Cryptocurrency trading is now a key venture for many people. Crypto investors make significant initial profits despite a volatile market. However, with crypto profits comes taxation by the IRS. Fortunately, once you know the ins and outs or how cryptocurrency is taxed, you can use some strategies to minimize the amount of crypto tax you pay to the IRS.
1. Hold Your Crypto Longer
The IRS taxes cryptocurrency at a capital gains rate. This depends on how long you’ve had the asset. The longer you hold the asset, the more the taxes reduce. Blake Harris Law suggests that you hold the gains longer than one year or until short-term gains become long-term gains. This will enable you to pay a reduced tax rate on capital gains of 10% to 37% crypto tax rates for short-term gains vs 0% to 20% for long-term gains.
2. Use a Tax-Focused Crypto Software
If you want to simplify your tax process, link your crypto wallets and exchanges to cryptocurrency software. Since this software can account for crypto transactions dating back to about 2014, it can also help you claim past tax charges and losses.
3. Buy and Sell Your Crypto Through an IRA or 401k
If you use your retirement account to buy cryptocurrency, you can defer or fully avoid paying any taxes on them. This applies to income and gains generated by a retirement account as they are eligible to tax deferment or elimination. Plus, always stay up to date with the crypto regulatory landscape.
4. Donate Your Earnings to Charity
Donating your cryptocurrency earnings to a qualified charity will get a tax deduction, leading to no capital gains tax. You can claim your deductions on your tax return. This way, you will earn more than if you paid normal taxes.
5. Gift Your Cryptocurrency
Similar to donating crypto to charity, gifting reduces your crypto tax liability. But, although you won’t pay tax on the gift, the receiver will pay tax on the crypto if they sell, trade or use it. Ensure both you and the recipient understand this.
6. Use Tax Loss Harvesting
Tax loss harvesting involves “selling assets at a loss” so as to offset your capital gains and reduce your crypto tax liability. Such trades happen before the end of the year to enable you to access the capital gains before they’re locked. You can then reinvest the money you save on taxes into your portfolio.
7. Become a Resident of Puerto Rico
If you become a resident of Puerto Rico and buy a home there within two years, you’ll pay 0% tax on capital gains. If you’re flexible about becoming a resident there, you’ll keep all your cryptocurrency profits. The above key tips by Blake Harris Law to minimize crypto tax liability.
Endnote
Crypto trading is highly volatile and highly profitable in equal measures. Since more profit means more taxes, understanding the tax requirements of the crypto market is important. With a continually changing regulatory landscape, make sure you keep up-to-date with the crypto tax laws. If you want to minimize your crypto tax liability, use the strategies we’ve outlined.