With adoption rates at an all-time high, and markets taking center stage amidst coronavirus fears, here’s what you need to know about the tax implications of owning crypto and Strategies for Bitcoin and Cryptocurrency Investors.
Governments have started taking a closer look at what exactly it is their citizens are doing with their bitcoin. As with every other asset and avenue of capital gain- they’re also looking for their cut of the profits. Whether or not you agree with bitcoin assets being taxed similarly to any other type of assets, chances are that it doesn’t matter and you’ll owe taxes on them anyway.
Crypto taxes can seem pretty convoluted at first glance, with understandable frustrations regarding what price it should be taxed at current market value? The value of the coins when you bought them? In the US, the government only makes one thing clear when it comes to the taxation of cryptocurrency: that is that it’s viewed as a type of property and not a currency- which does serve to make a few things more simple. As you can look at your crypto holdings as you would any other stock you might own.
Strategies for Bitcoin and Cryptocurrency Investors: Collect and Collate Existing Info
First things first. Whether you’re looking to minimize your tax burden, pay your fair share, or maximize potential refunds- you’re going to need to collect all the relevant data you have. Even if you plan on speaking to your accountant or financial planner, you’ll need to collect all of the following information first.
- Initial purchase records
- All transaction data
- Crypto income records (including coins received from hard fork exercises)
- Donation records
- Receipts of loss
With all of this information in hand, it can help you better understand your future tax burden, as cryptocurrency is looked at generally as property if you received it as a source of income- it’s then taxed as such, and may even be subject to state income tax as well. Sometimes, donating crypto to charitable funds is a good way to reduce the tax burden, however, you’ll need to make sure (and be able to prove) that the donation was made to a qualifying crypto charity.
It’s important that you understand how your crypto will be taxed for two very important reasons. The first being that in understanding how your crypto is taxed, you can then make a plan and take measures to reduce your tax burden. The second being that governments are starting to flex their grip and tighten control, ensuring that crypto taxes are paid, one way or another.
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Strategies for Bitcoin and Cryptocurrency Investors: Minimize Capital Gains
If you want to really reduce your tax burden as far as your crypto is concerned, you may want to take a close look at minimizing your capital gains. One way to do this, but still make your crypto work for you is by engaging in long-term investments.
Capital gains tax is notably lower against crypto that’s been held for a year or more. Sometimes dropping tax rates from hovering around 40%, to a mere 15% or even less. So choosing HODL over day trading is a solid choice to make when you’re looking to own crypto, but not payloads for using it. The best way to successfully hold onto that crypto, and steer clear of FOMO is to put it in cold storage.
Cold storage is when you put your coins into a wallet- generally a hardware wallet, that isn’t directly connected to the internet. Bonus points added is you’re using a clean wallet with freshly tumbled coins. Because it can take a bit longer to get those coins up and running on the market from cold storage, you’ll often miss out on tight windows anyway. Making it not worth the hassle of moving everything around, to begin with.
If you’ve successfully collected purchase receipts that show a significant unrealized loss- now may be the time to sell a bit of that well-curated supply. Selling certain amounts of the cryptocurrency you now hold may offer you a bit of paper profit- but will serve to supply you with some capital loss. This loss can be used to offset other potential capital gains tax burden, as well as the tax burden that has been accrued from ordinary income.
It’s also important to remember that capital loss can be carried over into the coming tax year, so selling a bit at a loss now may just serve to save you a bundle in 2021.
No Wash Sale Rule
The fattest ray of sunshine in crypto being viewed as property- as opposed to traditional security- is that there is no Wash Sale Rule. In traditional stock and bond trading, traders are prohibited from repurchasing a stock that they had previously sold at a loss for 30 days. As this doesn’t really apply to crypto, you can sell enough of your stash to offset capital gains, then buy back the lost amount at the rock bottom prices that are available to you. Leaving less of a dent in your digital nest egg and your bank account.
Strategies for Bitcoin and Cryptocurrency Investors: Maximize Deductions
The second best way that a crypto holder can offset their tax burden is by maximizing their deductions. Few people choose to do this, however. Mostly because it requires a decent amount of leg work. Since 2018, using a standard deduction has become… well, pretty standard. This is largely because of the boost that the standard deduction saw in 2017- jumping to $12,000 for singles and $24,000 for married couples.
However, if you pay close attention to what you use, or run a personal business, itemized deductions may work in your favor. As there are a number of tax-deductible expenses that many people forget about completely- or assume won’t make that big of an impact. Things like:
- Medical expenses
- State Income Taxes
- State Property Taxes
- Charitable Donations
Are all things that can be added into your itemized deduction. Charitable donations are particularly useful when it comes to maximizing your deductions as a crypto investor.
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Charitable contributions can work in your favor especially if you conduct them in cryptocurrency. By donating any crypt gains, or cryptocurrency that you’ve held for at least a year, taxpayers are able to deduct the fair market value of their contribution; provided they’ve held those coins for at least a year. It’s important to ensure that whatever charity you’re donating to is not only eligible for a deduction but also that you donate in crypto directly. As, should you sell your crypto and then donate the resultant dollar amount, that will constitute a sale and will be subject to tax.
Business expenses are another deductible asset that could prove outlandishly useful to the crypto investor. If you own a schedule C business- meaning you’re the sole proprietor- then you’re automatically opened up to a whole new world of possible deductions.
The other type of deduction that is important for reducing the tax burden is what’s considered “Above the Line” deductions. These are the deductions that are subtracted before you calculate your AGI. This means things like IRAs, 401(k)s, and health savings accounts are worth more than just the investment into your future, they can help deeply reduce your AGI without losing out on any money.