Crypto Tax: Tax is imposed by every government and is a compulsion. So, to reduce this heavy load that comes on your shoulder, we have looked at ways in which you can reduce crypto tax.
Harvesting tax losses
Selling assets at a loss in order to offset capital gains and reduce your tax liability is known as “tax loss harvesting.”
It’s crucial that you complete these deals before the end of the tax year since, if you’re a U.S. tax payer, your capital gains and losses for the prior tax year are locked in as of January 1.
Tax loss harvesting is typically used to offset capital gains, but even if you don’t have any cryptocurrency gains, you could still want to use it because capital losses can also be used to balance income or capital gains in other assets, such as traditional stocks.
Capital gains taxes are not applied to cryptocurrency gifts made to IRS-recognized non-profit or charity organisations, and in some situations, tax deductions may be available.
Also read: Bitcoin Whale Activity On A Major Decline, Further BTC Fall Ahead?
Under normal conditions, if you spent 20,000 USD on BTC and sold it for 60,000 USD more than a year later, you would be required to pay long-term capital gains taxes on your 40,000 USD profit. However, if you gift the asset, there won’t be any capital gains taxes due, provided the following conditions are satisfied:
The donated cryptocurrency has been in your possession for more than a year. You confirm that the IRS considers the intended recipient of the funds to be a tax-exempt organisation.
You donate the cryptocurrency to the company directly, without exchanging it for cash or another currency. These two actions both constitute cryptocurrency taxable events. Depending on the sort of organisation you donated to and whether you are itemising deductions, your donation may also be able to offset between 30 and 50% of your ordinary income in many cases.
Incline toward long-term capital gains in crypto
Investments held for more than a year receive preferential tax treatment from the IRS. Tax rates on long-term crypto gains vary by income level and range from 0 to 20%.
Also read: Year Ender 2022: Top 9 Craziest Crypto News of this Year; Bitcoin Collapse, SBF Arrest
Contrast this with the short-term capital gains tax rates, which are identical to the income tax rates that apply to your income bracket (10%-37%).
The plan is straightforward: waiting pays off, at least when it comes to your tax payment.
You won’t ever have a taxable event if the only thing you do is purchase crypto using fiat.
Simply holding your cryptocurrency is the only method to guarantee that you won’t be taxed on it. Putting up collateral to borrow cryptocurrency, however, is not a taxable event if you do need to leverage your investments to cover your expenses.
Be careful that some protocols’ use of your collateral may subject you to taxation; for instance, Alchemix’s self-repaying loans may generate taxable debt cancellation revenue. If you are compelled to liquidate your business, taxes will be due.