The month of April is rapidly approaching and that brings ominous clouds for many who have to pay their crypto taxes. Here are five ways to minimize that tax burden.
Tax season is upon us once again, and the United States Treasury is eyeing revenue from crypto gains more than ever. Cryptocurrency holders and investors in the U.S. need to report profits from crypto trading to the Internal Revenue Service (IRS) by April 18.
Furthermore, the IRS treats crypto generally like stocks, bonds, and other capital assets. Therefore, the money gained from crypto is taxed at different rates. It is considered either as capital gains or as income, depending on how it was acquired and for how long.
A certified public accountant (CPA) specializing in crypto, Lewis Taub, spoke to Decrypt, offering his advice on lowering that tax burden.
5 Ways to Reduce Crypto Taxes
- Identify dates crypto was bought and sold
This strategy can help reduce reported profits and the tax rate. The IRS has short-term and long-term tax rates on crypto. Therefore, any asset held longer than a year is hit with a 23.8% tax while those held less than a year can be taxed as high as 37%.
- Crypto losses buyback loophole
Crypto is considered property by the IRS so, unlike stocks, you can sell it at a loss and buy it back immediately. As a result, the loss will be available to offset gains on crypto made later in the year.
- Minimize tax on airdrops
The IRS recently ruled that airdrops are taxable if the recipient has “dominion and control” over the tokens. This means that airdrops can be subject to as much as a 37% tax even if you didn’t ask for it. Timing the claim of the airdrop can affect the tax rate, especially if the prices change.
- Maximize mining deductions
Crypto miners also have to pay taxes on the “fair value” of their coins when mined. Furthermore, this tax is classified as a “self-employment income” tax, which can be as much as 15.3%. Claiming deductions such as hardware costs, rent, and power bills can reduce the tax burden.
- Accurate record-keeping
Finally, it is important to keep accurate records of trading activities. The IRS has taken a heavy-handed approach to crypto earnings so detailed and accurate records are required for the filing. Additionally, there are software packages that will assist with crypto accounting.
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