In today’s world, it seems as though everything is expensive. Despite the popularity of cryptocurrency, there is still confusion surrounding cryptocurrency taxes and what you can do to minimize them while still abiding by the IRS’ rules.
There are more ways to reduce these taxes than you may think! Our cryptocurrency tax experts have outlined helpful information on how to keep these numbers as low as possible.
Optimal Cost Basis for Tax Lots
One method to keep cryptocurrency taxes as low as possible is finding the optimal cost basis. How much you pay for cryptocurrency is referred to as the cost basis. This amount has a significant impact on the taxes that you pay when you eventually sell your cryptocurrency. The amount that you pay in taxes depends on:
- The market value of the cryptocurrency at the time of transaction (proceeds)
- How much you paid for the coin (cost basis)
- The difference between the two above prices and whether it’s a gain or a loss
The higher your cost basis, the lower your tax bill. It’s possible to optimize your cost basis via tax lot ID methods such as HIFO, FIFO, LIFO, and Specific ID.
Taking this one step farther, you can also use software scenario modeling. This means using a cryptocurrency software that automatically tracks all of your transactions, allowing you to use the most beneficial Specific ID method that we touched on above. This is particularly beneficial as it takes out the margin of error in the process and gives you peace of mind that you’re using the right method to reduce taxes. Cointracking.info is a strong choice when it comes to software options.
Tax Loss Harvesting
Another method to keep your cryptocurrency taxes to a minimum is using tax loss harvesting. This works by offsetting your capital gains with capital losses that you’ve incurred during that tax year. It’s also possible that the losses are carried over from a previous tax return. As U.S. investors are taxed on net capital gains, by offsetting capital gains with capital losses, you help to lower your taxable income.
As an added benefit, the wash sale rule doesn’t apply to cryptocurrency. The wash sale rule means investors cannot claim losses on securities that are sold at a loss and reacquired within 30 days. This doesn’t apply to cryptocurrencies and can be ultimately used to lower the year’s capital gains.
Less Traditional Methods to Lower Cryptocurrency Taxes
Beyond the two above methods, you can also utilize other tactics. Gifting is another example; any cryptocurrency that is given as a gift means there is no income tax obligation and receiving crypto isn’t a taxable event. If you receive a gift that has a fair market value over $15,000, you’ll be required to submit a gift tax return that is primarily for informational purposes.
Self-directed IRAs are another option, allowing investors to keep their cryptocurrency assets in their 401-Ks and Roth IRAs. Popular options include Coin IRA, iTrust Shares, and Bitcoin IRA.
One of the easiest and most reliable ways to ensure you’re minimizing your cryptocurrency taxes is by working with a professional and experienced team. At Founder’s CPA, we’ve helped countless individuals and companies navigate the world of cryptocurrency, saving them time, stress, and money along the way. Take advantage of our complimentary assessment today!