Wednesday, June 29, 2022

How To Minimize Crypto Taxes

Track Your Crypto Transactions Recommended Tools

7 Steps To Minimize Your Crypto Taxes!

Calculating yearly profit and loss is never easy for traders. Youll have buys and sells of varying quantities and prices. These will be split across dozens of cryptocurrencies on several exchanges. Its virtually impossible to figure out by hand. Naturally, this niche is filled with platforms that are happy to assist. Here are a few of our favorites.

Research Private Placement Life Insurance

This is an intriguing topic worth further research and usually suited for high-net-worth clients, because the set up and administrative management fees can be cost prohibitive to the average crypto trader or investor.

The good news is the tax saving potential of PPLI is too sweet to ignore for several reasons:

  • The insured person doesnt pay taxes on investment gains.
  • Beneficiaries may avoid taxes when the death benefit is paid.
  • When properly structured, the insured persons estate may not be required to pay taxes.
  • There are no taxes on phantom income.
  • The insured can generally access most of the funds, tax-free, through policy withdrawals and loans.
  • There is asset protection from creditors.
  • There is easier tax compliance.

However, the sobering news is that your due diligence will reveal PPLIs are an unregistered securities product, meaning agents can only present them to accredited investors. In addition, the insurer must possess the ability to fund $1 million or more in annual premiums for several years. Its no wonder that wealthy families, trusts, and corporations collaborate with financial firms to reduce their tax burden. Do your research, as some of your crypto clients may qualify to take advantage of this top-tier wealth preservation strategy.

Is Crypto Taxed Like Stocks

Crypto is taxed like stocks and other types of property. When you realize a gain after selling or disposing of crypto, you’re required to pay taxes on the amount of the gain. The tax rates for crypto gains are the same as capital gains taxes for stocks.

Part of investing in crypto is recording your gains and losses, accurately reporting them, and paying your taxes. Like every investor, you want to keep this tax burden to a minimum. In closing, let’s look at a few effective ways to minimize crypto taxes:

  • Hold successful crypto investments for more than one year before selling or using them. Tax rates on these long-term gains are lower than rates on short-term gains.
  • Use tax loss harvesting. If you’ve had gains and losses on different types of cryptocurrency, you can sell both and use the losers to offset your gains.
  • Consider opening a crypto IRA. Like other IRAs, this type of account lets you make tax-deductible contributions and only pay taxes when you withdraw funds.

Recommended Reading: Do You Have To Pay Taxes On Bitcoin

Giving Asset To A Family Member As A Gift

Transferring your capital asset to one of your family members as a gift is totally tax free. In fact, the IRS permits taxpayers to give a particular capital asset as a gift to a chosen member of your family at a maximum of $15,000 in a year for one person. Some crypto investors use this strategy to help their family members who currently face financial challenges without worrying about getting taxed from this crypto transaction.

Hence, if you plan to extend your help financially to a member of your family in the future, like your mom, dad, or one of your siblings, you can use this strategy, and there will be no extra Cryptocurrencies taxes that you need to add in your return from this specific transaction.

Hire A Crypto Specialized Cpa

How to Reduce Your Crypto Tax Bill by Taking Out a Crypto ...

Navigating the tax code on your own can feel overwhelming. Thatâs why you may want to consider enlisting the help of a professional.

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.

If youâre looking for an accountant, you may want to check out our verified list of cryptocurrency tax experts.

Also Check: How To Backup Crypto Wallet

Contribute To A Pension

For example, if an investor is able to make a gross pension contribution of £10,000, the point at which higher rate tax becomes payable will increase from £46,350 to £56,350. If the capital gain, once added to the other taxable income in the year the gain is realised, falls within the extended personal allowance, the CGT liability will become 10 per cent instead of 20 per cent.

How Much Will You Owe

If you bought cryptocurrency for the first time in 2021, congratulations and welcome to the party. Its been a banner year for crypto investments: more than half of Bitcoin owners reportedly made their first purchases of the popular crypto last year. Crypto, while designed as an alternative to the traditional banking system, is still subject to U.S. tax laws as administered by the U.S. Internal Revenue Service . So if you made a profit from selling your crypto, trading it, or buying goods and services with it in the past year, its time to think about the tax you may pay on your capital gains.

First things first…

Coinbase doesnt provide tax advice. This article represents our stance on IRS guidance received to date, which may continue to evolve and change. None of this should be considered as advice or an individualized recommendation, but its important to us that our readers have relevant information available to them in the most accessible way possible. Please consult a tax professional regarding your own tax circumstances.

