Here’s How to Cut your Cryptocurrency Tax Bill
Since Bitcoin launched in 2009, the idea of cryptocurrency has captured people’s imaginations. In only 11 years, crypto has moved from speculative funny money to legitimate investment.
Like all investments, it has tax consequences. So check out the ideas below to save money on your crypto tax bill.
Hang on to it
One way to save on taxes is to adopt a buy-and-hold mentality. It might sound funny to give Warren Buffett-type advice on such a new age investment. But the IRS rules on capital gains are the same on crypto as on most assets.
If you hold crypto for less than a year and sell it for a profit, you’ll pay capital gains of up to 37%, depending on your tax bracket. However, holding it for over a year can reduce those taxes significantly. In fact, the highest tax rate you’d pay is 20%, but the average is 15%.
This strategy can be difficult because cryptocurrencies are notoriously volatile. But if you have a plan and the will to hold, the tax savings can be significant.
Sell it in a down year
As we mentioned earlier, crypto is volatile. That can work in your favor, and it’s not unusual to see huge gains in a short amount of time. But if you can sell it in a year when your income is low, the overall tax bill may be less.
This strategy can help whether you sell them for short or long-term capital gains because both depend on your tax bracket.
Marry it to a traditional IRA
Investing in a Self-Directed Individual Retirement Account (SDIRA) can also help reduce your immediate tax bill. Of course, you’ll pay taxes on it when you start to withdraw it during retirement. But if you anticipate your tax bracket will be lower in retirement than it is now, this can be a good strategy.
If you think your tax bracket might be higher in retirement than it is now, then you might take advantage of a Roth SDIRA. You’ll pay the taxes during your earning years and withdraw cash tax-free.
Enlisting the help of a certified financial planner can help you decide which option is for you.
Give it away
You can give up to $15,000 worth of cryptocurrency to a family member annually. If they are in a low enough tax bracket, they may not incur any significant taxes if they sell it. And you’ll be off the hook for taxes on the donation since the basis shifts to the family member.
If donating to a family member isn’t an option, consider giving some to charity. This approach is similar to the family gift, with a few significant differences. First, there is no cap on how much you can donate each year. And the recipient will pay no taxes on gains if they qualify as 501(c)(3) tax-exempt charity.
Finally, donating your crypto can result in a significant deduction at tax time.
Putting it all together
Dealing with the tax implications of crypto is not much different from other investments. So, it’s a good idea to get with an accountant and financial planner to determine your strategy.