Every year, we're greeted by the unavoidable annual milestone - tax season! For those residing in tax haven countries, this is probably the last of your worries. However, for the rest of us, taxes are an unfortunate reality we must face sooner or later.
But it’s not all doom and gloom; you can save thousands of dollars on your crypto tax liabilities with strategic planning and the right tools. Here are some easy methods to help you reduce your tax bill this season:
1. Take Advantage of the Long-Term Holding Period
The duration you hold onto your crypto can significantly impact your tax obligations. In many jurisdictions (e.g., USA, UK, Australia, etc.), holding onto your cryptocurrency for over a year before selling or exchanging your crypto may make you eligible for long-term capital gains tax rates.
Typically, these long-term rates are more favorable than short-term rates, which are applied to investments held for less than 12 months.
For example, say you bought BTC on the 1st January 2023 and then sold it on the 1st September 2023 for a $100,000 profit. This would be considered short-term capital gains in the US (as it was sold after 10 months) and is therefore taxed at the federal income tax rate for this bracket which is 24%.
NOTE: This calculation is based on the assumption that you have had no other income or short-term capital gains in the financial year period.
However, say you were to hold onto this BTC and instead sell it on the 1st February, 2024 - still for $100,000 profit. This would then be considered long-term capital gains (as it was sold after 13 months) and is taxed at a lower rate of 15%.
2. Harvest Your Losses
Tax-loss harvesting is another tactic that you can undertake to reduce your overall capital gains for the financial year period. This can be done by selling your crypto assets at a loss to offset your capital gains, slashing your overall tax bill.
For example, say you purchase 1 BTC at $50,000. After holding onto it for a while, you decide to sell it when the value drops to $45,000 - incurring a capital loss of $5,000.
During the same year, you also purchase 100 SOL for $4,000. The value of SOL triples, with your 100 SOL now worth $12,000. Consequently, you decide to take advantage of this price increase and sell all your SOL - leading to a capital gain of $8,000 ($12,000 - $4000).
In this situation, you can offset your capital gains of $8,000 with your capital loss of $5,000. As a result, you are only liable for capital gains tax on the remaining $3,000, thereby reducing your tax burden.
3. Utilize Crypto Tax Calculator
Crypto Tax Calculator (CTC) simplifies and minimizes your taxes by automating the process of calculating your crypto tax liabilities. By importing your transaction data from various exchanges and wallets, the platform accurately determines your capital gains and losses, saving you valuable time and reducing errors that are prone to manual calculations.
CTC also has a tax-loss harvesting tool, which highlights tokens & NFTs you can sell to potentially minimize your tax burden and which ones you should hold onto in order to be eligible for the long-term CGT discount. The calculator also supports a variety of inventory methods which you can change based on your preferences (see our point 4).
In partnership with CoinStats, CTC is offering all users $30 off any plan! Sign up here and get your taxes sorted today.
4. Use the Most Tax Effective Inventory Method
Inventory methods refer to the way in which you match your cost bases with the sales of your crypto assets, which is particularly relevant in situations where you’ve bought the same cryptocurrency at multiple price points. This can significantly impact your capital gains calculations, which can lead to you overpaying on tax..
Different countries also have different inventory methods (e.g., the UK has specific inventory methods set by HMRC), which you need to be aware of (see more on this here).
Luckily for you, Crypto Tax Calculator’s most tax-effective inventory method will select acquisitions with higher prices as they will lead to larger losses or smaller gains. This inventory method also allows short-term gains to mature into long-term gains, leading to you paying less tax in the long run. This option can be found on the ‘Reports’ page in CTC.
5. Invest via a Retirement Fund
Finally, one of the most effective ways to save on taxes is by investing in crypto through your retirement fund. And while not all countries offer pension systems, those residing in jurisdictions such as the US, Canada, UK, Australia, etc… are typically enrolled into a retirement scheme.
The contributions you make to your retirement fund are usually tax-deductible, allowing you to reduce your taxable income for the year. Plus, earnings from your investments in your pension fund (including gains from crypto) are often taxed at a lower rate than the standard capital gains tax rate, and in some cases, you can actually defer the taxes until you decide to withdraw your funds at retirement.
Conclusion
As you can tell by now, reducing your crypto tax bill isn’t all that hard. All it takes is employing a few simple strategies like holding assets long-term, harvesting losses, and using tax-effective inventory methods. You may also opt to invest in crypto via your retirement fund to take advantage of the tax benefits.
And don’t forget to utilize tools like Crypto Tax Calculator to streamline your tax calculations and maximize your tax savings. Take control of your crypto taxes today and start saving more of your hard-earned money!
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