How to reduce cryptocurrency tax bill 2018
- 06.05.2021
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Income events include earning staking or mining rewards, earning referral bonuses from crypto apps, or receiving compensation for your work in crypto. For more information, check out our complete guide to cryptocurrency taxes. Harvest your losses If some of your cryptocurrency holdings have decreased in value, then tax-loss harvesting can be a great way to decrease your overall tax bill.
Tax-loss harvesting is the practice of intentionally selling your cryptocurrency at a loss to claim tax savings. At this time, investors can sell cryptocurrencies like Bitcoin, claim the capital loss, then buy back their tokens. Invest for the long term The simplest way to minimize your tax burden is to wait to dispose of your assets until they are long-term property. Still, you should keep the preferred long-term capital gains rate in mind when making trading decisions.
Take profits in a low-income year Remember, the tax rate you pay on cryptocurrency disposals is based on your income bracket in a given year. As a result, some investors choose to take profits on cryptocurrency gains in years where their personal income is low. In some circumstances, this can make a big difference in terms of your tax bill. Give cryptocurrency gifts Cryptocurrency gifts come with their own tax benefits. If you give cryptocurrency away as a gift, you have no income tax obligation.
This might seem like a drastic step to take. However, 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. Receiving a crypto gift is not considered a taxable event. These amounts are used to calculate any gain or loss for the recipient to report when the crypto is sold. For more information, check out our blog on how cryptocurrency gifts are taxed.
Traditional retirement accounts are funded with tax-free income, but all gains and eventual withdrawals are taxed. Meanwhile, Roth retirement accounts are funded with taxed income, but all gains and eventual withdrawals are tax-free. For example, if you decide to sell your capital assets in a Roth IRA, you will not be required to pay capital gains tax until you withdraw your earnings.
Unfortunately, many well-known IRA providers do not give investors the opportunity 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. There are several options available for self-directed IRAs that allow investors to invest in cryptocurrencies. Though it may be an expensive step to take, many investors find that a quality accountant is well worth the money.
An accountant well-versed in cryptocurrency can cover their own costs by identifying strategies to minimize your tax burden. Give a cryptocurrency donation Cryptocurrency donations can be a great way to contribute to meaningful causes. Donating cryptocurrency is one of the few occasions when disposing of cryptocurrency is not taxed.
Additionally, cryptocurrency donated after a year of holding can be deducted based on its fair market value at the time of the donation. For more information, check out our guide on how crypto donations are taxed. Take out a cryptocurrency loan Looking to cash out some of your cryptocurrency profits? Because cryptocurrency is a capital asset, each taxable event from transacting with cryptocurrency needs to be reported on this form. Once completed, the net gain should be transferred to Schedule D.
CoinLedger automatically builds out this necessary form for its users, and you will receive a copy of this when your client sends you their cryptocurrency tax report from within the application. These CSV files contain the data that makes up the in spreadsheet format.
Checkout our complete guide on how to import your clients cryptocurrency forms into Drake accounting software here. Income Report If your client received crypto from events like mining, airdrops, or fork events, they will also receive an income report that reports the fair market value of this cryptocurrency at the time it was received. You can use the income report to report on the amount of income earned in the form of cryptocurrency for the given year.
This should be reported within the clients tax return. Cryptocurrency Specialized Accountants As the crypto economy continues to unfold and accelerate, many accountants are starting to specialize in crypto taxes and build their tax practice around it. Currently, the demand for cryptocurrency tax services largely outweighs the supply, so educated professionals are picking up highly profitable clients at a fast rate.
If you would like to be added to our directory of crypto tax professionals to start servicing these clients, please reach out to our team today at help coinledger. For a deeper dive into cryptocurrency taxes, please read our Guide to Cryptocurrency Taxes. Disclaimer - This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
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How to Avoid the Crypto Tax Trap as Seen in 2017/2018 - Crypto Market Crash 2021
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September 12, Many cryptocurrency investors and taxpayers view the tax system as a drain on their wealth. I have a different perspective on the tax code. If you follow the rules, you should enjoy legal tax deductions and be well-prepared for an audit. The majority of the tax law is actually intended to reduce your taxes — not increase it.
The tax code is an incentive system designed by the government that serves as a map to show you how to create and keep wealth for yourself. Building wealth is not about what you make but what you keep. Once you understand what the government wants you to do in order to reduce your taxes, you can use this information in your wealth and investment strategy.
Below we will review some of the tax strategies that apply to cryptocurrency investors. The key with any of these strategies is to be proactive not reactive. If you wait until you are filing your taxes during March or April to think about your taxes, you are too late and Uncle Sam wins. You need to consider and implement a foundational tax strategy for your portfolio well before tax season and also before liquidating any large amount of holdings. Know Your Numbers The key to properly implementing any tax strategy is first knowing where you currently stand.
