Have you traded crypto assets? Maybe you bought BTC years ago, when its price was much lower, and decided to make big returns this year. Or maybe you joined the revolution late and you bought some ETH, only to turn around and sell it for a quick amount. In either case, your crypto trade could influence your 2021 tax return.
How do crypto taxes work?
For better or worse, capital gains tax rules apply to cryptos like BTC and ETH. The Internal Revenue Service (known by the acronym IRS for the United States) treats all cryptos as capital assets, therefore, you must pay taxes when they are sold and additional income results. This is exactly what happens when more traditional investments, such as stocks or funds, are sold at a profit.
The amount of income tax you will have to pay depends on whether you have held the crypto for less than a year or more than a year. If you haven’t reached 12 months, your earnings are taxed at short-term capital gains rates, ie at your regular tax rate. But if at least 12 months have passed since you acquired it, you will be able to take advantage of a type of long-term capital gain; which is lower than most income taxes, based on your taxable income.
On the other hand, just like if you sell any other investment at a loss, if your crypto investment has gone down in value when you sell it, you will have the opportunity to claim a capital loss; that you can use to offset other income taxes. In that regard, it becomes imperative to trade with a reliable broker who can provide you with assistance, the BitiQ website will provide you with access to the right cryptocurrency trading platforms – access the official BitiQ app here.
How to minimize crypto-taxes?
If you think you might owe cryptocurrency taxes in the future, here are six ways to help minimize them:
1. Hold cryptocurrency for the long term
If you hold a crypto investment for at least a year before selling it, your earnings qualify for the long-term capital gains prime rate. Depending on your taxable income for the year, this can cut your tax rate almost in half, from a top rate of 37% for short-term earnings to a top rate of just 20% for long-term earnings. .
2. Offsetting profits with losses
As with any investment, you can take advantage of crypto income by also claiming losses from other trades in the year you make your profit. That means that if you made $1,000 from the sale of BTC, but lost $1,000 from the sale of Ethereum, you would not have to pay any tax, since you were down to zero.
However, these losses are not limited to other forms of crypto. If you’re about to cash in on a big trade in crypto assets, check out the rest of your portfolio to see if there are other losing positions you can sell to offset your gains. And if you end up losing substantially more than you make in a year, you can deduct up to $3,000 in excess losses against your personal income taxes, as well as carry forward any unused losses to offset your future investment earnings.
3. Sales on time with your tax rate
If you have the luxury of time on your side, it’s possible to try to wait for a lower tax rate, says Jeff Hoopes, associate professor at the University of North Carolina and director of research for the UNC Tax Center.
Maybe you got laid off, retired, went back to school, or moved to a state with lower taxes. You could then find yourself in a lower tax bracket, allowing you to sell your crypto with less tax due, he says.
4. Claim mining expenses
Although it may seem like a low-cost activity in theory, this activity involves considerable expenses, such as computers, servers, electricity and charges from the Internet service provider. If you are a crypto miner, you can deduct these costs against your income from the activity, although the amount you can deduct depends on whether you categorize your operation as a business or a hobby.
5. Consider investing through a retirement plan
If you invest in crypto using a retirement plan like a traditional IRA or Roth IRA, you can defer or avoid investment earnings altogether, although it’s not as easy as investing through a regular brokerage account.
6. Donate to charity
If you don’t need the entire return from your crypto trade, you can lower the tax burden by donating at least a portion. You will get a deduction for the full value of your crypto, including any returns. But this generally only makes sense if you’ve already planned to donate to charity.