8 Ways to Reduce Your 2020 Crypto Tax Bill

A new year means preparing to pay taxes, which affects every single crypto enthusiast. But getting it right and keeping the IRS off your back is no easy task.

Crypto taxes can encompass capital gains tax and income tax. The fee differs depending on the user’s activity (roughly, capital gains tax applies to trading and investing, whereas income tax is charged for mining and staking).

Though complex, it’s more important than ever to ensure you’re declaring every transaction. Official regulators worldwide have made cryptocurrencies, and following their digital paper trail, a top priority in 2020. They’ll be watching much more closely than they have been in years.

Still, you can use some legal tactics to limit the costs, and they vary according to the state of the market. Where downward cycles are more about limiting losses, bull markets require a much different approach.

As crypto enters a new year and market cycle, Crypto Briefing outlines some of our biggest tips for minimizing your crypto tax bill.

Track Crypto Trades Diligently

It might feel cumbersome, but it’s crucial to track every single crypto trade.

It’s impossible to make any savings if you don’t have an accurate record of your activity, so staying organized will likely be a huge benefit in the long run.

Today, there are several services for managing crypto portfolios and calculating taxes – TokenTax, TaxBit, and Cointracker are three of the best examples.

Play Long-Term Games

Capital gains tax falls under two categories in the U.S., short-term and long-term.

Short-term capital gains apply to assets held for less than one year, and any profits are charged anywhere from 10% through to 37%.

Long-term capital gains apply to assets held for more than a year, and the tax-free allowance is up to $40,000 for single filers. The rates are also more favorable for larger profits. That means crypto holders can avoid (or at least limit) capital gains charges as long as they keep their assets for at least a year before cashing out.

As it relies on a long-term game plan, this tactic is of particular benefit to investors rather than traders.

Defer Your Crypto Taxes

Like holding out for long-term capital gains tax rates, crypto holders can benefit from employing a strategy to time their sales around the tax year.

In the U.S., the tax year starts on Jan. 1, and filings are due in mid-April.

Knowing this, holders may choose to cash out holdings at the beginning of the year, meaning tax payments won’t be due until April of the following year.

Harvest Your Losses

If you made losses on any crypto assets over the tax year, you could use the loss to offset some of your capital gains costs.

This is a strategy called “tax-loss harvesting.”

As an example, if Alice is sitting on $20,000 of profit from two BTC she bought in the middle of the year, but she also holds a ton of XRP, which is $12,000 in the red, she could sell the XRP to reduce her taxable gain to only $8,000, i.e., the difference between the profits and the losses.

This tactic needs to be employed before the end of the tax year to be effective.

Identify Your Lots

You can minimize your tax bill by identifying your lots. This is also known as filing by “Highest-In-First-Out” (HIFO) rather than “First-In-First-Out” (FIFO), which is how accounts are filed by default.

If Bob bought 5 BTC at $10,000 in August and another 5 at $20,000 in December, he could limit his capital gains by prioritizing the coins he paid more for in his tax returns.

If he sold his BTC for $28,000 in January, the tax would be on a profit of $8,000 rather than $18,000. The Internal Revenue Service (IRS) requires accurate details of each asset’s buy and sell date to make use of the Highest-In-First-Out method.

Services like Cointracker can be helpful for this precise strategy.

Donate and Give Crypto

By sharing crypto as a gift, you can avoid paying any tax on sums of $15,000 or less.

This can be gifted to a family member or person of your choice. However, if it exceeds the $15,000 mark, you’re obliged to complete an IRS Form 709 to declare the gift.

Similar to crypto gifts, charity donations do not contribute to any capital gain for the giver or receiver.

As an example, imagine that Alice buys 5 Bitcoin at $10,000 and later sells them for $25,000 each. Her taxable gain would be $75,000. If she donates $15,000 worth of Bitcoin instead, her tax liability across all of her holdings is reduced, and the charity benefits.

Plus, she can claim an additional deduction on her 709 Form.

Move to a New Area

Moving to a new area is a more drastic measure than most others, but with such high tax rates in many parts of the U.S. (California, New York), opting for a change of lifestyle in an area with lower tax rates may be favorable to some crypto holders.

New Zealand and the Cayman Islands are two examples of areas where capital gains tax does not apply.

Accurately Filing for Crypto Taxes

The above outlined eight easy-to-implement strategies for minimizing how much taxes you may pay.

That being said, it is highly recommended that active traders also verify their filings with a Chartered Public Accountant (CPA), preferably one with knowledge of crypto.

While minimizing what you may have to pay, doing so at the risk of legal action is never worth any savings you might incur.

Staying safe and above board is the best long-term strategy for enjoying your hard-won profits and limiting stress.

Original source: https://cryptobriefing.com/8-ways-reduce-2020-crypto-tax-bill/


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