your gains and losses from trades made throughout the year can quickly become difficult, as you need to identify the US dollar value for each trade.

This makes it more difficult to find chances to lower your taxes via tax-loss harvesting, and more complicated to file your taxes at the end of the year. Luckily, there is a solution.

Cryptocurrency tax software can help take the stress out of filing your tax return. You don’t need to spend hours trying to calculate your capital gains. Instead of wasting time manually entering your transactions from exchanges like Coinbase, Kraken, and Gemini, you can automatically integrate them in minutes.

After verifying that your information is accurate, you can enter your crypto tax reports into filing software such as TurboTax or TaxAct.

How to Report Cryptocurrency Taxes In The USA?

In the United States, cryptocurrency is taxed as property. This means that capital gains and losses from buying, selling, or exchanging cryptocurrency are taxed just like gains and losses from buying, selling, or exchanging other property, such as stocks or real estate. The relation between cryptocurrency and taxes is a little tricky. Cryptocurrency is not taxed if it is simply held. You are only liable to report taxes on cryptocurrency when you profit from selling it, which is considered a taxable event. Also, there are a number of non-taxable transactions. Letâ??s take a look:

There are four types of taxable events in crypto:

Selling crypto for fiat (BTC to USD, ETH to GBP)
Trading crypto (BTC for ETH, like-kind exchanges are disallowed)
Using crypto to purchase a good/service
Receiving crypto as a result of fork, mining, airdrop, or in exchange for goods/services (included as income)

There are also a few notable non-taxable crypto events:

Purchasing crypto with fiat
Donating crypto to a tax-exempt organization (carryover basis)
Gifting crypto (carryover basis, up to $15k)
Transferring crypto from one wallet that you own to another that you own

Some crypto events are subjected to income taxes:

Revenue from cryptocurrency is taxed in the same way as regular income, according to the market value of the currency on the day it is received. The following are some of the most popular examples of crypto income:

Receiving cryptocurrency as payment for a service
Earning benefits via mining cryptocurrency
Earning benefits via staking cryptocurrency
Receiving interest payments when lending crypto

Cryptocurrency is taxed the same as any other type of transaction. If you use cryptocurrency to purchase everyday items, such as a cup of coffee, you are still required to record the transaction and calculate the capital gain or loss for tax purposes. There are currently no exceptions for transactions below a certain threshold or for certain types of transactions.