Lower Your Crypto Taxes
Take these steps and you could lower your crypto taxes this year (as always, confirm with your accountant or a tax expert about whether these tips apply to your situation).
In the US, you can erase your capital gains tax burden by donating crypto to a nonprofit.
Use Tax Software
Taxbit helps individuals and enterprises with their crypto taxes. Start a free trial today.
Markum LLP is an accounting firm that actually gets crypto. A nice change of pace.
Get a Tan
States like Florida and Texas have no state income or capital gains taxes.
How to lower your taxes with the Cryptocurrency Tax Survival Guide (2021)
Steps for reducing your crypto capital gains tax burden.
Want crypto gains but hate your tax bill? Never fear: here are great ways you might be able to reduce your tax bill*, whether you are in the US, UK, or the rest of the world.
Here in the US, the IRS has classified cryptocurrency as a property asset for your tax purposes. That means taxes on your crypto are similar to taxes on stocks or other investments. In short, you end up paying short or long-term capital gains taxes on any gains on your cryptocurrency investments. The rate you pay and whether or not it is considered a short or long term gain will depend on how long you’ve held the crypto asset:
- If you held the crypto asset for less than one year, it’s considered short-term capital gains.
- If you’ve held the asset for more than a year, it’s considered long term.
The current long-term federal rate caps out at 20% but when you add state taxes, you could end up owing more than 30% in higher tax jurisdictions like New York or California. Short-term rates are even higher and align with your tax bracket, so if you’re a high earner you could end up paying a massive 40% after state taxes.
Excited about your taxes yet? Ready to reduce your tax burden?
Here’s some great options for you to consider.
1) Donate Cryptocurrency to Charity
We might be a bit biased but donating appreciated cryptocurrency is a great way to partially offset or completely eliminate your crypto taxes while supporting a cause that you actually care about!
There’s a reason the world’s billionaires donate stocks and other forms of property instead of writing a check. It’s simply more tax efficient. Donating crypto means you could end up paying no capital gains taxes on the appreciated crypto, get a fair market value deduction for what you donated and the charity receives an even larger donation than if you just donated in fiat. In many cases, this might mean a 30% larger deduction and 30% more money for the charity than if you sold your assets and donated the after tax proceeds. You can donate bitcoin, ethereum and many more cryptocurrencies to 1,000+ crypto-enabled charities through The Giving Block and get an automatic tax receipt sent directly to your email.
It comes down to one thing: Would you rather donate to the IRS or your favorite charity?
For a more in depth report, you can also read the TaxBit cryptocurrency donation and gift guide or the Friedman guide on How Donating Crypto Saves You Money On Taxes.
2) Use Tax Software
One of the most important things you can do is to get organized so you don’t end up over or under paying your taxes. Specialized crypto-tax software is a great way to get all your crypto records in one place. You can import your wallets and exchange account transactions.
Software like TaxBit can help you identify strategies like tax loss harvesting opportunities. Regardless of the market trends, it’s good practice to check if you have any positions that are currently trading at a loss. If so, you could sell those positions and use the loss to offset some of your gains. This is commonly done at the end of the year.
If you donate crypto to charity, make sure to mark it as a donation in your tax software!
3) Speak To A Cryptocurrency Tax Professional
Don’t know where to start? You can get specialized and custom help from a qualified crypto tax accountant. They’ll teach you the crypto accounting basics and help you organize your crypto transactions and taxes. They’ll also advise on strategies like donating crypto, tax loss harvesting, or other ways to reduce your crypto taxes. Make sure the tax professional you get help from has experience with crypto. Not all CPAs have experience with crypto taxes! Our friends at Friedman have an entire department dedicated to digital currencies like Bitcoin, Ethereum, AMP, Basic Attention Token, Bitcoin Cash, Chainlink, Dai, The Graph, Gemini Dollar, Litecoin, Storj, UMA, Zcash, 0x, 1inch etc . They work with many high net worth individuals and some of the largest crypto companies out there to help solve complex tax issues. If there’s a way to reduce your crypto taxes, they’ll know how.
4) Move to Miami
This last recommendation is something you can do in addition to all the above strategies. Another way to reduce your capital gains taxes is simply by moving to a crypto friendly state like Florida that doesn’t have any capital gains taxes. If you’re coming from New York or California, that can make a 10% difference in what you owe each year. Plus if you move to Miami you’ll have the benefit of living in a city with one of the most crypto and tax friendly mayors in the world. If you haven’t already heard about Mayor Suarez and how he is shaking up Silicon Valley, check out his Twitter (he even has laser eyes!). Crypto traders and investors are flocking there because of the low taxes, nice weather and a pro-crypto government.
Whichever methods you use to reduce your taxes, make sure to consult a tax professional and use crypto specific tax software. In our case, we recommend using Friedman for a personal touch on your crypto taxes. For the DIYer, head over to TaxBit and give their software a shot.
Whichever strategy you use to reduce your capital gains taxes, you’ll still be left with a decision. Would you rather donate to the IRS or your favorite charity? The choice is yours, but we hope you choose to support one of the 6 nonprofits accepting crypto here.
*None of this is financial or tax advice, please DYOR and speak to a qualified financial professional before making any major financial decisions. Also, we advise that you talk to your spouse before moving to Miami.