Mining is one of the most profitable ventures in the ever-evolving crypto economy. It allows individuals to easily mine their coins, which can earn them much more than purchasing the same coin in the market. But, the taxes associated with it can be hefty mostly. While it is impossible and illegal to avoid these taxes completely, there are some methods you employ to mitigate the amount associated with them. In this article, we will be discussing exactly this: how to reduce your crypto mining taxes effectively and legally.
How Does The US Tax Crypto Mining?
There are several ways through which the US taxes the crypto mining sector. Currently, crypto mining rewards are taxed as ordinary income. The tax is put forward based on the price of the coin on the day the tax receipt is sent. Miners must pay taxes ranging from 10% to 30% based on their total annual income. These mining rewards are included in the taxable assets the moment they get deposited in a miner’s wallet.
There are mainly two types of miners in the crypto world: hobby miners and business miners. Both of them have separate tax implications. In the case of hobby miners, the tax implication is based on the miner’s income at the end of the year. In the case of business miners, some concessions can reduce their mining taxes.
Ways To Reduce Your Crypto Taxes?
One can make a lot of profit from mining cryptocurrencies. But, like any other business out there, the crypto mining industry is also susceptible to many tasks. Fortunately, there are several ways to reduce these associated tasks. Here, we will look into a few of them so that you know how to boost your income.
1. Mining As A Business
Running mining as a business can land you benefits like claiming tax deductions. You can also consider forming an LLC for asset protection.
2. Tax Minimization Techniques
You can also employ various techniques like tax loss harvesting, and the HIFO accounting method. You can also sell crypto during low-income periods to reduce tax rates.
3. Investment Strategies
Try to hold crypto assets for more than one year to make use of the lower long-term capital gain rates. You can also invest through crypto IRAs for tax-advancement growth. Another way is to set up a crypto retirement account.
4. Changing Location
Move to a new country or place that actively promotes and supports crypto trading. In such places, there will likely be little to no tax associated with crypto trading.
5. Charitable Approaches
In the US, donating your crypto coins to an IRS-certified charity can result in a significant tax deduction. In this way, you are not only contributing to a good cause but can also get a significant tax deduction.
6. Crypto Tax Software
Using specialized software to monitor your yearly taxes can also be very helpful when you’re gauging how to avoid your crypto taxes. Make sure to research the software to find the legitimate ones that you can use.
Consequences Of Not Paying Taxes
Many consequences can arise when one fails to pay these taxes or provides false information during tax details. Here, we will discuss a few of these consequences.
- Legal Penalties: You can face potential federal prosecution and can be imprisoned for up to 5 years for tax negligence. There is also a fine of up to $500K.
- Financial penalties: You can face a fine of 10 times higher than the original tax fees.
- Assets: The agencies can seize your assets and it may later become difficult to secure loans in the future.
- Government Actions: The government can restrict your passport if the State Department refuses to issue a new one. Tax liens are publicly accessible, which could lead to reputation damage.
Final Remarks
Crypto taxes not only apply when you’re trading them but also when you’re mining them. It differs based on individuals and cooperatives, depending on how many coins you have produced until the tax calculation. Failing to pay these taxes or correctly report your assets can land you in serious legal issues and prison in some cases. That’s why it is important to know how to minimize these crypto taxes. Adopting the above-given strategies into your life can help you with this. For further details regarding crypto taxes and other related aspects, stay tuned.
