Wednesday, June 29, 2022

How To Reduce Crypto Taxes

How To Reduce Your Crypto Tax Bill By Taking Out A Crypto

7 Steps To Minimize Your Crypto Taxes!

The crypto lending market has been experiencing an increasing interest in the past 12 to 18 months. More and more HODLers are using their digital asset holding as collateral for fiat currency loans. While the reasons to take out loans are myriad, one of the biggest arguments for taking out a crypto-backed loan is that it can help investors reduce their crypto tax bill.

In this article, you will learn how you can reduce your capital gains tax burden by leveraging crypto lending platforms.

You Dont Escape Being Taxed Just Because You Didnt Get A 1099

With a bank or brokerage, you will typically get a Form 1099 reporting the income youve received during the year. That may not be the case with cryptocurrency, however.

There isnt really the same level of reporting yet for cryptocurrency, relative to typical 1099 forms for stocks, interest and other payments, says Harris. The IRS doesnt get great reporting from Coinbase and other exchanges.

However, a November 2021 law will require greater tax reporting for those in the industry starting on Jan. 1, 2023. The law requires brokers including controversially, anyone who moves digital assets for another to report that info to the IRS on a 1099 or similar form.

Opponents say the law would require anyone who moves cryptocurrency, including miners and crypto wallets, to the new rules, including those who have no access to that info. However, lawmakers are already working on a new bill to more narrowly define who the law applies to.

But the lack of a 1099 wont let you escape any tax liability, and youll still have to report your gains and pay tax on them. Still, its not all bad news: If you had to take a capital loss, you can deduct that on your return and reduce your taxable income.

Find The Best Crypto Tax Software For Your Needs

Buying and selling cryptocurrencies, receiving airdrops, creating a NFT, re-selling a NFT, receiving income from DeFi are just some examples of what can be considered a cryptocurrency related taxable event.

In the last few years, there has been a complexification of the rules for accessing crypto taxes . Plus, if you use several exchanges for dealing with crypto, do a high number of transactions per year and/or have different types of crypto income, calculating your tax bill can be a challenge.

Also, the current number of accountants/CPAs familiar with crypto is very limited, so finding an accountant/CPA that can help you with your crypto taxes can be hard.

Crypto tax software facilitate tax reporting associated with crypto activities and can be a useful tool to help you access your taxes, helping to keep track of transactions across multiple platforms.

Also Check: Can I Short Sell Cryptocurrency

Keep Accurate Records Of Your Crypto Trades

One of the things most crypto traders fail to remember is that taxes are calculated based on the difference between the price of the crypto on the day of purchase and the day of sale. This becomes even more complicated when the crypto is a gift or has been received in lieu of salary or as income from mining or staking. In this case, the purchase price is deemed to be the fair value of the crypto on the day it was received.

Since most crypto traders undertake multiple trades in the year, it becomes very important to keep an accurate record of the transactions, and the price at which they were made. This is because major exchanges like Coinbase only issue a tax form statement to users who have realized gains in excess of $20000 and undertaken more than 200 transactions. If you haven’t kept an accurate record so far, it’s a good idea to use crypto tax software that can extract your data from the exchanges and create accurate tax documents.

Crypto Tax Software Technology

How To Reduce Crypto Taxes Legally?

Crypto tax software technology is used to reduce crypto tax legally, which helps calculate your crypto net gains or loss. Given the tax report, you can get by any reliable crypto tax software because the software contains a crypto tax reporting tool that gives you all the details of your crypto assets.

The below table will help you better understand different crypto tax soft wares features that help you choose reliable crypto tax software.

Features
  • Work with all the major exchanges.
  • Provide donations and closing reports.
  • Produce P& L statements to ensure tax reduction.

Read Also: Where To Buy Crypto Wallet

Donating Or Gifting Crypto Is Nontaxable

The IRSs guidance indicates that donating or gifting cryptocurrency are not taxable events, so you will not recognize any gains when gifting or donating appreciated crypto assets.

Consider the alternative situation: You cashed in your appreciated crypto for USD and donated this fiat to your charity of choice. In this case, you would pay the capital gains tax on cryptocurrency gains, which can vary from 10% to 37% if you held the asset for under one year, and from 0 to 20% if you held the asset for over one year, depending on your income.

Earning Cryptocurrencies Through Mining

Cryptocurrencies are commonly acquired in two ways:

  • bought through a cryptocurrency exchange
  • earned through mining

Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrencys network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.

The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.

Also Check: Where Does Cryptocurrency Get Its Value

Buy Cryptocurrency In Your Life Insurance Policy

Another way to pay zero tax on cryptocurrency gains is to buy coins within an international life insurance policy. You can fund an Offshore Private Placement Life Insurance with any amount of money you wish and create the equivalent of a ROTH or Traditional IRA. There are no contribution limits or distribution requirements.

  • Most offshore private placement policies require a minimum investment of $1.5 or $2.5 million.

