As the end of the year approaches, there are still ways to lower 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 gain on assets held for less than a year, it is a short-term gain, subject to regular marginal tax rates from 10% to 37% by 2021.
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And currency owned for more than one year may qualify for a long-term reduction capital gains rates 0%, 15% or 20%, depending on income.
While the purchase of currency is not a taxable event, someone can owe tax by converting it to cash or other currency, using it to pay for goods and services, receiving payments for work, and more.
1. Track earnings
One of the biggest challenges for cryptocurrency investors is keeping track of profits and losses, said Shehan Chandrasekera, a chartered accountant and head of tax strategy at cryptocurrency software company CoinTracker.io.
This is because many exchanges will not submit Form 1099-B detailing annual income, forcing investors to calculate annual profit or loss on their own.
And it's normal for investors to have multiple wallets on different exchanges, he said, adding to the reporting challenges. But investors have yet to disclose their taxable transactions.
"You, as a taxpayer, are responsible for reporting all your income, whether there are tax documents or not," said Enrolled Agent Adam Markowitz, vice president of Howard L Markowitz PA, CPA in Leesburg, Florida.
"The problem is people who buy a piece of bitcoin every time they get paid and then turn around and turn that bitcoin 72 times into different things," he said.
The best way for high-volume traders to get organized may be by investing in tracking software, including versions from previous years, depending on their activity, Markowitz said.
While there may be discrepancies, the software can offer an estimate of annual profit or loss, as "99.9% of cryptocurrency users are clueless," he said.
2. Legal loophole
If someone expects taxable earnings by 2021, they can take advantage of a loophole that allows them offset some gains with losses.
Currently, digital assets are not subject to the so-called "wash sale rule", which prevents someone from selling a losing investment to amortize the loss with other earnings and maintain their exposure by buying back an investment. "substantially identical" active within 30 days.
"If the market is down, this is a good time to take advantage of those losses," Chandrasekera said, and some investors have already been watching for opportunities.
For example, if someone bought bitcoin at $ 60,000, they can take advantage of the loophole by selling if it drops to $ 50,000, use the $ 10,000 loss to offset other gains, and buy back the asset shortly thereafter.
"You can sell lost positions now and buy them back in three seconds," added Markowitz.
However, House Democrats want close this gap after December 31, 2021, requiring the digital currency to follow the same laundering sales guidelines as stocks, bonds, and other securities.
And if someone wants to diversify their regular taxable portfolio, they can use the current loophole of cryptocurrency laundering sales for the same purpose.
"Maybe you will take more [cryptocurrency] losses this year and back on the market, "said Dan Herron, a certified financial planner based in San Luis Obispo, California and CPA for Elemental Wealth Advisors." You can use that to your maximum advantage right now. "
3. Take advantage of the bottom brackets
Another tax strategy may be to sell appreciated digital currency if someone expects to pay higher taxes in the future, Herron said, and some investors may qualify for a 0% tax rate.
A married couple filing with taxable income of $ 80,800 or less ($ 40,400 for single filers) can pay 0% tax on long-term capital gains by 2021 after subtracting a standard deduction of $ 25,100 from your adjusted gross income.
Someone below the threshold can also sell cryptocurrencies at a profit, not pay long-term capital gains, and buy back the asset for a so-called "base increase", which adjusts the purchase price to the current value for one more tax bill. come down. in the future.
"I think it's probably an underutilized strategy," Markowitz said.
4. Professional guidance
While relying on a tax professional to reconcile hundreds or thousands of crypto transactions can lead to an expensive bill, investors can save money by using tracking software to generate reports before meeting with an advisor, Herron said.
However, someone with five, six or seven figures in crypto 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 better information investors provide, the more beneficial 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."
