As the end of the year comes, tax season is just around the corner. If you’re doing cryptocurrency and earning a good chunk of change, reducing crypto taxes is vital. Not only do you get more out of the money you earn, but you also make sure you save money on taxes without doing anything illegal.
If you’re looking to slash your crypto tax without having the IRS on your tail, you need to know what you can do. Here are 5 tips for cutting down your cryptocurrency taxes and squeezing more out of every token.
Crypto Taxes Explained
Taxes on crypto are a great deal more complicated than regular taxes. The IRS treats cryptocurrency as property, meaning you must pay capital gains taxes when you sell. Any crypto owned and sold before 12 months will be taxed as short-term capital gains.
Cryptocurrency profits are taxable, just like any gains from stocks or bonds. This means that your earnings are taxable as ordinary income. When you trade cryptocurrency, the cryptocurrency gains become realized gains. That means you have to pay taxes on them, just as if you had sold the stock or bond.
Capital gains tax improves when they move from short-term to long-term gains. The tax differential is vast, which means there are several strategies that you can employ to cut down your crypto tax bill.
1. Hold Until Short-Term Gains Become Long-Term Gains
The IRS has a tough stance on crypto taxes, especially since they change right around tax time. However, there are two different tax types when it comes to cryptocurrencies.
First, there’s the short-term gain. This refers to cryptocurrency that you hold for less than one year. The IRS taxes short-term capital gains at 7 tax brackets, from 10% and up to 37%. However, if you hold the token for more than 12 months, your gains will be taxed at up to 0% up to a specific amount.
When deciding on which to buy and hold, choosing long-term gains is usually a good idea. However, investors tend to be too impulsive when it comes to cryptocurrencies. Fluctuations in cryptocurrency can make people nervous, especially if there are heavy gains or losses to be had.
2. Offset Capital Gains with Capital Losses
As with other investments, you have to invest responsibly if you’re looking to reduce crypto taxes. That being said, there are things you can do to reduce your crypto taxes. For example, you can offset your capital gains against your capital losses, also known as tax-loss harvesting.
Capital losses are the negative profits you make when you sell a security at a loss. For example, if you bought Bitcoin at $7,000 and sold it at $6,000, you would have suffered a capital loss of $1,000. You can use that $1,000 loss against capital gains for the year.
Ensure that you need to offset losses of the same type first as you recognize investment losses. Short-term losses are offset against short-term gains and long-term losses against long-term gains.
The good thing about this is if your short-term losses exceed short-term gains, you can use them against long-term gains too.
3. Donate Appreciated Cryptocurrency to Charity
Another great way to reduce crypto taxes is to donate your cryptocurrency to charities. The IRS allows donations of property to nonprofits, and cryptocurrency is property. When you donate your cryptocurrency to a nonprofit, you get a receipt for the donation. You’re then able to deduct the value of the contribution from your taxable income.
Now, when you donate cryptocurrency to a charity, you have two choices. You can either send it to the charity directly or send it to a Bitcoin wallet, such as Bitcoin IRA. When you donate to a wallet, you get a receipt from the wallet for your donations. This receipt is deductible from your taxes.
All you need to do is keep records of your donations, like Form 8283 or Form 1040, given to you by the IRS. That form will list all of the charity donations you made that year, as well as any gains or losses.
4. Hiring a Tax Professional
If you’re looking to reduce crypto taxes, hiring a tax professional is the best way to go about it. Not only will it help you get the most tax out of every cryptocurrency trade, but it’ll also help you file your taxes more efficiently.
A professional will handle all your crypto taxes for you, which will reduce crypto taxes for you. Tax professionals can also help you make wise investment choices, which will result in fewer taxes. If you have a ton of crypto, it makes sense to hire someone to help you manage your cryptocurrency taxes.
Even if you hire a tax professional, you still have a responsibility to yourself. When it comes to cryptocurrency, maintaining records is crucial. Having your documents organized, with receipts of all transactions, can save you a lot of money in the long run.
5. Gift Crypto To Family Members
One mistake that many investors make is forgetting that cryptocurrency is property. Therefore, your token gains are taxable. If you have a significant other, you can gift them your crypto. This avoids any tax issues as long as it’s done correctly.
Cryptocurrency gifting is a fantastic way to reduce crypto taxes. However, before you do this, make sure you consider all the angles. In December 2018, the IRS ruled that cryptocurrency gifts are subject to gift taxes.
This means that if you give someone a gift of cryptocurrency, you will be taxed again for it. However, there is a way around this. As long as you don’t give your family member more than $13,000 worth of cryptocurrency, you won’t be taxed.
The Bottom Line
When it comes to cryptocurrency, taxes should always be on your mind. At the end of the day, slashing your crypto taxes comes down to two things: investments and tax planning. However, there are several ways that you can avoid crypto taxes.
These strategies can help you make wiser cryptocurrency investments and reduce your crypto taxes in the process. Now that you know how to minimize crypto taxes, you can enjoy reducing your tax bill and getting more money out of the process.