10 Ways to Minimize Your Crypto Tax Liability

September 27, 2019 / by Mike Torres

Since the IRS started cracking down on crypto taxes, traders and users alike have been scrambling to get their affairs in order. As with regular taxes, there are various ways to reduce your crypto taxes. So, if you want to keep the IRS’ hands away from your sweet crypto gains, read on!

  1. Sell your assets at a loss!

Many investors are holding onto crypto coins with significant unrealized losses, and selling these crypto positions will trigger a capital loss. This capital loss can then be used to pay off other capital gains, as well as up to $3,000 of regular or ordinary income (if the loss is higher than your gains). 

This is known as tax-loss harvesting. The best part is, it’s totally legal! So, if you are currently hanging onto cryptocurrency that has significantly dropped in value, it’s well worth selling it to offset any gains you’ve generated earlier in the tax year.

  1. HODL away – for a year at least

This is the simplest way to minimize your capital gains. All you have to do is – nothing! Don’t trade, don’t sell, don’t even think about it. As long as it remains untouched, it remains untaxed. This approach requires a lot of patience and may be difficult to pull off for some. It is a good idea to hodl for at least 1 year to ensure you are taxed at the lower long-term capital gains tax when you eventually dispose your crypto.

Remember that moving your investment or engaging in any kind of transaction (apart from own-account transfers) will trigger capital gains. Make sure that you’re careful about your crypto exchanges and keep in mind that using cryptocurrency to pay for goods and services will also be treated as a taxable transaction.

  1. No wash sale rule

One of the few positives of cryptocurrency’s classification as property is that crypto traders are not subject to the unpopular Wash Sale Rule. 

For stocks and other securities, the Wash Sale Rule prohibits traders from repurchasing an investment which was sold at a loss within the 30 days following. Fortunately, this rule does not apply to cryptocurrency, and crypto traders are free to sell losing positions and then repurchase them. However, remember that the IRS may claim such transactions lack “economic substance”, so it’s advisable to wait a bit before repurchasing.

  1. Carry over your capital losses to following years

If your capital losses during 2018 exceed your capital gains, then you will have a carryover loss that can be used to offset gains in the years following. Unfortunately, these losses cannot be carried back to previous tax years – they only go forward.

  1. The classic: Tax Deductions

Every year, you have the option of deducting your actual itemized deductions or simply accepting the standard deduction. The choice is typically determined by whichever amount is higher. Even before the TJCA, most taxpayers would take the standard deduction instead of itemizing. From 2018, the standard deduction has doubled to $12,000 for single filers and $24,000 for married couples filing jointly, which means more taxpayers than ever will ignore their itemized deductions in favor of the standard deduction.

  1. Use your $3000 Tax Rebate

If your total capital gains and losses for the year add up to a negative number, you incur a net capital loss. If this net capital loss is less than or equal to $3,000 ($1,500 if you are married and filing a separate tax return), then that entire capital loss can be used to offset other types of income, such as income from your job.

If, however, your losses exceed that $3,000, then the amount over $3,000 can be rolled over to the next tax year.  

It’s critical to note that before being used to offset other types of income, capital losses also offset other types of capital gains. This can provide HUGE tax benefits for those who have capital gains in other areas.

  1. Opportunity Zone Investment (The New Kid on the Block)

The Tax Cuts and Jobs Act (TJCA) created a new investment vehicle called the Opportunity Fund. This is designed to spur economic development by providing tax benefits to investors in low-income communities, known as Qualified Opportunity Zones. You can defer tax on any capital gains that are reinvested within 180 days into an Opportunity Fund. After five years, the capital gains you have rolled over earn a 10% reduction. On top of that, if you don’t sell the investment for 10 years, you do not have to pay capital gains taxes on any returns you have received from the Opportunity Fund. Meaning, Opportunity Funds allow you to defer current-year capital gains and also earn tax-free returns going forward.

  1. Be generous – Charitable Remainder Trust

This particular method works by transferring an appreciated asset into an irrevocable trust. The trustee then sells the asset at full market value and re-invests the proceeds into other income-producing assets. Through this scheme, you pay no capital gains tax when the asset is sold, and you also receive a charitable deduction for the property transferred to the trust. The trust then pays you an annuity for the rest of your life, and when you pass away, the remaining trust assets go to charity. As a result, CRTs make it possible to reduce current-year taxes while allowing you to convert highly-appreciated assets into a lifetime income stream.

  1. Leave It to the Professionals

A good crypto accountant will almost certainly know how to save you money on your taxes. While hiring an accountant might seem like an expensive step, their fee pays for itself many times over via your reduced tax bill. Most crypto-investors aren’t actually tax experts, and it definitely pays to consult someone who is! You may also want to refer to a crypto tax guide so you are familiar with the basics.

  1. Let Someone Know You Like Them

Gifts under a certain amount aren’t taxed: by current rules, you can give away up to $15,000/year. While this might seem like a way too dramatic way to avoid tax, if you want to share your wealth with family and friends, giving them gifts in cryptocurrency could actually be a great way to do so. Keep in mind that the recipient will be liable to pay tax if they use, sell or trade the cryptocurrency, so make sure they know that.

Final Words

Nothing trumps education when it comes to taxes so if you have the time for it, learn everything there is to learn or if you have been paying attention; leave it to a tax professional.

There are many ways to cut back on your crypto taxes, but it is always safer to stay on the good side of the law. The methods outlined above are the safest and most legit ways of doing so.

Robin Singh is the co-founder and CEO of Koinly.io – a cryptocurrency tax reporting platform that automatically generates capital gains reports for USA, UK, Australia, Ireland and other countries.