How to avoid paying taxes on cryptocurrency gains
However, there are strategies that can help investors legally minimize their tax burden. How do crypto taxes work? Cryptocurrency is considered a form of property by the IRS, similar to equities and real estate. Disposal events include selling your cryptocurrency for fiat, trading your cryptocurrency for other cryptocurrencies, and buying goods and services with crypto. Income events include earning staking or mining rewards, earning referral bonuses from crypto apps, or receiving compensation for your work in crypto.
For more information, check out our complete guide to cryptocurrency taxes. Harvest your losses If some of your cryptocurrency holdings have decreased in value, then tax-loss harvesting can be a great way to decrease your overall tax bill. Tax-loss harvesting is the practice of intentionally selling your cryptocurrency at a loss to claim tax savings.
At this time, investors can sell cryptocurrencies like Bitcoin, claim the capital loss, then buy back their tokens. Invest for the long term The simplest way to minimize your tax burden is to wait to dispose of your assets until they are long-term property. Still, you should keep the preferred long-term capital gains rate in mind when making trading decisions. Take profits in a low-income year Remember, the tax rate you pay on cryptocurrency disposals is based on your income bracket in a given year.
As a result, some investors choose to take profits on cryptocurrency gains in years where their personal income is low. In some circumstances, this can make a big difference in terms of your tax bill. Give cryptocurrency gifts Cryptocurrency gifts come with their own tax benefits. If you give cryptocurrency away as a gift, you have no income tax obligation.
This might seem like a drastic step to take. However, if you want to share your wealth with family and friends, giving a crypto gift could be a great way to accomplish this goal. Recipients receive tax benefits as well. Receiving a crypto gift is not considered a taxable event. These amounts are used to calculate any gain or loss for the recipient to report when the crypto is sold. For more information, check out our blog on how cryptocurrency gifts are taxed.
Traditional retirement accounts are funded with tax-free income, but all gains and eventual withdrawals are taxed. Meanwhile, Roth retirement accounts are funded with taxed income, but all gains and eventual withdrawals are tax-free. For example, if you decide to sell your capital assets in a Roth IRA, you will not be required to pay capital gains tax until you withdraw your earnings.
Unfortunately, many well-known IRA providers do not give investors the opportunity to directly invest in cryptocurrency. Luckily, there are alternatives. Self-directed IRAs allow investors to store their retirement savings in alternative investments such as real estate, precious metals, and cryptocurrencies. There are several options available for self-directed IRAs that allow investors to invest in cryptocurrencies. 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. Give a cryptocurrency donation Cryptocurrency donations can be a great way to contribute to meaningful causes. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories.
But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Editorial disclosure All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser.
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