2021 was a big year for cryptocurrency, with everything from laser eyes to record highs. If you’re one of the more than 10% of Americans who traded cryptocurrencies in the last year, you undoubtedly have questions about how your transactions and other cryptocurrency activities will affect your taxes.
Cryptocurrency has propelled many investors to the moon, but as they say, everything that rises must eventually fall. For cryptocurrency profits, taxes are the dark side of the moon. Fortunately, there are legitimate and intelligent methods to avoid your cryptocurrency taxes. How? Read on.
Hold on
What is the simplest approach to avoid cryptocurrency taxes? All you have to do is HODL. You must retain your cryptocurrency investment for at least a year before selling it in order to use this tax avoidance approach. If you do this, you will often be eligible for a long-term capital gains rate, which is lower than the rate you would pay on a short-term gain. Nowhere is hodling more profitable than in Germany, where cryptocurrency sales made after a year-long holding period are tax-free.
While US cryptocurrency investors benefit from a lower capital gains tax rate for assets held for more than a year, a 50% capital gains tax reduction is available in Australia. Depending on their individual or combined marital income, investors can pay reduced tax rates of 0%, 15%, or 20% here as contrasted to short-term profits, which are taxed at Federal Income Tax bracket rates and have a maximum tax CGT of 37%.
Utilize the tax-free thresholds
The British tax payers are fortunate. Every person is entitled to a free CGT allowance of up to £12,300 per year. Profits under €600 are tax-free in Germany, meanwhile.
Unfortunately, Australia does not offer such a deduction, but US investors do. If your year total income is less than $41,676, you won’t have to pay any capital gains tax, according to the IRS. The annual cap for married couples filing jointly is $83,351. The annual cap for the head of household is $55,801. Knowing your possible tax-free maximums can help you plan your crypto disposal strategy and, as a result, actively minimize your taxable position.
Incorporate losses into profits
You may benefit from cryptocurrency profits by deducting losses from other investments in the year you realize your profit, just like with any other investment. Accordingly, if you made $30,000 from selling Bitcoin but lost $30,000 from selling Ethereum, you would have broken even and wouldn’t have to pay any taxes.
Other cryptocurrencies are not exempt from these losses, either. Check the remainder of your portfolio whether there are any other losing assets you may sell to balance your profits if you are ready to cash in a sizable crypto investment.
In the US, if your capital losses are more than your capital gains, you can deduct the smaller of $3,000 ($1,500 if you’re married and filing separately) or the entire net loss listed on line 21 of Schedule D from your income (Form 1040). You may roll over a net capital loss that exceeds this threshold into future tax years. Tax-loss harvesting is the practice of using this to your advantage.
Invest in a cryptocurrency IRA, pension, or annuity fund
Investing in cryptocurrency as part of a retirement, pension, or annuity investment is one of the best ways to avoid paying cryptocurrency tax.
Self-directed IRAs are specialized IRAs available in the US that let you invest in unusual assets including cryptocurrency, real estate, and precious metals. Taxes would only apply when money was removed from the account, not during any trade of bitcoin or other cryptocurrencies within the account.
Although these plans are far more sophisticated than standard annuity plans, you can delay or completely eliminate crypto investment profits in the UK by utilizing a retirement plan like a typical IRA, Roth IRA, or individual retirement account (IRA).
Investing in cryptocurrency and using self-managed superannuation accounts both have advantages for Australian investors (SMSF). Long-term profits are effectively taxed at a rate of 10% under existing SMSF regulations, whereas income is only taxed at a rate of 15%. Gains from cryptocurrency assets are taxed at 0% when included in a retirement pension. A SMSF will require its own wallet, which must be kept completely apart from any accounts used for individual bitcoin investments.
Utilize the yearly gift tax exemption
United States-based? Consider yourself fortunate because, unlike in nations like Australia and the UK, cryptocurrency gifts to anybody under $16,000 are tax-free.
Instead, American taxpayers benefit from a $16,000 yearly gift tax exception, which is applicable to every recipient of a gift. If you are over the $12.06 million lifetime gift tax exemption, gifts worth more than $16,000 might possibly be subject to gift taxes of 40%. You may intentionally avoid paying capital gains tax on the bitcoin you sell of by giving it away.
Changing your tax rate
You may always try to wait out a lower tax rate if you have the luxury of time on your side. You could be preparing to retire, have strategically reduced your pay, or be returning to school. Timing your crypto disposals to coincide is an efficient tax-reduction strategy if you can switch to a reduced tax rate.
Make a charitable contribution
Your bitcoin gift is deductable from your taxes. If you donate at least some of your cryptocurrency to charity and don’t require the entire benefit from your investment in cryptocurrencies, you can reduce your capital gains tax burden. The whole value of your cryptocurrency, including any capital gains, will be deducted from your taxes if the charity is registered.
In the US, use the IRS’s database of exempt organizations to verify a charity’s 501(c)3 eligibility. If you want to claim your gift as a tax deduction on your federal taxes, the charity must be 501(c)3-registered.
Donations to organizations in Australia that have DGR status—deductible gift recipient status—can only be deducted from your taxes.
Give your spouse your cryptocurrency assets
Coupled up? Depending on the nation in which you pay taxes, you might be allowed to transfer some of your cryptocurrency assets tax-free to your spouse, civil partner, or other domestic partner. Transfers between spouses, for instance, are now excluded from CGT in the UK due to a tax-free gift loophole.
As a result, assets can be transferred between partners, allowing you to offset profits using both of your yearly CGT allowances. The CGT allowance for married couples and civil partners is virtually doubled as a result. The HMRC states that you cannot be divorced or live apart in order to receive this payment.
Because the receiver gets the asset’s base cost, the transfer is said to occur at “no gain, no loss.”
Invest in a fund for opportunity zones
By investing in an Opportunity-Zone fund, US investors can postpone a portion of their cryptocurrency tax obligation. A provision in the 2017 tax legislation allows taxpayers to transfer the proceeds from the sale of, say, a stock or business, into a fund established to encourage investment in an economically underdeveloped area. This allows taxpayers to postpone and potentially cut capital gains taxes. Typically, investors have six months to relocate their money. The law also allows you to postpone paying capital gains tax until 2026 and, if you retain the investment for a further two years, to reduce your tax liability by as much as 10%.
Similar to the US, UK investors who hold their earnings through Enterprise Investment Scheme (EIS) and Social Investment Tax Relief (SITR) investments for three or more years are exempt from capital gains tax.
To find unrealized losses, use a cryptocurrency tax calculator
If you don’t know how your portfolio is doing, it’s doubtful that you’ll be able to identify possibilities to minimize your cryptocurrency taxes. The HRMC in the UK, the ATO in Australia, and the IRS all advise cryptocurrency investors to utilize a crypto tax software like Koinly to pay the appropriate taxes. But when used wisely, cryptocurrency tax software may be just as effective in assisting you in paying less tax.
An illustration. Let’s imagine you anticipate paying a hefty capital gains tax bill. Look at your unrealized losses by entering your Koinly portfolio dashboard. You can sell at a loss if you have underperforming assets. As a result, they become realized losses that you can use as an offset against your capital gains to pay less in taxes. Another name for this is tax loss harvesting.
In some nations, losses can also be offset up to a specific level against regular income. To see if this is the situation where you reside, be sure to review the cryptocurrency tax legislation of your nation.