If you set up a private placement policy, hold it for a few years, and then close it down, you get tax deferral similar to a traditional IRA. That is, youll pay tax on the gains when you close out the policy.

If you hold the policy until your death and pass the cryptocurrency to your heirs, you get tax free similar to a ROTH IRA. Because of the step up in basis, your heirs receive the coins at their price on the date of your passing and pay zero tax on the appreciation while they were held in your life insurance policy.

Donate Or Gift Appreciated Assets To Avoid The Capital Gains Tax

Crypto Tax Australia / How to Reduce Capital Gains Taxes

As mentioned above, you have to pay the capital gains tax on cryptocurrency when you sell or trade your tokens for profit. However, per the IRSs guidance, you do not have to pay the capital gains tax when donating or gifting cryptocurrency.

Additionally, donations of crypto to a qualified charity are eligible for the itemized charitable deduction. Its important to note that the IRS distinguishes gifts vs. donations to qualified charities. To claim this deduction, be sure youre donating to a qualified charitable organization.

To get the most tax-savings out of your donations, we recommend donating your crypto assets in the following order of preference:

  • Long-term appreciated assetsavoid the capital gains tax and deduct the fair market value of the crypto at the time of the donation!
  • If you dont have long-term appreciated assets then you should prioritize short-term assets that have not appreciated muchyou still avoid the capital gains tax but you can only deduct up to your cost-basis.
  • If you dont have any appreciated assets, then your last pick should be short-term assets that are in a loss position. However, itd be more tax beneficial for you to harvest these losses in this case, as mentioned above.
  • Recommended Reading: How To Invest In Blockchain Stocks

    Consider Hiring A Professional

    If you find taxes confusing in general, you may want to seek assistance from a qualified professional. Tax advisors stay up to date on the latest IRS rules and regulations. Hiring one to work with you could be a wise decision, especially if you made a high number of trades or think you might have incurred significant capital gains this year.

    Irs Enforcement Of Crypto Taxes

    Anyone that sells, converts, pays, donates, or earns income with cryptocurrency must report those transactions to the IRS. While itâs called cryptocurrency, the government considers the digital currency property. That means cryptoâs treated more like collectible coins than dollars, and you owe tax on any increase in value between the purchase and sale price.

    The tax rules are fairly straightforward on the surface: Taxpayers must calculate the difference between the purchase and selling price of a cryptocurrency and pay tax on any short or long-term capital gains. Of course, you can also use any losses to offset other capital gains or some ordinary income, so itâs worth remembering that the sword cuts both ways.

    The confusion comes into play with unusual transactions, such as airdrops or hard forks. In some of these edge cases, cryptocurrency holders may be forced into paying a tax on cryptocurrency that they acquire without their permission! Many people also forget that purchases with cryptocurrency are taxedâeven on a cup of coffee.

    While the IRS has tried to clarify some of these edge cases, it has also made it abundantly clear that every cryptocurrency seller must pay their fair share of taxes. The agency has sent out numerous warning letters, added a new question to Form 1040, and even hired crypto experts in its efforts to track down tax evaders.

    Here are the top four tips on how to potentially avoid taxes on crypto:

    Also Check: How To Do An Airdrop Crypto

    Offset Crypto Gains With Losses

    When you sell an investment, you realize a gain or a loss. Which you realize depends on how much you sold the asset for and its cost basis. The good news about the U.S. tax code is that capital gains and losses can offset each other. If you consciously use this to your advantage, this is called tax-loss harvesting.

    Technically, gains and losses of the same type offset each other first. Short-term gains would offset short-term losses and the same for long-term tax items. Then, you can offset any resulting net loss against a net gain of the other type.

    Lets say you have a $1,000 short-term loss, a $2,000 short-term gain, a $3,000 long-term gain, and a $5,000 long-term loss. In this case, youd end up with a $1,000 net short-term gain and a $2,000 net long-term loss. Then, youd net these values against each other to end up with a net $1,000 long-term loss.

    If you have an overall capital loss for a year, you can claim up to $3,000 of it. Any leftover loss can be carried forward to future years. Many of the best robo-advisors offer automatic tax loss harvesting for investors.

    What Is Gas On Ethereum Network

    Cryptocurrency Tax Made Easy

    Gas is a unit of measure for the amount of computational effort that it will take to execute certain operations on the Ethereum network. Every transaction on Ethereum requires a certain amount of computation effort, measured in gas. The transaction fee you have to pay to the Ethereum network to execute a transaction is based on the amount of gas required, and paid in ether the cryptocurrency that runs on the Ethereum network. The common unit used for these transaction fees is called a gwei or one nano ether .

    As the number of transactions increase on the Ethereum network, gas prices go up. This is due to supply and demand: there are a limited number of slots for transactions to go into each block on the Ethereum network, but more demand to get into each slot.

    As you can see in the chart below, over the past few months, average gas fees steadily rose while spiking on multiple occasions due to the congestion caused by increasing DeFi activity. As a result, each time users move their coins in the Ethereum network, there is a hefty transaction fee that has to be paid to miners, thereby reducing profits.

