Investing in cryptocurrencies can lead to enormous gains if you watch the market closely and it’s easy to get excited about watching values increase as your portfolio grows. Amid this excitement it’s easy to forget about the looming shadow of taxes which has the power to eat into your profits quite significantly. Fortunately there are many ways you can defer and minimize these taxes. Read on for the best measures to save on your crypto tax bill and maximise your own profits.
- 1. Tax Loss Harvesting
- 2. Invest Long Term
- 3. Gifting Crypto
- 4. Opportunity Zones
- 5. Buy And Sell With Your Retirement Fund
- 6. Leverage Software
- 7. Selling Out
1. Tax Loss Harvesting
Unfortunately, investments don’t always make the gains we hope for and this is as true for crypto as any other investment. However, you can use these losses to your advantage when it comes time to cash in on your gains in other areas. Selling your reduced-value cryptocurrency to realize those losses means you can offset other gains and minimize your tax bill. This is a completely legal and in fact common practice amongst investors and a great way to lower your tax bill. In fact you can even offset these losses against up to $3,000 of regular income to save even more on taxes.
2. Invest Long Term
The amount you pay in capital gains tax decreases the longer you hold your investment, so getting in for the long haul can be a smart way to decrease your crypto tax bill. In the US, cryptocurrency is treated as property, which means that after 12 months you’ll see a significant drop in your tax bill if you’re selling up. Buying and selling cryptocurrencies means keeping a close eye on the fluctuations of the market and selling at the opportune time, but ensuring you’re familiar with how your capital gains tax will be affected by investment time is another essential element to the game. It may be that hanging on to your crypto past the one-year mark, even if you anticipate a small price drop, will be the best way to maximize your profit.
3. Gifting Crypto
Just give it away! This is a counterintuitive way to make money, but it can be a good way to avoid paying capital gains tax as the government doesn’t claim any tax on gifts of up to $15,000 a year. If you are planning on gifting significant amounts of money to family or friends, for example providing a house deposit to your kids, then offering your crypto gains can be the best way to go about it as you’ll simultaneously be reducing your tax bill. Recipients of these gifts need to be aware, however, that they’ll be expected to pay taxes if they use the cryptocurrency, and unfortunately this isn’t a good tax dodge if you’re looking to gift it away and then ask for it back, as the IRS will closely track the movement of such investments.
4. Opportunity Zones
Introduced into the tax code in 2017, opportunity zones (OZs) are providing a great tax saving opportunity and can be taken advantage of by crypto traders. An OZ is an actual geographic area in the United States, so designated to encourage investment and economic development. From the perspective of the government, an OZ incentivizes investors to invest their as yet unrealized gains in these economically deprived areas. The OZ gets a developmental boost, whilst investors get to defer and reduce their taxes. Combined, these investments become a Qualified Opportunity Fund (QOF) providing an economic boost to the OZ.
This is a long-term solution to minimizing your crypto tax bill and it works as follows. Upon realizing your gains, you can invest those gains in a QOF within 180 days of selling. Your ultimate tax relief will depend upon the duration of your involvement with the QOF. You can defer paying tax on your capital gains for up to five years in a QOF, but if you maintain your investment beyond five years you’ll start to see tax reductions. With five to seven years investment you’ll get a 10% tax free allowance on your gains, and after seven years that increases by a further 5% to a 15% allowance.
Additionally, you’re likely to see an appreciation on your QOF stock. After ten years, this appreciation becomes entirely tax free on top of the 15% you’ll save on your investment. A long-term solution, but if you’re sitting on a large unrealized crypto gain the OZs can save you hundreds of thousands of dollars.
5. Buy And Sell With Your Retirement Fund
Using your 401-K or your individual retirement fund (IRA) to buy and sell cryptocurrencies can enable you to defer paying any tax, or even avoid paying it at all. In the US, all gains made by a retirement account will return into that retirement account. With many IRAs the tax on these gains will be deferred by several years and in the case of a Roth-IRA there will be no tax at any time on these gains. Deferring tax is valuable as you don’t need to chip away at your profits to pay your taxes, rather you can plug all your gains back into the market and watch your investment grow and grow.
6. Leverage Software
Actually calculating your taxes on your crypto gains can be a complicated business, and short of hiring an accountant (which can sometimes be worth the investment for the expertise in itself) there is some crypto-crunching software you can leverage to help work out how to minimize your taxes. When you’re calculating your tax liabilities, you’ll need to know the dollar value of every trade you made over the year – this can quickly become an inhuman task when you’re dealing with multiple trades and varying currencies. Even a small mistake in these calculations can cost you if the IRS ever comes looking, so using crypto tax software will automate this whole process and save you.
7. Selling Out
Some of these are short term solutions whereas others, such as taking advantage of OZs, entails years of even decades of planning. But by investing in crypto you’re taking care of your future, and these tax opportunities will save you vast sums in the long run.