Cryptocurrency Tax Tips

The amount of time that you hold an asset helps the IRS determine what tax rate you will pay. If you buy cryptocurrency and sell it within a year, you will pay short-term capital gains tax. That percentage is the same as regular income. Earning a profit up to $10,000 means you will only pay 10% in taxes. Once you exceed $500,000, though, you could pay up to 37% on your profit.

Selling your coins after owning them for longer than one year means you will pay long-term capital gains tax. The tax rate for long-term capital gains is much lower than the rate for short-term capital gains. You won’t pay any taxes on long-term capital gains up to $40,400 as an individual and $80,800 as a married couple filing jointly. Even if you earn more than $500,000, you will only pay a 20% tax. That’s the maximum amount.

This is one of the most important cryptocurrency tax tips. Pay close attention to it when buying and selling.

Some estimates say that more than 8,000 cryptocurrencies exist. A few of them increase in value. Others lose value quickly. Obviously, you don’t want to lose money on your investment. If you do, though, you can use the loss to lower your tax burden. That’s one of the cryptocurrency tax tips many people forget.

Let’s say you made $11,000 in profit from investing in Bitcoin. During the same year, you lost $2,000 on your Ethereum investment. That means you had a short-term capital gain of $9,000. You stay in the 10% tax bracket instead of bumping you to a higher rate.

This strategy applies to all of your short-term and long-term capital gains. You might want to talk to a tax professional about how you can lower your tax burden. Selling some low-performance coins this year could actually help you save money and give you more funds for future investments.

Did you lose $10,000 in a crypto investment five years ago? If you didn’t claim the loss on your taxes, you still have that option. You will, however, need documentation that proves you took a loss.

Keeping your cryptocurrency in a retirement fund could help you avoid taxes on your investment. You have the option to add cryptocurrencies to 401(k), Roth IRA, Traditional IRA, Simple IRA, and SEP accounts.

In many cases, putting crypto in your retirement account means that you can defer taxes until you withdraw funds. This creates the opportunity for your investment to grow exponentially. Just like mutual funds and stocks, you can use the account’s financial growth to purchase more investments. If you paid annual taxes on the amounts, you would have less money to invest. This can make a huge difference within just a few years.

Most investment professionals will not encourage you to spend a lot of money on cryptocurrencies. Even established coins have volatile values. You simply do not know how the industry will respond to new technologies, regulations, and unforeseen circumstances. They can add diversity to your portfolio, but they probably shouldn’t play a major role. It’s just too risky.

Unfortunately, you cannot any losses when you choose these options. You might want to combine it with other cryptocurrency tax tips to strike a balance.

Dozens of digital wallets and cryptocurrency platforms promise to make buying and selling easy. Ideally, you should choose one that also makes it easy to track gains and losses. That way, you won’t have to do a lot of calculations when reporting profits to the IRS.

Coinbase stands out as one of your best options. It has excellent security, a straightforward user interface, and accepts a broad range of coins. You can find how much you’ve made or lost with a couple of clicks. Coinbase also has fairly high fees, though.

Kraken has lower fees, which makes it appealing to new investors. You can use the platform to track your trades. It does not come with a wallet, though, so you will need to pair it with a digital wallet to spend money directly.

As far as cryptocurrency tax tips go, this one is very simple. It will also make it much easier for you to file your taxes accurately.

This is one of the cryptocurrency tax tips most likely to prevent you from unintentionally breaking tax law. Many investors assume that they only pay taxes on coins when they sell them for fiat currency (dollars). That isn’t the case, though. You must pay taxes on all transactions.

If you used Litecoin to purchase Dogecoin, the IRS considers that a taxable event. You must report it.

Cryptocurrency tax tips will likely change often over the next several years. This is still a new investment option, so lawmakers haven’t fully decided how to regulate and tax it.

If you don’t have the time to follow changing tax laws, consider hiring an accountant or tax professional. The expense of hiring a professional could protect you from large fines. In the end, it’s probably worth it.

This is one of the cryptocurrency tax tips most likely to prevent you from unintentionally breaking tax law. Many investors assume that they only pay taxes on coins when they sell them for fiat currency (dollars). That isn’t the case, though. You must pay taxes on all transactions.

If you used Litecoin to purchase Dogecoin, the IRS considers that a taxable event. You must report it.

Cryptocurrency tax tips will likely change often over the next several years. This is still a new investment option, so lawmakers haven’t fully decided how to regulate and tax it.

If you don’t have the time to follow changing tax laws, consider hiring an accountant or tax professional. The expense of hiring a professional could protect you from large fines. In the end, it’s probably worth it.