    Although its not explicitly mentioned in the tax code, gas fees paid on transactions can be used to reduce your tax bill when properly tracked and reported.

    Read Also: Where To Buy Verge Crypto

    Example : Business Income Or Loss

    Alice regularly buys and sells various types of cryptocurrencies. She pays close attention to the fluctuations in the value of cryptocurrencies and intends to profit from the fluctuations. Her activities are consistent with someone who is engaged in the business of day trading. In 2017, Alice sold $240,000 worth of various cryptocurrencies, which she originally purchased for $200,000. Her net profit is $40,000. Since Alice is actively trading in cryptocurrency, which is a commercial activity, she has to report business income of $40,000 on her 2017 income tax return.

    Gains On Crypto Trading Are Treated Like Regular Capital Gains

    So youve realized a gain on a profitable trade or purchase? The IRS generally treats gains on cryptocurrency the same way it treats any kind of capital gain.

    That is, youll pay ordinary tax rates on short-term capital gains for assets held less than a year. But for assets held longer than a year, youll pay long-term capital gains tax, likely at a lower rate .

    And the same rules for netting capital gains and losses against each other also applies to cryptocurrencies. So you can deduct capital losses and realize a net loss of up to $3,000 each year. If your net losses exceed this amount, youll have to carry them over to the next year.

    Don’t Miss: How To Read Bollinger Bands Crypto

    What Crypto Records Will The Cra Want

    The CRA is fairly clear on the fact that you have to keep extensive records of your crypto transactions.

    The problem with exchanges is that there is no standard for the records they keep and how long they keep them. This means that the onus is on the taxpayer to periodically export information from these exchanges to make sure they are maintaining meticulous records. You need to keep all the required records along with supporting documents for at least six years from the end of the last tax year that the records relate to.

    Here are the different kinds of records you are expected to maintain:

    • Transaction date
    • Receipts of purchase and transfer of crypto
    • The fair market value of the cryptocurrency in CAD at the time of the transaction
    • A description of the transaction and the cryptocurrency address of the other party
    • The accounting and legal costs
    • The exchange records
    • Digital wallet records and cryptocurrency addresses
    • Software costs related to managing your taxes

    You can use Koinly for your record keeping without paying anything! Just sync your exchange accounts via read-only API keys and your blockchain wallets using your public keys or addresses. Koinly will then sync your transaction history automatically from time to time – so you’ll always have great records of your crypto transactions.

    How Are Airdrops And Forks Taxed In Canada

    5 Ways to Avoid Paying Taxes on Cryptocurrency Gains

    The CRA has no specific guidance on how airdrops and forks are taxed in Canada – but we can infer their tax treatment from their guidance on what is considered business income. Forks and airdrops are unlikely to be taxed as income on receipt, but you will pay Capital Gains Tax when you later sell coins or tokens you received from an airdrop or hard fork.

    Read Also: What Makes Crypto Go Up

    How Do Crypto Taxes Work

    Before we get into tax reduction strategies, letâs go through the fundamentals of how cryptocurrency is taxed.

    Cryptocurrency is considered a form of property by the IRS, similar to equities and real estate. That means itâs subject to both capital gains and income tax.

    Capital gains: If you dispose of your cryptocurrency, youâll be subject to capital gains tax. Disposal events include selling your cryptocurrency for fiat, trading your cryptocurrency for other cryptocurrencies, and buying goods and services with crypto. Youâll need to pay capital gains based on how your tokens have appreciated since you originally received them.

    Income tax: If you earn income in the form of cryptocurrency, youâll need to pay income tax. Income events include earning staking or mining rewards, earning referral bonuses from crypto apps, or getting compensated for your work in crypto.

    Trading Cryptocurrency For Another Type Of Cryptocurrency

    Generally, when you dispose of one type of cryptocurrency to acquire another cryptocurrency, the barter transaction rules apply. You have to convert the value of the cryptocurrency you received into Canadian dollars. This transaction is considered a disposition and you have to report it on your income tax return. Report the resulting gain or loss as either business income or a capital gain .

    Recommended Reading: Is Investing In Crypto Worth It

    What About The 30

    The only reason the strategy still works is that regulation has not caught up with innovation. Its very recently that governments have started to take cryptocurrencies seriously and realized the systemic threat they pose. You cant use the tax-loss farming strategy with stocks and securities anymore, as they are subject to a 30 day Wash Rule to prevent such shenanigans. The SEC decrees that the losses generated when rebuying the stocks or securities within 30 days of their sale are disregarded. Its like it never happened.

    The SEC has not yet managed to get its grubby little regulatory hands on cryptocurrency so this rule doesnt apply to our digital assets, for now. The IRS considers crypto as property, not a security, so for the moment, we are safe. I remember reading something about a US government proposal to tax unrealized gains in crypto. Hopefully, that was just a bad dream along with my Central Bank Digital Currency recurring nightmare.

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