Investing in cryptocurrency comes with the potential to make a lot of money in a short period of time. That being said, crypto is not without its downsides, especially as tax season rolls around. Are you facing heavy crypto taxes as a result of your trading activity? Here are a few tips on how to cut down on crypto taxes no matter where you live.
1. Dive deeper into accounting methods to find a better way to report your digital asset earnings.
What you will discover as you dive deeper into your crypto wallets to uncover capital gains and capital losses is that there are multiple ways to report any earnings from the sale of your digital currency. Finding the right accounting method is what will ultimately determine how much you pay when you file your tax returns. With that in mind, understanding these accounting practices and how to leverage them to your advantage is key as a taxpayer.
The first step you should take, whether you’re accounting for Australia cryptocurrency tax or cryptocurrency taxes in the U.S., is to look for a crypto tax calculator that can help you identify trades, income, and other taxable events found in your wallet transactions (independent wallets and exchanges like Coinbase). New traders can often forget to record when they purchased their assets, what the value of the asset was, and what they sold it for.
Once you have more in-depth information regarding your crypto assets, you can calculate your tax liability with accounting methods such as:
- First-In, First-Out (FIFO): The FIFO method helps you report crypto activity by determining the first asset you purchased and calculating your most recent sale based on the first assets purchased.
- Last-In, First-Out (LIFO): LIFO, as the name suggests, is an accounting method that focuses on calculating trades based on your most recently purchased assets rather than the first purchases.
- Highest-In, First-Out (HIFO): HIFO focuses on calculating trades based on the most expensive assets you purchased as a crypto trader.
- Specific Identification Method: Specific identification allows you to identify exactly which asset you sold in order to get the most benefit from your trading activity.
It’s important to remember that the possibility of an audit is always present when you’re filing your own tax forms. If you want to prepare for the upcoming tax year, look for the best crypto tax software that provides you flexibility with accounting methods, helps you consolidate your transaction history, allows you to export your information to the necessary IRS form, and offers support for your chosen assets (BTC, ETH, LTC). Whether it’s Koinly, CryptoTrader.Tax, TaxBit, or CoinTracker, you’re sure to find tax software that works for you.
2. Give your cryptocurrency away to get the deductions you’re looking for.
Giving feels great, and if it helps you reduce the amount you owe to the IRS, that’s even better. There are multiple ways you can give if you’re looking to reduce your tax liability. The first way to do this is to gift it to a friend or family member. Because you’re not paying for products or services, this is not a taxable event (but the person it’s being given to will have to pay taxes if they engage in any crypto trades).
If you’re looking to receive deductions, you can donate your crypto to a charitable organization. Charitable contributions fall into one of two categories: cash and non-cash. If you donate cash, you will incur taxes as you’ve traded your assets for fiat currency, although you will be able to deduct this amount when you file your contributions. You can also donate crypto directly to organizations that accept it, which makes your life easier. Either way, giving is both beneficial for the recipient and for your tax returns.
3. Wait until the year after you’ve purchased your assets to sell them.
Cryptocurrency trading comes with a great deal of urgency. After all, the prices of crypto can rise or fall in a matter of seconds, having a major impact on your balance and forcing you to engage in crypto transactions in order to avoid losing out on profits. That being said, if you’re in it for the long haul, you should wait until a year after you’ve purchased certain tokens to sell them. Long-term capital gains come with lower tax rates than short-term capital gains!
Crypto taxes can be killer if you made a ton of money from your trading activity. However, there are ways to reduce your tax bill and save money. Whether you’re an active trader, looking to trade in the future, or even a miner supporting your favorite blockchain, use the guide above to discover how you can reduce your overall tax liability and preserve more of your trading profits.