Avoid capital gains tax on cryptocurrency and learn how to enjoy your crypto gains while minimizing your tax payments. Over the years, Bitcoin and other cryptocurrencies have determined how much we depend on fiat currencies. Of course, most central governments, after failing to take control of the Crypto space, decided to take a share of this space by taxing cryptocurrencies.
Cryptocurrency taxes are the same as other types of taxes. However, the concept and how to calculate it varies in each country. By following the methods below, you can avoid capital gains tax on cryptocurrency
How to avoid capital gains tax on cryptocurrency
1. Self-Directed IRA
A self-directed IRA, allows you to invest in assets like gold, real estate, and cryptocurrencies. By following the applicable rules and procedures, you can set up a self-directed IRA where you can buy cryptocurrency assets.
To learn more about IRS and its relation with cryptocurrencies, go to IRS on cryptocurrency trading
The IRA gives you the option to make tax-deductible contributions during your working years, but you will have to pay ordinary income taxes on withdrawals in retirement.
2. Less Capital Gains Taxes with Tax-Loss Harvesting
Tax-loss harvesting refers to selling stakes or interests at a loss. This loss is used to compensate the capital gains tax made from the trade of other stakes and interests at a profit.
So, how does this method help us avoid capital gains tax on cryptocurrency? Cryptocurrency investments that have already lost value can be vended to offset gains with losses. Imagine you have 20,000 dollars in capital gains from the increasing value of Bitcoin (BTC). On the other hand, you have an Ethereum (ETH) that has decreased by about 2,000 dollars in value.
By not selling, you will bear the capital gains tax from your 20,000 dollars growth in BTC investment. However, by selling the ETH at its current value, you realize the 2,000 dollars loss it has endured. You can then use this loss to offset your supposed tax, which in this example will be 18,000 dollars in capital gains.
3. Give away to Charity with CRTs
CRT pays a constant income to the donor, for a specific period of time or an entire lifetime. After the certain period for the CRT has passed, the remaining assets and value in the future are donated to a charity of your choice.
By donating assets into the trust, you can enjoy its tax deduction advantages. Tax deduction depends on a number of factors: what kind of CRT you are using, the projected income compensations, and the interest rates from the IRS. Taxes on short-term capital gains are postponed for the duration of the trust.
Take note that once you’ve given away your cryptocurrency assets to a CRT, consider it gone forever, since the trust fund contract is irrevocable. It will continue to bring income for you and the heirs named.
How to avoid capital gains tax when selling cryptocurrency
Sell assets during a low-income year. Whether you have short-term or long-term capital gains, the tax rates you pay are determined by your income. You can avoid capital gains tax on cryptocurrency by selling cryptocurrency
that you know will experience higher values in years with lower tax rates.
Selling cryptocurrency might affect some of your income to be taxed at a higher rate, but that does not push all of your profit into a higher tax bracket.
Do you have to report crypto on taxes if you don’t sell?
The IRS has stated that cryptocurrencies are taxable, and the amount of tax depends on whether it is a capital asset or a personal use asset. Selling or trading crypto means that they are tagged as capital assets, but holding them in your wallet and trading them for cryptocurrencies means that they are classified as personal assets.
If you trade your crypto that is classified as a capital asset for cash, then it will be considered a sale, and you need to pay taxes for that transaction. If the cryptocurrency is classified as personal use, then if you trade your crypto for other cryptocurrencies, it will not be considered a sale and there will be no taxes incurred.
Investing money in cryptocurrency may result in significant gains if you bought the assets before they begin trending up in value. If you’re lucky enough to experience high values, then a little bit of tax planning might help you reduce the crypto tax bill you owe on your gains. The list of ideas above could help you avoid capital gains tax on cryptocurrency.
Cryptocurrency taxation is very complex, and the tax regulations might change in the future. Because of that, it’s always best to consult a tax professional, such as a tax attorney. They can help you minimize your taxes by providing tax laws.