Hold on.
Is there a simple way to avoid paying cryptocurrency taxes? All you have to do now is HODL. Before selling your crypto investment, you must hold it for at least one year to avoid paying taxes. If you do this, you’ll be eligible for a long-term capital gains rate in most nations, which is lower than the rate you’d pay on a short-term gain. Nowhere is hodling more rewarded than in Germany, where cryptocurrency traded after a year of holding is tax-free.
Meanwhile, Australian crypto investors can take advantage of a 50% capital gains tax discount, while US crypto investors can also benefit from a lower capital gains tax rate. Unlike short-term profits, which are taxed at Federal Income Tax bracket rates, with a maximum tax CGT of 37 percent, investors can pay lower tax rates of 0%, 15%, or 20%, depending on individual or combined marital income.
Use tax-free thresholds to your advantage.
Taxpayers in the United Kingdom are in luck. Every individual is entitled to a tax-free CGT allowance of up to £12,300 each year. In Germany, however, total capital gains of less than €600 per year are tax-free. Unfortunately, there is no equivalent allowance in Australia, however US investors do get a slice of the pie. If your annual income is less than $40,000, you won’t have to pay any Capital Gains Tax, according to the IRS. The annual maximum for married couples filing jointly is $80,000. This maximum is $53,600 per year for the head of household. Knowing your tax-free maximums is an excellent method to plan your crypto disposal strategy and, as a result, actively optimize your taxable situation.
Losses must be offset by gains.
You can take advantage of crypto gains by declaring losses on other investments the same year you realize your profit, just like any other investment. That means you wouldn’t owe any tax if you made $30,000 selling Bitcoin but lost $30,000 selling Ethereum because you broke even.
However, these losses are not limited to other types of cryptocurrencies. Look over the rest of your portfolio to see if there are any other losing assets you may sell to balance your gains if you’re about to cash in a substantial crypto investment.
If your capital losses exceed your capital gains in the United States, you can claim the smaller of $3,000 ($1,500 if married filing separately) or your total net loss listed on line 21 of Schedule D to reduce your income (Form 1040). If your net capital loss exceeds this amount, you can carry it forward to a future year. Tax-loss harvesting is when you consciously use this to your advantage.
Invest in a cryptocurrency IRA, pension, or annuity fund.
Buying crypto as part of a retirement, pension, or annuity investment is one of the most effective ways to minimize crypto tax.
Self-directed IRAs are special IRAs that allow you to invest in unusual assets like cryptocurrency, real estate, and precious metals in the United States. Any bitcoin or other cryptocurrency transactions done within the account would be exempt from capital gains tax; taxes would only apply when the money was removed.
In the United Kingdom, you can defer or prevent crypto investment gains entirely by utilizing a retirement plan such as a typical IRA, Roth IRA, or individual retirement account (IRA), albeit these plans are significantly more sophisticated than regular annuity plans.
Cryptocurrency and self-managed superannuation funds provide similar advantages to Australian investors (SMSF). Income is taxed at a rate of only 15% under current SMSF regulations, while long-term profits are taxed at an effective rate of 10%. Gains from crypto assets held in a retirement plan are taxed at 0%. A SMSF will require its own wallet, which will be kept separate from personal cryptocurrency accounts.
Make use of the annual gift tax exemption.
Are you based in the United States? Consider yourself fortunate because, unlike in Australia and the United Kingdom, crypto gifts to anyone under $15,000 are tax-free.
Instead, American taxpayers are entitled to a $15,000 yearly gift tax deduction, which applies to each individual to whom you donate a gift. If you provide a gift for more than $15,000, you may be subject to gift taxes of 40% of the amount over $15,000. You can avoid paying capital gains tax on bitcoin you sell by strategically donating it.
Modify your tax rate.
You can always try to wait for a lower tax rate if you have the luxury of time on your side. Perhaps you’ve accepted a pay reduction to save money, are preparing to retire, or are returning to school. If you’re able to go to a lower tax rate, scheduling your crypto sales to coincide is a good way to save money on taxes.
Make a charitable donation
Yes, you can deduct your cryptocurrency donation from your taxes. If you don’t need all of the profit from your crypto investment, donating at least some of it to charity will help you save money on capital gains taxes. If the charity is registered, you’ll obtain a deduction for the full amount of your cryptocurrency, including any capital gains.
In the United States of America, Use the IRS’s exempt organization database to look for a charity’s 501(c)3 status. If you want to deduct your donation from your federal taxes, the charity must have 501(c)3 status.
Only donations to organizations with DGR status (deductible gift recipient status) are eligible for a tax deduction in Australia.
Give your crypto assets to your spouse as a gift.
Are you in a relationship? Depending on where you pay taxes, you may be able to tax-free transfer portion of your crypto assets to your spouse or civil partner. Transfers between spouses, for example, are now excluded from CGT in the United Kingdom due to a tax-free gift loophole.
This means that asset ownership can be transferred between partners, allowing you to utilise both of your annual CGT allowances to offset profits. For married couples and civil partners, this practically doubles the CGT allowance. According to the HMRC, you cannot utilize this benefit if you are separated or live apart.
Because the recipient inherits the base cost of the asset being transferred, the transfer is said to have ‘no gain, no loss.’
Invest in a fund that focuses on opportunity zones.
By investing in an Opportunity-Zone fund, US investors can delay a portion of their crypto tax payment. A feature in the 2017 tax code allows taxpayers to defer, and even decrease, capital gains taxes by putting the profits from the sale of a stock or business into a fund designed to encourage investment in economically disadvantaged areas. Generally, investors have six months to shift their funds. You’ll also be able to delay capital gains tax until 2026, and if you keep the investment longer than that, you’ll be able to reduce your tax payment by up to 10%.
In a similar spirit, any profits achieved on investments in an Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR) in the United Kingdom are exempt from CGT if held for three years or more.
To find unrealized losses, use a cryptocurrency tax calculator.
If you don’t know how your portfolio looks, it’s unlikely that you’ll be able to find bitcoin tax minimization options. The IRS in the United States, the ATO in Australia, and the HRMC in the United Kingdom all advise crypto investors to utilize a crypto tax app like Koinly to pay the correct amount of taxes. When used strategically, though, crypto tax software is just as good at assisting you in paying less tax.As an example. Let’s imagine you’re expecting a sizable capital gains tax bill. Take a look at your unrealized losses on Koinly’s portfolio dashboard. You can sell assets that are underperforming at a loss if they are underperforming. This converts them to realized losses, which you can use to lower your tax burden by deducting them from your capital gains. Tax loss harvesting is another term for this.
Losses can also be adjusted against regular income in some countries up to a specific amount. To see if this is the situation where you live, examine your country’s crypto tax regulations.
