If you are currently a crypto owner or have been holding crypto assets for a few years now, or if you are just joining the crypto trading revolution, either way, you are liable to pay tax on all 2021 cryptocurrency transactions. Nobody likes taking the burden of taxes, yet that is our duty towards the economy. However, if you want to retain more profit for yourself, you need to follow some of the strategies to cut down your tax amount. This article shares eight ways in which you can reduce your crypto transactions tax bill in 2021. Keep reading to learn the tricks!
Before getting to our topic, let us look at why crypto trading is quite popular among today's generation:
When bitcoin trading came to the surface for the first time in 2009, people were too sceptical about it to even think of putting any investment into it. However, some of the techies who grasped the core idea of bitcoin soon realized it to be the future of the global financial industry. Soon, the number of investors saw a rise, and today, millions of people carry daily cryptocurrency transactions. The fascinating aspect of crypto trading is that it can empower users to be their own banks. No central ruling entity regulates crypto transactions, and anyone can access all kinds of financial services without any restrictions. This allows members to either be a crypto miner or a trader and earn a good chunk of money through it.
It has also opened doors for a new job arena related to blockchains and cryptocurrencies, further strengthening the global economy.
Now, let us look into ways to reduce the crypto tax bill:
Shift to a new city
Tax amounts differ in different areas within a country. So if you are a crypto holder who wants the lowest tax bills on crypto transactions, then you need to find details about tax bills in your nearby state or city. Even better if you find a place where there is no taxation on capital gains.
Try to lessen your taxable income
Minimizing your taxable income is one of the best strategies to avoid high tax bills on crypto transactions. For this, you have to scour the tax code to receive credits and deductions in tax amount, which will bring down your total taxable income.
Work in a long term strategy
Taxation for capital gains comes under the following categories: the short term and long-term. In short term capital gains, the tax applies to assets held only for a year or less. This will go between 10 to 37%.
On the other hand, in Long term capital gains, assets held beyond a year duration are eligible for taxation on capital gains. For such assets, a tax-free allowance of approximately 40,000 dollars is given. This implies crypto holders can totally eliminate or lower the tax on capital gains if they hold their crypto assets for about a year before turning them into actual revenue.
Pass on your assets to your friend or a family member
You can effectively lower your tax bill on transactions by gifting your crypto assets to a friend or family member. However, this strategy depends on your investment goals.
With the IRS, crypto holders can give around 15000 dollars every year without any stress of tax to a trusted person. This strategy can help you in two ways:
- The recipient of your asset may earn a minimal amount of revenue which will be not applicable for taxes when any transaction is made using your gifted asset.
- Or, you'll have to pay a lower amount of text than performing transactions by yourself.
Get to know your LOTS
By filing in Highest-In-First-Out in place of the default setting of First-In-First-Out filing can help you minimize your transaction tax. This is called identifying your LOTS.
For you to understand better, let us take an example here:
Mike purchases five bitcoins at rupees 10000 dollars in August and later buys five more cryptos at around 20000 dollars in December. Here he can control his capital gains by trading on crypto coins for which he paid higher tax returns.
Further, if he sells his Bitcoin for 28000 dollars in January, the amount will be applied on the capital gains of 8000 dollars instead of the 18000 dollars that mike gained on his first coin purchase.
Do some Charity with your valuable cryptocurrency assets
Suppose you donate some of your valuable crypto assets to a charity. In that case, your capital gains taxation will automatically get eliminated as well as you may receive a tax deduction, which you can claim during your tax returns.
Try tax-loss harvesting
If you encountered any kind of trade losses around the tax year on your crypto assets, you could use this loss to notify the tax department that your current holdings are not liable for any taxation. Hence you can eliminate capital gains tax for the year. This is how you harvest your tax losses on crypto. Remember that this strategy will be beneficial only when you apply it before the end of the tax year.
Make the crypto investment in SDIRA
SDIRA is an abbreviation for Self-Directed Individual Retirement Account, another effective strategy to cut down your crypto tax bill. For this, you have to make an investment within a tax-free or tax-deferred self-directed individual retirement account. This allows you to pay your taxes in two ways:
- Paying taxes while having a less taxable income at the time of retirement.
- Or pay your taxes directly when you participate in your Roth SDIRA because your calculated future estimates might need you to pay higher taxes during your retirement.
Crypto trading is a hot trend that everyone wants to invest in, from experienced investors to millennials. Though doing it right will bring ultimate fortune to your doorsteps, not having a strategy for transaction tax bills can affect your profits. Hence while you trade cryptocurrency, make sure you follow these eight steps to lower down transaction tax amount.
