While digital currencies are increasingly becoming popular, governments are also working out how to tax their transactions. While people have made fortunes out of dealing with cryptocurrencies, its market has also been volatile of late. Consequently, people might look to sell off crypto holdings from their portfolios.
Have you made substantial cryptocurrency transactions and are now faced with an enormous tax bill? Worry not. The taxes can be managed, and there are specific strategies that you can use to reduce your tax liabilities in a legal manner.
In this article, we shall look at what are the options to manage your crypto portfolio. You may also consider using software to make management easier. Check out this Taxbit Review to learn more about how these tools work.
Let’s get to it.
Taxation on your Cryptocurrencies
Before we discuss how to manage your taxes, we need to quickly understand how your crypto assets are taxed:
Cryptocurrency transactions are taxable by law in a manner similar to transactions related to other tangible properties. The amount of tax liable primarily depends on two factors:
- How long have you held the crypto assets
- Your total income for the year
In case the crypto has been held for less than a year, higher rates shall be charged.
The core principle is that the tax is charged on the profit you made on the crypto, i.e., the difference between the price you purchased it at and the amount you sold it for. There are different types of crypto transactions that are taxable:
- In case it is sold in the form of a fiat currency
- In case it has been used to purchase goods or services.
- In case there is a trade between different types of cryptocurrency.
Managing taxes on your Crypto Portfolio
1. Keep the crypto in your portfolio until at least one year has elapsed
The capital gains rate that is applied depends on the time you have held the cryptocurrencies. In other words, if you have held them for less than a year, it would be considered a short-term capital gain. Anything exceeding that would become a long-term capital gain.
The taxation on a long-term capital gain is significantly lower. Thus, if you have the patience to hold the crypto assets for up to a year, your tax liability automatically gets reduced.
2. Sell the crypto assets in a year when you make a lower income
Another strategy related to timing could be to sell the crypto assets in a year when you have made less money from your various sources of income. As the income is lesser, you will be evaluated as under a lower income bracket, and the amount of crypto tax charged would be less.
3. Reduce your taxable income
You can check if you are eligible for certain tax benefits. This can be by donating to charities, investing in government bonds, putting money in a health savings account, or taking care of medical procedures. The goal is to bring down your taxable earnings for the year, thus simultaneously reducing the amount levied as crypto tax.
4. Offset the capital gains with capital losses
In your declaration form to the revenue department, you need to clearly indicate the losses that you have made on crypto transactions, thus making them exempt from taxation. This is better known as tax loss harvesting.
5. Relocate to a state that does not charge income tax
There might be some states which do not require you to pay taxes on your investment gains. This might be due to the state trying to increase business opportunities. Moving to such a state would help you reduce the amount you owe. Of course, you still need to pay the federal tax. But the overall tax amount owed, and thus, the tax on the crypto, would reduce.
6. Gift the crypto assets to a family member
You could come to a mutual agreement about how to use the crypto coins. Since you have essentially transferred the crypto coins to a close relative, you can still indirectly make use of them.
You can try gifting some of your crypto assets to a trusted family member who draws a lesser salary. At the same time, since he makes a lesser salary, the tax liability would also be lesser.
7. Pass it on along with your will
You can choose to bequeath your crypto investments, along with your other assets, onto the next generation. This would delay the time of payment of taxes.
1. Do I owe taxes if I sell my crypto assets for a loss?
No, it does not fulfill the criteria of a profit being made upon the crypto asset.
2. Is non-traded crypto also liable to taxes?
No, you need not report the crypto until you sell it.
3. If I trade one crypto for another, will it still be considered to be a taxable event?
Yes, this is covered under taxable earnings. The market value of the crypto at the time of trading shall be considered.
The world is set to see drastic changes in the manner in which it uses the currency, thanks to the global disruption caused by cryptocurrencies. It is necessary to stay abreast of all the changes that are being made as a result of this. Here, we have provided a useful discussion of how you can manage your crypto portfolio, what your tax liabilities are, and how you can approach the situation.