Cryptocurrency is a new asset class that has led to investors accumulating large amounts of wealth. Many consider crypto as a good investment, but they forget that they may need to pay taxes on their gains.
Fortunately, the US tax code offers some way crypto investors might be able to reduce the taxes owed on digital currency. Here are some ways you can legally avoid taxes on cryptocurrencies.
1. Declare Your Crypto as Income
If you use a crypto wallet and receive digital coins in exchange for goods and services, or you mine and stake crypto, the taxation is different.
In this case, cryptocurrency is treated as income when you get it. You should record and report the fair market value of the cryptocurrency you receive and count it as income for proper taxing.
When you report this income, it is taxed at ordinary income tax rates. These are higher than capital gains tax rates. The initial value of the currency when you receive it is what you report as income.
When you eventually dispose of the cryptocurrency, you use that basis to calculate any capital gain you may have and pay the applicable capital gain taxes.
2. Hold on to your Crypto for the Long-term
If you are holding cryptocurrency as an investment and it isn’t earning any income, you don’t owe taxes on cryptocurrency until you sell. You can avoid taxes altogether by not selling any in a given tax year.
When you want to sell, ensure the crypto has been held for more than a year. That way you will lower your tax burden.
3. Sell Assets During a Low-Income Year
The lower your taxable income is, the lower your tax rate will be. You will reduce your taxes by selling crypto that you know will gather profits in years, in which you know you’ll pay taxes at a lower rate.
4. Donate to Charity
Donations to a qualified charity are tax-deductible if you itemize your deductions. For this to work, you must have held the asset for at least one year before donating it.
Donating cryptocurrency means you get to deduct the fair market value of your cryptocurrency, but you don’t have to pay capital gains taxes when doing so.
5. Gift Your Family Members
Gifting cryptocurrency will help you avoid taxation on your gains. The receiver won’t have to pay a tax gift either.
The current rules allow a person to give up to $15,000 per person in a year without filing a gift tax return or paying any gift taxes.
Even when you exceed the $15,000 limit, you still won’t have to pay gift tax unless you’ve used up all your $11.7 million lifetime estate exemption.
However, the recipient of the cryptocurrency will need to know your basis in the crypto to determine the tax they will owe when they eventually sell it.
They will have to pay tax on the entire gain above your abscess, but the tax might be less than what you would have paid.
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