Preparation is key!
It is essential to keeping track of crypto transactions. These records must be detailed – the date wasacquired the crypto, dollar value, the date sold, and the proceeds. To save time, there is software available that automatically calculates cost basis and capital gains. Start by gathering all this information, and then identifying the expenses that can be deducted on your a return such as property taxes, student loan interest, and mortgage interest. This information will be used by a tax preparer in calculating a tax bill.
Minimize gains, maximize loss
Cryptocurrency is treated as property by the IRS. All trades, purchases, & sales are taxable and subject to both short-term and long-term capital gains and losses tax treatment. This means that every time it is transferred , it triggers a gain or loss, meaning taxes. With this in mind, here are a few ways to minimize capital gains:
- Be a long-term investor. The IRS rewards patience. Capital gains taxes on investments that are hold form more than a year are much lower than those held for less.
- Opt to harvest losses, that is selling bitcoin and other crypto for less than it was purchased for. This will incur capital loss, which will then offset capital gains.
- Opting to gift or donate unsold crypto. Taxes will not be paid on up to $15,000 worth of crypto gifts.
Mind your deals
- When it comes to swaps, make sure to get some advice before going into them. most swaps are taxable to both sides, except for 1031 exchanges. However, they may not apply to swaps of cryptocurrency.
- Deals, however small, can trigger taxes. There is no deal too small to call the attention of the IRS. If you use bitcoin to buy a pair of shoes, that is a taxable transaction to both sides.
- Payments to employees and independent contractors are taxable and require different forms to be issued. If paid in crypto or bitcoin, they will be subject to withholding and payroll taxes. How is it possible to withhold taxes if paid property? Paying for some in cash, some in bitcoin, and withholding mostly the cash.
Maximize your deductions, too
Even though deductible expenses may not be as powerful in reducing tax bills as they were before due to the Tax Cuts and Jobs Act of 2017, there are still a lot of opportunities to explore. Take due diligence in researching possible strategies and ask an accountant's advice on it.
About the author: Myrtle Bautista is a freelance content writer who specializes in creating unique, high quality content. She usually write articles under taxes including filing tips, planning, and reform; financial health, investments, and healthcare.