Find out what you can do to reduce your crypto taxes, as Bitcoin price is soaring and deadline is approaching!
On November 13, the price of bitcoin jumped above $93,000 and crypto investors face a deadline that could impact future taxes. Investors need to establish a “cost basis” or their original purchase price for cryptocurrency, to avoid inflated profits. In addition to that, there are other ways to manage and reduce your crypto taxes.
It can require a combination of strategic planning. And taking proactive measures can maximize your after-tax returns, so let’s explore actionable ways to help you minimize your crypto taxes and increase your profits.
How To Reduce Crypto Taxes
1. Understand How Crypto is Taxed
The IRS treats cryptocurrency as property, meaning any sale, trade, or use of crypto may trigger capital gains or losses. The duration you hold the asset – short-term (less than one year) or long-term (more than one year) – determines the tax rate applied. Long-term capital gains are taxed at lower rates compared to short-term gains, making holding crypto for over a year a tax-efficient strategy.
2. Leverage Tax-Loss Harvesting
Tax-loss harvesting involves selling underperforming assets to offset capital gains. This strategy reduces taxable income by balancing out gains with losses. If your losses exceed gains, you can deduct up to $3,000 from your ordinary income annually and carry forward unused losses to future tax years. Timing is critical, especially during market downturns, to optimize tax savings.
3. Use Specific Identification of Cost Basis
When selling crypto, identifying which units are being sold can impact your tax bill. Specific identification allows you to choose units with the highest cost basis (the purchase price), minimizing taxable gains. Tools and platforms like crypto tax software can help automate this process and ensure accurate reporting.
4. Hold Crypto in Tax-Advantaged Accounts
In jurisdictions where allowed, holding crypto in tax-advantaged accounts, such as Individual Retirement Accounts (IRAs), can shield your investments from immediate taxation. This approach is particularly beneficial for long-term investors, as it defers or eliminates taxes until withdrawal.
5. Donate Crypto to Charitable Organizations
Donating cryptocurrency to a qualified charity allows you to claim a deduction for the asset’s fair market value without incurring capital gains taxes. This dual benefit makes charitable contributions an effective tax reduction strategy.
6. Optimize for the Wash Sale Rule
While the IRS wash sale rule currently applies to securities, it does not yet apply to crypto, once virtual currency is seen as property. This loophole allows you to sell crypto at a loss and repurchase the same asset without waiting 30 days. However, tax regulations may change, so consult a tax professional to avoid potential issues.
7. Regularly Monitor Crypto Tax Legislation
Crypto tax laws are constantly evolving. Stay informed about changes in legislation that may impact your strategies. Consulting with a crypto tax advisor can help ensure compliance and identify new opportunities for tax savings.
Additional Tips:
- Track Your Transactions Accurately: use reliable crypto tracking tools to maintain precise records of all trades, purchases, and sales.
- Consider Gifting Crypto: gifting up to $18,000 (as of 2024) per recipient is tax-free and can help reduce taxable holdings;
- Plan Crypto Investments Around Your Tax Bracket: strategically selling during years with lower income can help minimize capital gains taxes.