Nobody’s ever really thrilled about paying taxes. Even though most of us do the right thing and file our annual tax return, it’s always interesting to learn about ways to reduce how much we owe. If we can be strategic with how we manage our finances and assets and also reduce our tax burden, why wouldn’t we?
As you likely already know, you must pay taxes on your cryptocurrency and investment income. But you may be surprised to learn about some of the steps you might be able to take to help offset your earnings, and in the process reducing your crypto tax liability to your not-so-dear old Uncle Sam.
Below you will find a few things you might consider doing to lower your crypto taxes—if not in time for 2019 taxes, you can do them for 2020. Try these tips to see how much of a difference they can make for your tax bill.
Tax Loss Harvesting with Crypto
When it comes to tax purposes, cryptocurrencies are treated like property, much like how stocks are treated. Because there is so much volatility in the cryptocurrency market, you can be strategic in how and when you sell or trade your cryptocurrency assets. If you sell some of them at a loss (“harvesting” the loss), you can offset some of your gains and reduce your tax liability for the year.
The volatility in the crypto marketplace is part of the reason this plan works so well for investors seeking to reduce tax liabilities. And because the IRS views crypto as property rather than securities, they are not subject to the restrictions of the wash sale rules—opening the door for tax loss harvesting.
Invest for Longer Periods
We’ve already discussed how the IRS views cryptocurrency as property. But did you know that the capital gains rate is lower if you hold your investments for more than a year?
This means that in many cases, it is wiser to hold onto the crypto for 13 months or longer before deciding to sell. Of course, there are times when it works out better financially to engage in tax loss harvesting; but it is worth considering the potential benefits of reduced capital gains in mind before making your final decision to sell or hold.
Gift Your Cryptocurrency
Taxes are only required if you have sold your cryptocurrency. If you give it away or donate it, you are not required to pay taxes.
How much can you gift? It is allowable to give up to $15,000 per year without you or your recipient becoming liable. Only once the recipient uses, sells, or trades the cryptocurrency, it becomes a tax liability for them.
Whether you’re looking for an excuse to be generous to friends, relatives, and other loved ones, or you just want to find a little relief from your tax burden for the year, gifting your crypto can be a great option to consider.
One neat thing about this practice, according to Bitcoin.com, is that you can gift up to $15,000 to as many people as you’d like with no annual reporting requirements. Another way of saying this is that your total per recipient is capped at $15,000; there is no cap on how many of these gifts you can give.
You should also make it clear to the people you gift that if they cash out in the future, the gains will be calculated at the rate or value on the day it was gifted.
Consider Buying Your Cryptocurrency within your IRA
There are many reasons to consider buying crypto through your IRA or 401(k). Some reasons are stronger than others depending on your situation. One of the most important reasons is that this money, outside of Roth IRAs (where you pay taxes upfront), grows tax-free until it is distributed. You even have the option of deducting untaxed IRA contributions from your taxes, which may offer huge tax advantages today.
Additionally, you have extra time to make contributions for the sake of your tax return. For instance, you will have until April 15, 2021 to make contributions to your IRA accounts that apply to the 2020 tax return.
If you’re reading this before April 15, 2020, you can make IRA contributions and have them count towards 2019. And if you file an extension, you can make contributions to your SEP IRA through October 15, 2020, and have them count for 2019.
Be sure to consider the type of IRA–Traditional, Roth, SEP, SIMPLE, etc.—into which you contribute, since this choice affects the maximum amount you can contribute.
Record All Crypto Transactions in Great Detail
It’s widely considered to be best practice to keep a detailed history of all your cryptocurrency transactions, including the dates of buying or selling, and the amounts (both crypto and dollar currency) associated with these transactions. There are spreadsheet templates and even apps available online that can help you with this, and potentially automate some of this documentation so that it’s easier for you to remain compliant.
Be aware that most crypto companies do not send out end of year tax documents like you may be accustomed to other financial services companies doing for you. You must keep up with your own transactions with detailed records.
Hire a Tax Pro with Specific Crypto Experience
One of the most important things you can do for your tax situation is to hire a CPA or certified tax attorney who has a large amount of experience preparing tax documents for people who have invested in cryptocurrencies. Don’t just take their word for it, though; get social proof in the form of references. Make sure you’re seeking out accountants that have specific experience dealing with cryptocurrency for the best results. Additionally, consider looking for IRS enrolled agents (EAs) to work on your behalf. They are prepared to go to bat for you if the IRS questions something on your tax return; these professionals are experienced handling such cases, and can even help you be proactive and possibly avoid such scenarios from playing out.
Thanks to the power of the Internet, video chat, and smartphones, you can even consider long-distance CPAs to handle your cryptocurrency needs. You may need to, especially if you live in a smaller community with few, if any, experienced crypto CPAs. Some cities have emerged as major crypto hotspots; it might be worth engaging with a professional from one of these communities, even if they’re not local to you, because they will be closer to any updates and have more resources to draw on as they handle your situation.
In fact, you might want to call and ask some of the following questions before deciding which CPA is the right choice for you:
- During the past five years, how many tax returns have you prepared containing cryptocurrency holdings?
- Have you received any specialized instruction when it comes to preparing cryptocurrency tax returns?
- Do you have any certificates related to preparing crypto taxes?
- How are you keeping up-to-date with the latest tax laws and regulations related to crypto tax prep?
- During the past five years, how many of your crypto clients have been audited?
Your goal in asking these questions is to determine if the CPA has experience with crypto, and if yes, just how much they have.
Ultimately, your goal is to save on your taxes by making wise financial choices and being appropriately cautious. These tips could help you do achieve that.
However, this information is intended as educational content and is not intended as professional tax advice. If you want tax advice for your individual situation, be sure to consult directly with a certified tax professional.