There are pros and cons to everything, including cryptocurrency. On one hand, it is an interesting, and often profitable, investment. On the other hand, it is still taxable.
People are often surprised by this.
The good news is that there are some methods, other than giving up your US citizenship, that can mitigate the amount of tax you pay for your bitcoin or cryptocurrency of choice.
Think Longterm Investment
People are attracted to cryptocurrency for all kinds of reasons, pure curiosity, tech fans, investment, the list goes on. Whatever your reason is, try and think in the longterm. Here is why.
The IRS (Internal Revenue Service) think of cryptocurrency as property, not as an equivalent currency to dollars. This means that if you sell your bitcoin for example and make a profit then that is considered to be capital gains, which are taxable. All is not lost though. Luckily, the government is encouraging of longterm investments. Therefore, if you hold on to your coins for more than 12 months you will pay a lower rate of tax than if you were to cash in and cash out quickly.
It is unlikely that you are of an age where retirement is on your mind, but this might make you think differently. You can defer tax by using your retirement account. “This is a bit of a coup for crypto fans,” says, Andy Breen a crypto blogger at Write My X and 1Day2Write, “With this simple adjustment to how they trade they can maximize gains with minimal tax.”
Using a trusted agent or platform from the alternative investment IRA industry, you can grow your investment with no tax gains. Why? Because any gains made within your retirement account, or any income, are not taxable.
Plan How You Will Use It
Maybe you have invested for investment’s sake and have no plans to actually use any of the cryptocurrencies you have been slowly squirreling away until the day you decide to retire early. For the sake of lower tax, you might consider using some of it at least.
“Often when my clients invest they are thinking ‘how much?’ and not ‘what for?’”, says, Antony DeBruin a financial expert at Britstudent and Nextcoursework. “I always advise them to come back when they have at least a three year plan of how they will use their investment into cryptocurrency.”, adds DeBruin.
When you are creating your plan, look at how you spend regular currency and see are there any parallels that could have tax benefits. Your retirement fund is one that we have covered. How about gifts? Every year we spend hundreds, if not thousands, of taxable dollars on birthdays, weddings, bar mitzvahs, and Christmas. When investing, look at the big events you have coming up, these are all opportunities to gift your bitcoin and pay less tax on it. Keep a portion of your investment to one side for this purpose. The recipient also pays no tax on the gift. However, they will pay a tax if they sell it. When you gift cryptocurrency, include suggestions of how the recipient can enjoy it – such as airlines they can use it with, and websites that accept it.
The gift option also applies to charity donations. This is another one to add to your plan. If you usually make annual donations switch to donating in cryptocurrency fr better tax options.
Cryptocurrency can seem like a fun interest to dabble in and there is nothing wrong with that. It can’t be recommended enough that you keep a clear track of your purchases and investments. It is easy to lose track and, like many unfortunate souls, get stung by the IRS. If accounting is just not something that you can keep your head around, do the best that you can until it gets too much and then look for a tax consultant who specializes in crypto tax. Alternatively, there are a number of specialized tax apps emerging for just this purpose.
Whichever method you use, thinking ahead, having a plan, and staying organized could mean the difference between a big pinch from the IRS and a pinch you barely feel.
Mildred Delgado is a contributor at Coursework Writing Services and PhD Kingdom who has been involved in many projects throughout the country. Mildred is a keen investor and blogger at Originwritings service.