As each tax season ends you have the opportunity to analyze your investment portfolio and create a tax strategy for the following year. If you’ve begun to invest in cryptocurrency, below are nine helpful cryptocurrency tax tips you can consider baking into your tax strategy.
Tip #1 – Hold Your Crypto for a Year or More
Cryptocurrency is taxed at a capital gains rate that depends on how long you’ve held the asset. If you hold crypto for a year or less, the tax rate ranges from 10%-37%, depending on income and filing status. If you hold a digital asset for longer than a year, the tax rate ranges from 0%-20%.
Tip #2 – Consider Using Tax-Focused Crypto Software
Linking your exchanges and crypto wallets to cryptocurrency software can automate and simplify the tax process. They can account for transactions dating back to 2014, which can help you claim past tax losses.
Tip #3 – Buy and Sell Through an IRA or 401k
Using your retirement account to purchase cryptocurrency allows you to defer or fully avoid paying taxes on your cryptocurrency. Income and gains generated by your retirement account return back into the account with taxes deferred or eliminated completely.
Tip #4 – Take Advantage of Qualified Opportunity Funds
Qualified Opportunity Funds (QOFs) are partnerships and corporations that invest in economically distressed communities. Should you take the capital gains made from your crypto and reinvest it in a QOF then taxes are deferred while held in the QOF. As long as the money is in a QOF then at five years there is a 10% reduction in capital gains taxes. At seven years there is a 15% reduction in capital gains taxes. And at ten years, any appreciation on the investment is tax exempt.
Tip #5 – Donate to Charity
You will get a tax deduction if you donate your cryptocurrency assets to a qualified charity. The tax deduction will be the equivalent of the fair market value of the asset at the time of the donation and you will not have to pay capital gains on the donated property.
Tip #6 – Gift Your Cryptocurrency
If you want to reduce your taxes and share your wealth, you can always give your cryptocurrency as a gift. Just know that you won’t be taxed on the crypto gift but the recipient will have to pay taxes on the crypto if they use, sell, or trade it.
Tip #7 – Become a Resident of Puerto Rico
If you’re a heavy hitter in the crypto investment world then consider becoming a resident of Puerto Rico. Should you move to Puerto Rico and buy a home there within two years, you will pay 0% on capital gains, which means you keep all of your crypto profits.
Tip #8 – Use a HIFO Algorithm
For tax purposes, you can use a specific identification method set forth by the IRS called a Highest-In-First Out or HIFO. The IRS requires a specific set of criteria used to calculate your crypto gains and losses. Once you enter this criterion into a crypto tax software then the HIFO algorithm will select the crypto that you paid the highest price for and sell that off first. This will result in minimum capital gains taxes and thus a lower tax bill.
Tip #9 – Tax Loss Harvesting
If your crypto portfolio goes in the red, then you can sell those crypto investments that have lost value to “harvest” those losses for tax purposes. These realized or “harvested” losses can be used to offset your taxable capital gains. With the money you save on taxes you can then use it to reinvest in your portfolio.