• Akanksha Malik, Digital Strategist and Content Creator at Mesha


• 30.01.2023 11:45 am
#crypto

Cryptocurrency has the potential to generate significant wealth for investors, but it is important to be aware that this wealth may be subject to taxation. By understanding the tax implications of cryptocurrency and implementing strategic approaches, investors can minimize their tax burden. In this article, we will provide an overview of cryptocurrency taxes and present some strategies for minimizing tax liability.

6 Ways to Minimize Crypto Tax

1. Buy Crypto in an IRA or 401k

One way to minimize your crypto tax burden is to buy crypto through an individual retirement account (IRA) or a 401(k) plan. These types of accounts are tax-advantaged, which means that you can potentially reduce or eliminate your tax liability on crypto gains made within the account. 

However, it's important to note that there are strict rules and limitations that apply to IRAs and 401(k)s, and you'll need to work with a financial professional to set one up and make sure you're in compliance with all relevant regulations. Additionally, it's worth noting that the tax implications of holding crypto in an IRA or 401(k) may vary depending on your jurisdiction, so you'll want to make sure you understand the specific tax rules that apply to your situation.

2. Hold onto Your Crypto for the Long Term

As a crypto investor, you may have come across the advice to hold onto your cryptocurrency for the long term. This is a common belief among many in the crypto community. Well, there is some truth behind this statement. Holding onto your crypto investments for an extended period of time can help reduce your tax burden and maximize returns. 

When you hold onto your cryptocurrency investments for a year or more, you qualify for what’s known as a long-term capital gains tax rate. This rate is much lower than the ordinary income tax rate that applies when you sell off quickly or trade frequently, making it an attractive option for those looking to minimize their taxes on digital assets. 

3. Offset Crypto Gains with Losses

One important strategy you should consider when it comes to minimizing your crypto taxes is offsetting gains with losses. Offsetting gains with losses means that if you make a profit on one cryptocurrency, you can take some of those gains and use them to offset any potential losses from other cryptocurrencies in the same year. 

Offset crypto gains with losses is an effective way to optimize your taxes since it lets you reduce your taxable income by reducing or eliminating capital gains or income from trades or sales of cryptocurrencies. You’ll also benefit from lower tax rates for long-term holdings since any profits are treated as long-term capital gains, which have much lower tax rates than short-term capital gains.

4. Sell Assets During a Low-income Year

One strategy to potentially save money on taxes when selling cryptocurrency is to consider the tax rate you will pay based on your income level. If you have short-term or long-term capital gains from the sale of cryptocurrency, the amount of your taxable income will determine your tax rate. 

If you expect to have a lower income in a particular year, it may be beneficial to sell cryptocurrency that you expect will generate gains during that year, as you may pay a lower tax rate on those gains. It is important to note that while selling cryptocurrency may result in some of your income being taxed at a higher rate, it does not necessarily mean that all of your income will be pushed into a higher tax bracket.

5. Give Gifts to Your Family

Gifting cryptocurrency is a great way for investors to reduce their taxable income for the year. By transferring tokens into someone else's account, investors are able to avoid capital gains taxes on the transferred asset, potentially saving thousands in taxes each year. 

Additionally, the Internal Revenue Service allows individuals to give up to $15,000 per person annually without having to pay a gift tax or even report it on your income tax return. Even if you exceed the $15,000 gift limit, you will not be required to pay gift taxes as long as you have not used up your lifetime estate exemption of $11.7 million.

6. Leverage a Crypto Tax Software/Service

Cryptocurrency taxes can be a tricky and complicated thing to understand. A great way to make sure you are paying your crypto taxes properly is by using a tax software that specializes in cryptocurrency. Crypto tax software provides many features, such as the ability to import data from multiple exchanges, tracking cost basis and capital gains/losses, creating IRS-ready reports, and much more. 

However, if you find it difficult to use the software, reach out to companies that offer crypto tax services in order to get your taxes filed. These companies have trained professionals who specialize in handling cryptocurrency taxes and can help ensure you are paying the right amount of taxes and that your returns are filed accurately and on time. By using a crypto tax service, you can have peace of mind that your tax obligations are being taken care of and you can avoid any potential issues with the IRS.