Guest post, written by Jon
The Internal Revenue Service (IRS) released official guidelines surrounding general tax principles that apply on transactions made using cryptocurrencies in 2013. The guidelines state that the IRS treats all virtual currencies as property for tax purposes. This puts cryptocurrencies in the same bracket as stocks, where you need to pay taxes when you sell and make a profit.
Bear in mind that the IRS looks at all types of cryptocurrencies as virtual currency. If you have carried out cryptocurrency trades in recent times, your investments are subject to taxes. Just how much you need to pay depends on various factors such as how much money you’ve invested and how long you hang on to your investments. Fortunately, saving money on your crypto taxes is possible, provided you address different aspects.
Think Long Term
If you plan to invest in cryptocurrencies, it is important that you look at investing for more than a year. This is because your taxes end up being lower when you hold on to your crypto investments for more than one year. Keeping trading through the year, on the other hand, will result in higher capital gains taxes.
If you remain invested for more than a year, long-term capital gains taxes apply, which do not exceed 20%. If the length of your investment is less than a year, you could end up paying close to 40% as taxes. If you are worried about the volatility that comes with crypto trading, you might consider borrowing against your crypto investments to minimize your tax liability.
Turn Losses to Tax Savings
What happens when your crypto investments result in losses? In such a scenario, you may use the loss that you incur to offset your tax liability through gains from other trades, from the sale of any other type of property, or even income from your regular job. The IRS lets you deduct up to $3,000 against regular income.
Convert to a Fiat Currency
When you sell a virtual currency and end up making a profit, set money aside in a fiat currency. In the United States, you would convert into U.S. dollars. The amount you need to set aside depends on your tax bracket as well as the duration of your investment. Converting to a fiat currency gives you easy means to determine your capital gains.
Keep Detailed Records
Keep records of all your crypto investments because you don’t want to end up paying more taxes than you should. Besides, you might need to submit records to the IRS. The records you maintain should carry details such as how much you invest, how you pay for your investment, the time period, and the profits or losses that result from your trades. With accurate details available easily, determining your correct taxes becomes relatively simple.
One way to save some money on your taxes is to give some of your cryptocurrency away as gift. The IRS has placed limits on how much you may gift without attracting taxes. As long as your gifts remain below the IRS-imposed cap, you pay no taxes.
Hire an Accountant
If you are unsure about how crypto taxes work, think about working with an accountant who has the required experience. While this comes at a cost, you do not have to worry about nasty surprises down the road, and it may also lead to long-term savings.
The taxes that your crypto investments attract depend on various factors such as the amount you invest as well as the duration through which you remain invested. While saving some money on your crypto taxes is possible, seeking assistance from a professional might work best for you.
Jon works as a researcher with iCompareFX. This website lets its users compare the world’s leading overseas money transfer companies across different parameters, and it give them access to special offers as well.