Read Also: Where Can I Buy Dash Cryptocurrency

Turbotax Has You Covered

Don’t worry about knowing the tax implications of cryptocurrency transactions.

Whether you have stock, bonds, ETFs, cryptocurrency, rental property income or other investments, TurboTax Premier is designed for you and can help you easily and accurately report your gains and losses. TurboTax is the only major online tax preparer that supports importing over 1500 stock and 2,250 cryptocurrency transactions at once, directly from financial institutions, saving you time and ensuring accuracy. TurboTax Premier has partnered with hundreds of financial institutions and investment platforms to allow you to auto-import your investment info seamlessly when doing your taxes. Increase your tax knowledge and understanding, all while doing your taxes.

How Cryptocurrency Taxes Work

How To REDUCE Capital Gains Tax on Your Crypto

As a United States citizen, you owe taxes on the income you earn worldwide. Most people hold cryptocurrency as an investment. Under the current Internal Revenue Service virtual currency guidelines, cryptocurrency is most often treated as a capital asset. This means the tax you pay on it is capital gains tax.

You pay capital gains taxes depending on the type of capital gain you have. The two types are short-term and long-term capital gains and are based on how long you hold the asset, in this case the cryptocurrency.

  • Short-term capital gains occur when you sell cryptocurrency for more than you bought it and held the investment for a year or less. These are taxed at the taxpayers ordinary income tax rate, just like wage income.
  • Long-term capital gains are realized when you sell cryptocurrency for more than you bought it but held the investment for longer than a year. These gains are taxed at more favorable long-term capital gains tax rates, which can be as low as 0%.

Its essential to realize that virtual currencies are relatively new, and the IRS or Congress may change their stances on crypto taxes in the future. But based on the current taxation of cryptocurrency, here are a few ways you might be able to help reduce or eliminate the potential taxes you may owe.

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Global Crypto Tax Opportunities

There’s only one special tax haven reserved for the largest of crypto whales: Puerto Rico. As an American, moving to Puerto Rico allows you to pay 0% capital gains tax, which means youll keep all of your profits on crypto assets.

However, this strategy makes more sense for the whales than the shrimps of the crypto world.

Puerto Rico is America’s tax haven, but the savings you make on your crypto will be diminished by recent spikes in living costs. Due to the bona fide residency requirement to buy a home within two years under Act 60-2019, real estate on the island has skyrocketed in price.

Therefore, we encourage this option only if you are a significant crypto whale with the means to buy high and sight unseen in Puerto Rico.

For smaller-scale U.S. investors, moving to a crypto-friendly state with moderate living costs can allow you to live large off your crypto gains, even if you are not a whale.

The key is to drive your income up and your expenses down, and you can do that by choosing a tax-friendly ZIP code and/or lifestyle. As a crypto investor, you want to look at the end-of-year expenses and make some lifestyle choices pronto.

Moving to a state without income tax is a smart tax move and is an attractive option for investors who are able to work remotely. Nine U.S. states have no income tax as of 2021: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Give Up Your Us Citizenship

The most dramatic way to stop paying the IRS for your cryptocurrency gains is to give up your US citizenship. Once you expatriate, the IRS no longer has any right to your earnings. Would you give up your citizenship simply to avoid taxation? Its become a hot topic of late due to excess gains US citizens have pulled in in recent years.

Again, US citizens pay US tax on their capital gains and cryptocurrency gains no matter where they live. If you move to Panama, but keep your US passport, you still pay US tax on your trading profits. The only way to get rid of the IRS forever is to turn in your blue passport.

To give up your US citizenship, you may need to pay an exit tax and must have a second passport in hand before turning in your US travel document. Without a second passport, theres no way to expatriate from the United States.

You have two choices when it comes to getting a second passport. You can buy one from countries like Malta , Dominica or St. Lucia , or you can earn one over time by becoming a resident of a foreign country.

For example, you can become a resident of Panama with an investment of $20,000. After 5 years of residency, you can apply for citizenship and a second passport. So, you can either buy a passport or earn one through residency.

Also Check: How To Sell Crypto On Bittrex

The Bottom Line: Being Prepared Helps You Save On Taxes

Planning ahead is the very best way to minimize your tax liability from capital gains on your crypto transactions. To recap:

  • Consider how long youve held your crypto before selling it.

  • Record all of your purchases, trades, and sales.

  • Choose the accounting method that best reduces your tax liability.

