Updated: Oct 28, 2021
5 Tips to save money on taxes when buying and selling cryptocurrency like in the United States.
It seems like everyone and their Shiba Inu is buying and selling cryptocurrency these days. If you are like most people, paying taxes on the sale is an afterthought. With a little strategic tax planning one could potentially save big on taxes and keep more money in your pocket on the sale of Bitcoin, Ethereum and other coins. Being proactive is the most effective way to limit your tax bill because once the clock strikes midnight to start a new year it's too late.
How are Cryptocurrencies Taxed?
Before we dive into strategies, let's lay down some groundwork on how cryptocurrencies are taxed. In short the difference between purchasing price and the price you eventually sell the coin for is what is taxed. If you sell for more then you purchased its a gain and a loss if you sell for less then what you paid. Tax is also determined on how long your crypto is held between the purchase and sale. A Short-Term Sale is when a coin is sold within a year of purchase. A Long-Term Sale happens when you hold for more than a year.
Now that we have laid some basic groundwork, let's discuss how we can take advantage of the current tax laws to save you money.
Tip #1 - Take Advantage of a Loophole Soon to Be Closed
As the time of this article being published, cryptocurrency is classified as a "property" and not "Stock or Securities". While this wording appears subtle, it has at least one major impact. Sale of property (Crypto) is not subject to wash-sale rules. This opens up a window of opportunity that is likely soon to be closed by congress in proposed tax bills.
But how can you take advantage? You can sell cryptocurrency that has decreased in value for a loss and immediately purchase it back. If this is your only sale for the year then you can take up to a $3,000 loss to offset other income from the year. You can also use this strategy to offset gains from other cryptocurrencies. Not only will this decrease your tax on the gain but if you immediately purchase back the crypto, this will decrease the chances of owing tax in the future due to having a higher purchasing price.
Tip #2 - Hold for More Than A Year
As mentioned before, sales of cryptocurrency are classified as either Long-Term or Short-Term. This is important because gains on Long-Term sales have a special tax bracket that is favorable compared to Short-Term of which is taxed as ordinary income. This means that just holding longer could dramatically decrease your tax bill!
Tip #3 - Sell in Low-Income Years
If you have had a down year and didn't have much income, there's a silver lining. Long-term Capital gains are taxed at 0% for income up to $40,400 filing single ($80,800 MFJ). This means that if the sale of cryptocurrency is your only income for the year you could owe little to no tax for the year.
Tip #4 - Donate the Coin to Charity
If you are charitably minded, donating cryptocurrency that has appreciated in value could make a ton of sense. Not only could you deduct the full market value of your coins at the time of donation, but you could also avoid paying tax on the capital gain completely. Using this strategy could save you thousands just by donating cryptocurrency instead of cash.
Tip #5 - Use a Self-Directed Individual Retirement Account
By funding a Self-Directed Individual Retirement Account (SDIRA) and then investing in Cryptocurrency, you can avoid taxes on all gains within the SDIRA until funds are withdrawn at retirement. Funds contributed to SDIRA could also decrease taxable income in the year of contribution. Conversely, if the SDIRA is a Roth, while contributions are not deductible, distributions at retirement are tax free saving on taxes in future years.
Don't Let Time Pass
The cryptocurrency space is rapidly changing and evolving but that doesn't mean there aren't ways to save on taxes. A little planning ahead and some advice from a tax professional could save you big time come April but only if you are proactive. If you have questions or need help with tax planning schedule a consultation and we can discuss how we can save you money in taxes.