Smart Strategies to Minimize Cryptocurrency Taxes

With the growing popularity of cryptocurrency, more investors and traders are reaping significant gains from their holdings. However, those gains often come with hefty tax bills, as crypto is subject to taxation in most countries. Fortunately, there are strategies you can employ to minimize your cryptocurrency taxes legally and keep more of your profits. Here’s a guide to the most effective tax-saving methods for crypto investors.

Call Turner Business Solutions at (316) 285-0125 if you need a crypto tax expert to assist you. You can also schedule a free consultation online.

1. Hold Crypto for the Long Term

One of the simplest ways to reduce your tax liability is by holding your cryptocurrency for over a year. In many countries, including the U.S., long-term capital gains (assets held for more than one year) are taxed at a lower rate compared to short-term gains (assets held for less than one year). Short-term gains are typically taxed at your ordinary income tax rate, which could be as high as 37% in the U.S., depending on your income level. Long-term capital gains, on the other hand, are taxed at rates ranging from 0% to 20%.

Strategy: When possible, hold onto your crypto for over 12 months to take advantage of lower long-term capital gains tax rates.

2. Harvest Crypto Losses

A common strategy used in traditional stock markets is tax-loss harvesting, which is also applicable to crypto investments. Tax-loss harvesting involves selling underperforming or depreciated assets to realize losses. These losses can be used to offset capital gains from other profitable investments, thereby lowering your overall taxable income.

Additionally, if your losses exceed your gains, you can use up to $3,000 of net losses to offset other income. Any remaining losses can be carried forward to future years, offering more opportunities for tax savings.

Strategy: Review your portfolio for any cryptocurrencies that are underperforming. Selling these assets at a loss can reduce your taxable capital gains and offset other income.

3. Utilize Specific Identification Accounting Method

When you sell or trade cryptocurrency, the amount of tax owed depends on which specific coins or tokens were sold. Many people use the FIFO (First In, First Out) method by default, where the first coins you bought are considered the first ones you sell. However, you can potentially lower your taxes by using specific identification to choose which coins to sell.

For example, if you bought Bitcoin at different times and prices, you could choose to sell the coins with the highest cost basis, minimizing your capital gains. This method allows you to strategically select which units of crypto you sell to reduce your tax liability.

Strategy: Keep detailed records of your crypto purchases, and when selling, use the specific identification method to select the coins with the highest cost basis.

4. Consider Moving to a Tax-Friendly Jurisdiction

If you're a high-income earner or expect to make significant gains from crypto, you might want to consider relocating to a more tax-friendly jurisdiction. Some countries, like Portugal, Germany, and Singapore, either don't tax crypto or offer favorable tax treatment for long-term holdings.

In the U.S., certain states like Florida and Texas have no state income tax, which could save you money on crypto gains if you’re a resident of those states.

Strategy: If you have the flexibility and your crypto portfolio is substantial, consider moving to a tax-friendly country or state to reduce your tax burden on cryptocurrency gains.

5. Donate Cryptocurrency to Charity

If you’ve made significant gains in your cryptocurrency holdings and are charitably inclined, donating crypto can provide a tax benefit. In the U.S., donations of appreciated assets, including crypto, to a qualified charitable organization allow you to deduct the fair market value of the donation on your taxes, without having to pay capital gains tax on the appreciation.

This means you can both reduce your tax bill and contribute to a cause you care about. It’s a win-win situation that can provide significant savings if you’ve seen substantial appreciation in your crypto investments.

Strategy: Donate appreciated cryptocurrency to charity and claim a deduction for the full market value while avoiding capital gains taxes.

6. Use Crypto in Tax-Advantaged Accounts (Where Possible)

In some jurisdictions, it is possible to hold cryptocurrency in tax-advantaged accounts like IRAs or 401(k)s in the U.S. These retirement accounts offer significant tax benefits, such as deferring taxes on gains or completely eliminating them in the case of Roth IRAs, where earnings grow tax-free.

Though this option is still relatively new and has some limitations, it can be a powerful tool to minimize taxes on your cryptocurrency gains over time.

Strategy: Explore options for holding cryptocurrency in retirement accounts to defer or avoid capital gains taxes.

7. Consider Gifting Cryptocurrency

Gifting cryptocurrency can be a tax-efficient way to transfer assets to family or friends, particularly if they are in a lower tax bracket. In the U.S., you can gift up to $17,000 per year (as of 2023) to any individual without triggering gift tax reporting requirements. Additionally, the recipient may pay lower taxes on the gift if they later sell the crypto and have a lower income tax bracket.

If you're looking to pass on some of your cryptocurrency holdings, gifting allows you to reduce your taxable estate while potentially minimizing tax liabilities for both you and the recipient.

Strategy: Gift cryptocurrency to family or friends who are in lower tax brackets, reducing the overall tax burden on gains when they sell.

8. Stay Updated on Tax Law Changes

Cryptocurrency tax laws are still evolving, and what may be allowed today could change in the future. For example, certain countries may introduce new reporting requirements, tax rates, or specific regulations related to crypto. Staying informed about these changes can help you take advantage of any new opportunities for tax minimization and ensure you remain compliant.

Strategy: Keep up with tax regulations in your country and consult with a crypto tax professional or use tax software to stay compliant and minimize your liability.

Conclusion

While paying taxes on your cryptocurrency is unavoidable, there are several strategies you can use to reduce your tax liability. Whether it's holding your assets for the long term, harvesting losses, or using tax-advantaged accounts, a proactive approach to tax planning can help you keep more of your hard-earned crypto gains. As always, consult with a tax professional to ensure you are following the rules and making the most of the available strategies.

Call Turner Business Solutions at (316) 285-0125 if you need assistance with your crypto taxes. You can also schedule a free consultation online.