  • Watch the market for the best times to sell, especially if youre hoping to use tax-loss harvesting to offset gains.

And make sure to consult your tax or financial advisor about these and other considerations regarding crypto investments. With crypto, as in life, a little planning goes a long way.

Trade crypto on Coinbase?

For more information on crypto and taxes as well as tools for tracking your crypto transactions, Coinbase users can sign in and check out Coinbase Taxes.

Keep Records Of All Transactions

crypto

You must keep track of all your cryptocurrency transactions, including how much you paid for crypto, how long you held it for and how much you sold it for, as well as receipts for each transaction.

While your crypto exchange may provide a 1099-B reporting your crypto transactions to both the IRS and you, it might not record the cost basis, or original amount you paid for your crypto, if you transfer coins between offline cold wallets and your account.

To help address issues like these, software companies have emerged that will scrub the blockchain to detect transfers between your wallets, whether on an exchange or not, and give you reports of all transactions related to the wallets you give it within a given tax year, says Jon Feldhammer, tax partner at Baker Botts.

Tools like Koinly and Cointracker connect to exchanges and crypto wallets to track your crypto transactions and complete the forms you need to file your cryptocurrency taxes.

Also Check: How Do You Buy Bitcoin On Cash App

Bonus Case: Move To A Crypto

None of the strategies fit your situation? Theres a last, more radical change: moving to a crypto-tax-friendly country.

There are states in the US that dont impose any income tax for individual taxpayers. If you have large crypto profits, you can consider moving to a state-tax-free place in the US and save on your crypto taxes. There are other factors you need to consider, but this is a strategy you can use to reduce your taxes.

You can consider moving to Puerto Rico and benefit from low-income taxes and zero capital gains taxes for years. Check all the details about a possible move in our 7 crypto trends and tax tips report. Please consider all the caveats when implementing this possible move. Moreover, you should consult with crypto tax accountants and lawyers to evaluate all the pros and cons of such a move.

*This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 20+ AMA crypto tax reports for free.

Can Bitcoin Help Avoid Taxes

Bitcoin is a decentralized Cryptocurrency that many people are using for more opportunities to increase investments and double the profits. However, investing in it doesnt give you an exemption from your tax obligations. Thats why you still have to report your Bitcoin transactions when you file your return during tax season. In addition, even though youll be paying the appropriate taxes on every profit you earn, there are still various ways you can, at least, lessen the amount of your tax liability.

Also Check: How To Prepare Crypto Taxes

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How To Handle Cryptocurrency Transactions On Your Tax Return

5 Tips to Minimize Crypto Taxes – Complete Guide!

You can usually download a transaction report from your cryptocurrency exchange platform, including all of your buys, sells, and exchanges of cryptocurrency in your account. If all of your cryptocurrency transactions occur on one exchange, gathering the information you need to report transactions on your tax return should be relatively easy. If you have cryptocurrency transactions on several exchanges, you’ll need to download several reports.

Also Check: Can I Day Trade Bitcoin

Ways To Pay Zero Tax On Cryptocurrency Gains

Note that this article is focused on US citizens and US persons . The United States IRS has declared that cryptocurrency is an asset or property, but not a currency. Therefore gains on cryptocurrency are treated the same as profits from the sale of a stock, rental real estate, or any other passive investment.

If you want to avoid tax on your cryptocurrency profits, you must plan ahead. Here are 4 ways to stop paying tax on your cryptocurrency gains and your capital gains.

Do You Pay Taxes On Crypto

You’re required to pay taxes on crypto. The IRS classifies cryptocurrency as property, and cryptocurrency transactions are taxable by law just like transactions related to any other property.

Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain. For example, if you buy $1,000 of crypto and sell it later for $1,500, you would need to report and pay taxes on the profit of $500. If you dispose of cryptocurrency and recognize a loss, you can deduct that on your taxes.

Buying crypto on its own isn’t a taxable event. You can buy and hold cryptocurrency without any taxes, even if the value increases. There needs to be a taxable event first, such as selling the cryptocurrency.

The IRS has been taking steps to ensure that crypto investors pay their taxes. Tax filers must answer a question on Form 1040 asking if they had any type of transaction related to a virtual currency during the year.

Crypto exchanges are required to file a 1099-K for clients who have more than 200 transactions and more than $20,000 in trading during the year. The IRS has also issued summonses to crypto exchanges to find investors who had at least $20,000 in cryptocurrency transactions from 2016 to 2020.

Read Also: How To Set Up Crypto Wallet

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