This means that you have to accurately calculate your portfolio to date to know what you owe in taxes currently based on your trades and know the cost basis of your current holdings. Both your cost basis and current tax liability will drive any tax strategy.
Additionally, accurately calculating your portfolio will protect your assets from interest and penalties charged by the IRS. It is no news that the IRS is zeroing in on cryptocurrency investors and the efforts here will only increase with time.
Make sure you work with an experienced cryptocurrency CPA and not an accountant who is rushing into the space to make a quick buck when calculating and analyzing your portfolio. Strategically Minimize Capital Gains The simplest way to minimize capital gains is to avoid triggering additional capital gains. The current taxation structure that applies to transacting in cryptocurrency makes this difficult since anytime you trade or spend cryptocurrency this is a taxable event.
One thing to keep an eye on here is a new bill called HR introduced on the House floor very recently. This would be great for cryptocurrency investors and the industry if this was passed. I am not very hopeful but watching this closely. HR , also called the Virtual Value Tax Fairness Act of would restore this exemption for digital assets under a five-year sunset provision. In the meantime, as always, all cryptocurrency transactions are taxable events and should be reported accordingly.
Cryptocurrency investors should be careful to choose their trades carefully and minimize them as much as possible. Know Your Holding Periods After you calculate your current portfolio positions it is important to analyze your current holding period on all your assets. This is because anytime you hold your cryptocurrency over days it will be taxed at long-term capital gains rates which are significantly more favorable than the alternative short-term capital gain rates.
Make Sure You Maximize Your Losses If your capital losses in exceed your capital gains, then you will have a carryover loss that can be used to offset gains in future years. It is important to note that losses cannot be carried back to previous tax years. One very large benefit for cryptocurrency investors is a consequence of the current taxation structure for cryptocurrency which treats cryptocurrency as property.
This means that wash sales most likely do not apply to cryptocurrency. Purchasing goods and services with crypto is a new concept. But with the new crypto technology, the ability to do this is much more likely. However, if the transaction had happened inside an SDIRA or Solo k, there would not be any tax due at the time of the transaction.
Tax-loss harvesting can be used with any asset class but crypto price volatility and fluctuations throughout the year can make this particularly effective. A capital gain or loss is equal to the value of what you receive at the time of disposal Proceeds less the value of what you obtained the asset for at the time of purchase Cost Basis.
Crypto volatility and fluctuations might be timed to reduce or eliminate your tax obligations. For example, Sally purchased 0. Sally also sold 0. Not a bad way to have your cake and eat it too. We also know that taxes owed are determined by three factors: The market value of the crypto at the time of the sale Proceeds. How much you paid for the crypto Cost Basis. Gain or Loss.
However, if Jack had a higher cost basis, the resulting gain and the tax bill would be lower. This may be possible using Specific ID. According to IRS A39 , you can use the Specific ID method to figure out the cost basis of each unit of crypto asset you are trading, selling, or otherwise disposing of. To do this, you must keep accurate records that include all this specific information: Date and time of each unit acquired. The cost and fair market value of each unit acquired at that time.
The date and time of each unit sold, exchanged, or otherwise disposed of. The fair market value of each unit and the amount of money or the value of the property you received for each unit at the time it was disposed of. This required information should be available with decent crypto tax software.
Using this information, Jack can use Specific ID to sell 1 Bitcoin with the highest cost basis to reduce or eliminate his tax obligation. Move to a State with No Income Tax Where you live can also make a difference in the amount of taxes that you ultimately pay. Several states have no income tax or they tax investment income at a lower rate than income. Most states tax income from investments and income from work at the same rate. These tax breaks take different forms. Typically, these states allow taxpayers to exclude some or all their capital gains income from their taxable income.
New Hampshire currently taxes investment income and interest, but it is set to phase out those taxes starting in However, these states do have other methods of raising tax revenue. The most common is a sales tax. Higher property taxes are also common as are excise taxes. Ultimately it can be a balancing act to determine the lowest tax-cost state depending on your income, spending habits, and lifestyle.
It now asks if a taxpayer has either received, sold, exchanged, or disposed of digital currency. The tax preparation software companies are also expecting an increase in the number of people needing to account for crypto taxes.
You might find this Cryptocurrency Tax Calculator a useful tool to help estimate taxes whether you received your crypto by purchasing it, as a payment for services, or in exchange for goods. You can choose between a traditional tax-deferred account or a tax-free account.
Both come with your choice of tax-advantaged retirement savings -or- you can combine multiple versions under one umbrella account. Beginning your decision process is as simple as taking the self directed retirement quiz. Others imitate—we innovate. Our deep history in this space has flourished into a thriving community with special events and unbeatable service.
Ready to take control of your financial future? Start where you are.
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