4 year-end measures to reduce your cryptocurrency tax bill
As the end of the year approaches, there are still ways to reduce cryptocurrency tax bills, financial experts say.
The IRS generally defines cryptocurrency as property for tax purposes, and investors must pay taxes on the difference between the purchase price and the sale price.
If there is a profit on assets held for less than a year, it is a short-term gain, subject to regular marginal tax rates of 10% to 37% for 2021.
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And currencies held for more than a year may benefit from 0%, 15% or 20% lower long-term capital gains rates, depending on income.
While the purchase of currency is not a taxable event, someone may owe withdrawals by converting them to cash or other coin, using them to pay for goods and services, receiving payment for work and more.
1. Monitoring of earnings
One of the biggest challenges for cryptocurrency investors is tracking gains and losses, said Shehan Chandrasekera, CPA and head of tax strategy at crypto-tax software company CoinTracker.io.
This is because many exchanges will not send the Form 1099-B detailing annual revenues, forcing investors to calculate annual profit or loss themselves.
And it’s okay for investors to have multiple portfolios on different exchanges, he said, further adding to the reporting issues. But investors still need to disclose their taxable transactions.
“As a taxpayer, you are responsible for reporting all of your income, whether or not there are tax documents for it,” said registrant Adam Markowitz, vice president of Howard L Markowitz PA, CPA at Leesburg , in Florida.
“The problem is those who buy a piece of bitcoin every time they get paid and then turn around and convert that bitcoin 72 times into different things,” he said.
The best way for high volume traders to get organized may be to invest in tracking software, including versions from previous years, depending on their business, Markowitz said.
While there may be some discrepancies, the software can offer an estimate of annual gains or losses since “99.9% of cryptocurrency users have no idea,” he said.
2. Escape from the sale of washing
If someone expects taxable gains for 2021, they can take advantage of a loophole that allows them to offset some profits with losses.
Currently, digital assets are not subject to the so-called “blank sale rule”, preventing someone from selling a losing investment to write off the loss against other gains and maintain exposure by buying back an asset. ” essentially identical “within 30 days. .
“If the market is down, now is a good time to reap these losses,” Chandrasekera said, and some investors have already looked for opportunities.
For example, if someone bought bitcoin at $ 60,000, they can take advantage of the loophole by selling it if it drops to $ 50,000, use the $ 10,000 loss to offset further gains and redeem. the asset shortly thereafter.
“You can sell losing positions now and buy them back in three seconds,” Markowitz added.
However, House Democrats want to close that loophole after Dec.31, 2021, demanding that digital currency follow the same blank-selling guidelines as stocks, bonds and other securities.
And if someone wants to diversify their regular taxable portfolio, they can use the current crypto-sell washout loophole for the same purpose.
“Maybe you take more [cryptocurrency] losses this year and come back to the market, ”said Dan Herron, a certified financial planner based in San Luis Obispo, Calif. and CPA with Elemental Wealth Advisors.“ You can use this to your best advantage right now. “
3. Take advantage of lower supports
Another tax strategy can be to sell popular digital currency if someone expects to pay higher levies in the future, Herron said, and some investors can claim a 0% tax rate.
A married couple filing with taxable income of $ 80,800 or less ($ 40,400 for single filers) can pay 0% long-term capital gains deductions for 2021 after subtracting a standard deduction of $ 25,100 from their adjusted gross income.
A person below the threshold can also sell cryptocurrency at a profit, fail to pay long-term capital gains, and redeem the asset for a so-called “up” basis, which adjusts the price of purchase at present value for a lower tax bill. in the future.
“I think it’s probably an underutilized strategy,” Markowitz said.
4. Vocational guidance
While using a tax professional to reconcile hundreds or thousands of crypto transactions can result in an expensive bill, investors can save money by using tracking software to generate reports before meeting with an advisor, Herron said. .
However, someone with a five, six, or seven-digit cryptocurrency can benefit from ongoing tax planning, not just year-end advice, Markowitz said.
“You are missing out on potentially huge opportunities in a market that never closes,” he said.
And as with all types of financial planning, the more information investors provide, the more helpful advice they can receive.
“It always comes down to communicating with your tax preparer,” Markowitz said. “And make sure you have someone who knows what they’re doing.”