Crypto trading is one of the most profitable ventures out there, but the tax associated with it can sometimes be really hefty. While it is impossible and illegal to completely avoid these crypto-related taxes, you can employ several strategies and other mechanisms to minimize the associated tax. In this article, we will look into these strategies in detail and how you can utilize them to their maximum benefit.
Top Tips To Avoid Crypto Taxes
There are several ways to minimize the tax cost associated with various online transactions in the crypto world. Here, we will discuss the top seven strategies that you can adopt into your crypto lifestyle.
1. Crypto Tax Loss Harvesting
Crypto tax loss harvesting is a strategy that involves selling an asset at a loss to register a capital loss. That is, if you have gained a profit of $5000 a month, and out of this profit you bet on a declining asset and lost $2000. Then it will register a loss of $2K in your portfolio. In that way, you only need to pay the tax associated with the $3K profit you have. You can later buy back this asset and still claim a tax loss. This is only applicable to cryptocurrencies, not traditional stocks.
2. HIFO Accounting
The HIFO (Highest In, First Out) is a crypto trading strategy that can reduce your taxes. This is done by selling the crypto assets on a cost base. This is mainly done to record a loss on your part. Suppose you buy a crypto for different prices from the market, and from one of these purchases, you incur a loss. You can then use this loss to your advantage and have your tax reduced.
3. Crypto Donations
Crypto donations are one of the main methods that you can employ to reduce your taxes. In the US, there is a law that allows you to donate your crypto to IRS-Certified Charities and gain a significant tax deduction. In this way, you are not only contributing a little bit of your profit to charity but can also gain a tax deduction from it.
4. Profit-Off Low Income Years
This is another best way by which you can significantly reduce your crypto-related taxes. In this way, you try to cash out your crypto-related assets during the year when your income is considerably low. This can help you be recognized as someone who has lower gains, which will allow you to be charged less than what you normally charge for crypto withdrawals.
5. Crypto Tax Software
Using crypto tax software to keep track of how much you need to pay as taxes is also very helpful when you’re looking for ways to reduce your crypto-related taxes. There are software out there for this purpose. You can choose any legitimate ones and can plan a way to reduce your tax obligations to the government.
6. Crypto Loans
The crypto loan strategy for tax deduction typically involves taking loans using cryptocurrencies as collateral. You can purchase new cryptocurrencies utilizing these loans. As you’re not selling them, you won’t be subjected to any tax. You can utilize this strategy to your advantage for crypto tax deductions.
7. Relocating To A Tax-Friendly Region
If you’re currently living in a country with a high tax on crypto, then it would be better to relocate to crypto tax-free countries. There are several countries out there that charge little to no tax on crypto allowing people to mine and trade their crypto without any associated cost. Some of the notable examples of such countries include UAE, Switzerland, Singapore, Germany, Bermuda, and so on.
Final Remarks
Crypto taxes only apply to you if you sell or trade your crypto. This can have 2 outcomes: a gain or a loss. If it is a loss, then you would most likely need not pay any tax. However, if you incur a gain, then you will be subjected to a crypto tax that is quite similar to tax on your regular income. Failing to report crypto taxes could then lead to various legal issues. That’s why it is important to know various ways in which you can minimize the taxes. Adopting the above-given strategies into your life can significantly help in this. For further details regarding crypto taxation and to know how you can purchase cryptocurrencies with reduced fees, stay tuned.
