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Famously, two things are certain: death and taxes. Crypto taxes are no exception. Regarding taxes and cryptocurrency, there are useful tactics you can implement to lower your tax liability and schedule future cryptocurrency activity to minimize future tax obligations.
What follows is a detailed list of methods we frequently recommend to cryptocurrency traders to help them understand how to stay out of trouble with cryptocurrency taxes.
There are numerous legal approaches to avoid crypto taxes. Here are the top five lawful strategies for US taxpayers to reduce and avoid cryptocurrency taxes. These may also be useful to foreign taxpayers, who can consult our country guides to learn more about minimizing cryptocurrency taxes in various jurisdictions.
The rise of cryptocurrency has revolutionized the financial landscape, offering investors a new asset class with the potential for significant returns. However, with great rewards often come great responsibilities, and in the case of crypto, one of those responsibilities is paying taxes on your gains. While there’s no magic bullet to completely avoid taxes on crypto, there are several strategies you can employ to minimize your tax burden and maximize your profits.
Understanding Crypto Taxes: The Basics
Before diving into tax-saving strategies, it’s crucial to understand the fundamentals of crypto taxation. In most countries, including the United States, cryptocurrency is treated as property for tax purposes. This means that any gains you realize from selling, trading, or using crypto are subject to capital gains tax. The specific tax rate you’ll pay depends on your income level and the length of time you held the asset.
For example, in the United States, short-term capital gains (assets held for less than one year) are taxed at your ordinary income tax rate which can be as high as 37%. Long-term capital gains (assets held for more than one year) are taxed at a lower rate, ranging from 0% to 20% depending on your income level.
Strategies to Minimize Crypto Taxes
Now that you have a grasp of the basics, let’s explore some strategies you can use to reduce your crypto tax burden:
1. Buy Items on BitDials:
BitDials is a platform that allows you to purchase everyday items using cryptocurrency without triggering a taxable event This is because you’re not technically selling your crypto; you’re using it as a form of payment. However, it’s important to note that BitDials currently has a limited selection of items available, and the platform may not be suitable for all your spending needs
2. Invest Using an IRA:
Investing in cryptocurrency through a traditional or Roth IRA can offer significant tax advantages. Contributions to a traditional IRA are tax-deductible, and your earnings grow tax-free until you withdraw them in retirement. With a Roth IRA, you don’t get an upfront tax deduction, but your withdrawals in retirement are tax-free. However, there are income limitations for contributing to IRAs, and you’ll need to choose an IRA custodian that allows cryptocurrency investments.
3 Have a Long-Term Investment Horizon:
As mentioned earlier, long-term capital gains are taxed at a lower rate than short-term capital gains. Therefore, holding your crypto for more than one year before selling can significantly reduce your tax liability. This strategy is particularly effective for investors who believe in the long-term potential of cryptocurrency and are willing to ride out market fluctuations.
4. Gift Crypto to Family Members:
The IRS allows you to gift up to $16,000 per year to any individual without incurring gift tax. This means you can transfer your crypto to family members without triggering a taxable event. However, if the recipient sells the crypto for a profit, they will be responsible for paying capital gains tax on the increase in value.
5. Relocate to a Different Country:
Some countries, such as Portugal and Singapore, have more favorable tax regimes for cryptocurrency than others. If you’re willing to make a significant lifestyle change, relocating to one of these countries could help you reduce your crypto tax burden. However, it’s important to carefully consider the costs and benefits of moving to a different country before making a decision.
6. Donate Crypto to Charity:
Donating cryptocurrency to a qualified charity is a tax-deductible expense. This means you can reduce your taxable income by the fair market value of the crypto you donate. Additionally, you won’t have to pay capital gains tax on the appreciation of the asset.
7. Offset Gains with Appropriate Losses:
If you’ve incurred capital losses on other investments, you can use them to offset your crypto gains and reduce your taxable income. This is known as tax-loss harvesting, and it can be an effective way to minimize your tax burden, especially in years when the crypto market experiences a downturn.
8. Sell Crypto During Low-Income Periods:
Your capital gains tax rate is based on your income level. Therefore, selling your crypto during a year when your income is lower can result in a lower tax rate. This strategy can be particularly beneficial if you anticipate a significant increase in your income in the future.
While completely avoiding taxes on crypto may not be possible, by employing the strategies outlined above, you can significantly reduce your tax burden and maximize your profits. Remember to stay informed about the latest tax regulations and consult with a qualified tax professional to ensure you’re compliant with all applicable laws.
Hold crypto assets long term
Lower long-term capital gains tax rates can be obtained by holding your cryptocurrency assets for longer than a year. When you decide to sell your cryptocurrency, you may be able to take advantage of tax benefits if you use this investment strategy.
The tax strategy for cryptocurrencies is straightforward: holding for at least a year pays off, at least in terms of your tax liability. Nevertheless, you are at the mercy of the market, so it might be wiser to sell your cryptocurrency when it has increased significantly in value rather than holding onto it for future gains.
Keep complete records of your crypto transactions
To calculate the cost basis of your cryptocurrency acquisitions and to ensure proper tax reporting, you must keep accurate records of all cryptocurrency transactions. Maintaining comprehensive and well-structured documentation can guarantee adherence to tax laws and avert possible sanctions.
Use these techniques to create a winning tax plan, stay clear of cryptocurrency taxes, and improve your overall tax status.
How to Pay Zero Tax on Crypto (Legally)
How do you avoid tax on cryptocurrency?
There are various ways to avoid crypto taxes – including IRAs, gifting, donations, loss-harvesting, and using annual capital gains allowances. How is crypto taxed? Profits made on cryptocurrency investments that have been sold are subject to capital gains tax. How can you legally pay less tax on Bitcoin?
Can crypto investors avoid paying taxes?
In terms of the former, the way that investors can avoid paying taxes is not to sell their crypto holdings. Tax is only calculated on the capital gains made from an investment position – and capital gains only occur when the trade is exited, and a profit is made. If the position is never exited, then there’s nothing to tax.
How to reduce crypto tax?
If you’re looking to reduce crypto tax, don’t cut corners. Failing to report crypto income is considered a violation of federal law, leading to penalties. For short-term gains (365 days or less), they are taxed as ordinary income. For long-term gains (for more than 365 days), they are subject to long-term capital gains tax rates.
Do you have to pay tax on crypto?
This allows investors to cash out a certain amount of crypto each year without needing to pay taxes on the profits. For example, the UK has a 2023 capital gains tax allowance of £6,000. In this scenario, let’s say an investor bought £10,000 worth of crypto, which is now worth £25,000.