Cryptocurrency is classified as “property” for federal income tax purposes. In the case of the typical investor, this means that the IRS considers it an asset capitalized. This means that cryptocurrency taxes are not different from taxes you have to pay on other gains you earn from the exchange or sale of capital assets.
When you think to buy any capital asset, whether a stock or bond, house, widget Dogecoin, Bitcoin, or any other investment. You create an amount equal to your price to purchase it. If you decide to sell it, you evaluate the proceeds from your sale against the base to figure out if you suffer either a capital loss or capital gain. If your sales exceed your basis, then you’ve got a capital increase. If the reverse is true, you suffer an investment loss.
It is also essential to think about the period you owned the asset. Based on the length of time you keep your crypto, and the number of your losses or gains are deemed “short-term” or “long-term.” This distinction can be a significant factor in the amount you’ll have to pay in tax on crypto.
- Short-Term Capital Gains and Losses. If you purchase and sell an asset in 365 days, it is a short-term profit or loss. Short-term gains will be subject to taxation at the same rate that you pay for regular income, including salaries, wages commissions, and other income earned. The IRS offers seven tax brackets for steady income from 10 percent to 37% by 2021.
- Long-Term Capital Gains and Losses. If you purchase an asset and then sell it in one year and a half, the difference between the sale price and the basis is a long-term capital gain or loss. Tax is usually lower on payments over the long term than an immediate gain since taxes are typically lower. Three tax rates apply to capital gains over a long time, which are 0%, 15%, and 20%. The tax rate you pay will depend on the income you earn.
How to Avoid Crypto Taxes:
1. Purchase crypto using an IRA
It is possible to put your money into cryptocurrency tax-free by investing it into a self-directed IRA. Most IRAs permit you to invest in conventional investments, such as mutual funds, stocks, and exchange-traded funds (ETFs). Self-directed IRAs are types of IRAs that allow you to invest in specific assets, like precious metals, cryptocurrency, and real property.
2. Sell In a Low-Income Year
While you wait the time for gains from cryptos to transform into a long-term perspective, you may want to look at a different aspect of timing, such as selling in an income-strapped year.
Selling during a low-income year will help you pay taxes on short-term and long-term gains. If you earn short-term gains which are tax-deductible as regular income, there won’t be any other income to add to push you into higher tax brackets.
3. Reduce Your Taxable Income
In a similar way to selling your investment properties during a year of low income, Another tried and tested tax-saving method is to reduce your tax-deductible income. This involves scouring the tax code to find tax credits and deductions, which can lower your tax-deductible payment down.
4. Make sure you declare your crypto as income
If you get cryptocurrency in exchange for goods or services, or mining cryptocurrency, taxes work differently. In such cases, your cryptocurrency is considered income when it comes to receiving it. It is your responsibility to keep track of and disclose the fair value of the currency you received and include it as income on your tax return.
5. Hold onto your crypto for the long term
If you’re investing in cryptocurrency and aren’t earning income, you don’t have to pay taxes on it until you decide to sell. Taxes can be avoided entirely if you don’t sell any cryptocurrency in the tax year in which you are.
6. Offset crypto gains with losses
You can either realize a gain or loss when you sell your investment. The amount you get is contingent upon the amount you paid for the asset and the cost basis. The great thing concerning tax law in the U.S. tax code is that capital gains and losses can offset one another. If you decide to use this advantage, it’s called tax-loss harvesting.
7. Sell assets in the year of low income
When you make capital gains that are long-term or short-term, your income will determine the tax rate you have to pay. The lower your tax-deductible payment is, the less the tax rate you pay. You could save money in taxes by selling cryptocurrencies that you know will generate gains when you are sure you will pay tax at a lower rate.
8. Donate to charity
Donations to a charitable organization that is qualified can be tax-deductible if they can itemize deductions. To be eligible, you must hold the asset for a minimum of one year before donating it.
For example, the transfer of property, for instance, cryptocurrency. It is common to take the fair value of the cryptocurrency. However, you do not have to pay taxes on capital gains in the process.
There are some limitations on the amount of deduction you can deduct, so consult with your tax advisor to find out how a donation might assist the tax burden.
9. Send gifts to your family
Giving cryptocurrency as a gift can aid you in avoiding tax on the profits. The recipient will not have to pay gift tax as well. In the current rules, you can give any amount up to $15,000 annually without having to file a gift tax return or paying any gift tax. If you do exceed the limit of $15,000, however, you won’t be required to pay taxes on gifts unless you’ve exhausted the entire $11.7 million exemption to estates throughout your lifetime.
10. Grab it until you’re dead
If you’re not required to access the funds you’ve invested in the cryptocurrency you own, you may prefer to utilize it to build wealth using a generational instrument for the future. You have to be convinced of the long-term benefits of cryptocurrencies for this strategy to succeed. However, this method could give you a significant tax advantage.