Minimizing tax liability for crypto-invested clients
Based on cryptocurrency tax guidelines specified by IRS, anyone making cryptocurrency profits has to pay taxes. Cryptocurrency transactions are considered just like stocks, which means investors need to pay taxes any time they sell a cryptocurrency and make a profit.
Unfortunately, not many people understand how to account for cryptocurrency gains on their tax returns. Therefore, it’s important that cryptocurrency investors speak with their accountants and/or tax attorneys to accurately calculate their crypto tax liability. They should pay taxes on all previous years’ cryptocurrency profits, regardless of the amount of profit you make. But if your client has purchased cryptocurrencies with U.S. dollars, then they don’t owe taxes, unless they sell the cryptocurrencies at a profit.
Cryptocurrency is increasingly becoming a new area of enforcement for IRS. With the IRS issuing a serious warning to tax filers for tax evasion on cryptocurrency profits, crypto traders should be looking closely at the tax implications of their investments.
With this enforcement comes the question: How can your client minimize their crypto tax liability while complying with the IRS requirements? Here are four strategies invested clients can use:
Strategy 1: Make long-term cryptocurrency investments. To incentivize long-term investing, the government has fixed lesser capital gains tax rate for investments held for more than a year than for investments that are held for less than a year. Therefore, tax liability reduces if you own cryptocurrencies for more than one year. Cryptocurrency investors should always do their own thorough research so that they don’t get tempted to sell in the short-term. When it comes to cryptocurrency investment, thinking as an “owner” usually pays off better in the long run than being a “renter” in the short term.
Strategy 2: Set aside money in dollars (and not in another cryptocurrency) whenever you make a profit on the sale of a cryptocurrency. Determining how much money to set aside in dollars on making a profit depends on two things: how long you owned the cryptocurrency for, and your tax bracket. If you owned it for more than one year, then you pay a lesser percentage of long-term capital-gains taxes and vice-versa.
Converting from one cryptocurrency to another is the worst thing to do if an investor has made a huge profit on the initial cryptocurrency investment. If you receive additional cryptocurrencies through a “fork,” then ordinary taxes (not long-term capital gains taxes) must be paid on the amount that you received, as if it was converted into USD on the day you received it. Therefore, you should immediately set the estimated tax proceeds aside as soon as you receive fork-based cryptocurrencies.
Strategy 3: Maintain a detailed record of all your cryptocurrency transactions. Keep a record of all your cryptocurrency transactions in a spreadsheet with details of buying and selling dates and amounts. You may also be able to export the transactions data from many cryptocurrency wallet and exchange websites for use in a spreadsheet. Unlike financial-services companies, most cryptocurrency companies don’t send you year-end tax statements which further complicates the tax filing process.
Strategy 4: You can gift or donate your cryptocurrency and not pay taxes. The cryptocurrency gifting process is similar to how the process for gifting stocks works. The value of the gift is the fair market value when the cryptocurrency has been gifted.