With adoption rates at an all-time high, and markets taking center stage amidst coronavirus worries, here’s what you need to know about the tax consequences of holding crypto and Strategies for Bitcoin and Cryptocurrency Investors.
Governments have begun taking a closer look at what precisely it is their people are doing with their Bitcoin. As with any other asset and avenue of financial gain they’re also seeking for their piece of the earnings. Whether or whether you agree with bitcoin holdings being treated similarly to any other form of assets, odds are that it doesn’t matter and you’ll owe taxes on them anyhow.
Crypto taxes might appear rather confusing at first sight, with legitimate complaints surrounding what price it should be taxed at current market value. The worth of the coins when you purchased them? In the US, the government only makes one thing clear when it comes to the taxes of crypto currency: that is that it’s recognized as a sort of property and not a currency- which does serve to make a few things more straightforward. Like you may look at your crypto assets like you would any other stock you could possess.
Strategies for Bitcoin and Cryptocurrency Investors: Collect and Collate Existing Info
First things first. Whether you’re aiming to reduce your tax burden, pay your fair part, or optimize prospective refunds- you’re going to need to gather all the essential data you have. Even if you intend on speaking to your accountant or financial advisor, you’ll need to gather all of the necessary information beforehand.
- Initial purchase records
- All transaction data
- Crypto revenue records (including coins obtained via hard fork exercises)
- Donation records
- Receipts of loss
With all of this information in hand, it may help you better understand your future tax burden, since crypto currency is looked at usually as property if you obtained it as a source of income- it’s then taxed as such, and may even be subject to state income tax as well. Sometimes, contributing crypto to charitable funds is a fantastic approach to decrease the tax burden, however, you’ll need to be sure (and be able to document) that the gift was made to an eligible crypto charity.
It’s crucial that you understand how your crypto will be taxed for two very significant reasons. The first is that by knowing how your crypto is taxed, you can then build a strategy and take efforts to lower your tax burden. The second is that governments are beginning to stretch their grasp and tighten control, ensuring that crypto taxes are paid, one way or another.
Read our newest articles How Far We’ve Come: The Evolution of Bitcoin and Blockchain Technology and What Bitcoin Halving Really Means.
Strategies for Bitcoin and Cryptocurrency Investors: Minimize Capital Gains
If you want to truly lower your tax burden as far as your crypto is concerned, you may want to take a serious look at limiting your capital gains. One way to achieve this, yet still make your crypto work for you is by investing in long-term investments.
Capital gains tax is substantially lower against bitcoin that’s been kept for a year or longer. Sometimes decreasing tax rates from hovering around 40% to a paltry 15% or even less. So selecting HODL versus day trading is a smart decision to make when you’re trying to possess Bitcoin, but not payloads for utilizing it. The easiest approach to effectively hang onto that crypto, and stay away of FOMO is to place it in cold storage.
Cold storage is when you place your coins inside a wallet- often a hardware wallet, that isn’t immediately linked to the internet. Bonus points are awarded when you’re using a clean wallet with freshly tumbled coins. Because it might take a little longer to get those coins up and running on the market from cold storage, you’ll typically miss out on tight periods regardless. Making it not worth the trouble of shifting things around, to begin with.
If you’ve successfully gathered purchase receipts that reveal a big unrealized loss- now may be the time to sell a part of that well-curated supply. Selling specific quantities of the crypto currency you now own may provide you a little paper profit- but will function to supply you with some capital loss. This loss may be used to offset additional possible capital gains tax loads, as well as the tax burden that has been incurred from ordinary income.
It’s also crucial to note that capital loss may be carried over into the future tax year, so selling a little at a loss today may just help to save you a lot in 2021.
No Wash Sale Rule
The fattest beam of sunshine in crypto being recognized as property- as opposed to conventional security- is that there is no Wash Sale Rule. In conventional stock and bond trading, traders are barred from repurchasing a stock that they have previously sold at a loss for 30 days. As this doesn’t really apply to crypto, you may sell enough of your hoard to offset capital gains, then purchase back the lost amount at the rock-low prices that are accessible to you. Leaving less of a dent in your digital nest egg and your financial account.
Strategies for Bitcoin and Cryptocurrency Investors: Maximize Deductions
The second best method that crypto possessor may offset their tax burden is by maximizing their deductions. Few individuals opt to do this, though. Mostly because it needs a significant bit of leg effort. Since 2018, applying a standard deduction has become… well, quite typical. This is partly due to the rise that the standard deduction experienced in 2017- rising to $12,000 for individuals and $24,000 for married couples.
However, if you pay careful attention to what you use, or operate a personal company, itemized deductions may work to your advantage. As there are a number of tax-deductible items that many individuals forget about completely- or feel won’t make that large of an effect. Things like:
- Medical expenditures
- State Income Taxes
- State Property Taxes
- Charitable Donations
Are all items that may be put into your itemized deduction? Charitable gifts are especially important when it comes to optimizing your deductions as a crypto trader.
If you are interested in more information about cryptocurrency, feel free to read additional articles like The Best Ways to Make Money with Bitcoin and Bitcoin Members Only Clubs: Getting in Has Never Been Easier.
Charitable gifts may work to your advantage particularly if you perform them in bitcoin. By contributing any crypt gains, or crypto currencies that you’ve held for at least a year, taxpayers are entitled to deduct the fair market value of their gift; provided they’ve kept those coins for at least a year. It’s crucial to confirm that whichever charity you’re contributing to is not just qualified for a deduction but also that you contribute in Bitcoin directly. As, should you sell your crypto and subsequently contribute the consequent dollar amount, it would constitute a sale and will be liable to tax.
Business costs are another deductible item that might be outlandishly valuable to the crypto investor. If you own a Schedule C business- meaning you’re the sole proprietor- then you’re instantly opened up to a whole new universe of potential deductions.
The third form of deduction that is crucial for minimizing the tax burden is what’s dubbed “Above the Line” deductions. These are the deductions that are removed before you compute your AGI. This means items like IRAs, 401(k), and health savings accounts are worth more than simply the investment into your future, they may help drastically lower your AGI without missing out on any money.