Five Key Crypto Tax Tips

 Here are some of the best crypto tax tips to help you put some more money in your pocket. 

Covered:

  • Reporting Crypto to the IRS
  • Tax Tips
  • Crypto Havens

Reporting Crypto to the IRS

It’s important to start off this guide by going over how the IRS treats crypto, at least for US citizens.

The IRS treats all digital assets (crypto) as property, essentially making them taxable, like stocks or real estate. If you were a pure investor this tax year, just using fiat to buy crypto, then you don’t need to worry about reporting anything to the IRS.

Most commonly, reporting is required when one of the following occur: trading one crypto for another, selling your crypto for some sort of fiat, or using crypto to buy goods and services (for example, buying some Dallas Mavericks merchandise with Dogecoin).

However, it’s important to remember that all taxes are based on your income, and just because there’s a taxable event, you may not need to pay taxes on it. It’s all situational, it’s just important to report taxable crypto events and to be honest, you know, to avoid that thing they call tax evasion.

Tax Tips

1. Keep taxable events to a minimum

In most countries, almost every crypto trading event is taxable. Even if you are to do a crypto to crypto trade on a DEX (decentralized exchange), it is still considered a taxable event. Therefore, make sure you keep track of your trades, and if you are primarily using a CEX (centralized exchange; e.g. FTX.US), don’t worry because they will typically send you a tax report that can help you file.

2. HODL and add fiat

This is a nice segue into our second crypto tax tip, which is to just HODL and continue to add fiat in some form of DCAing (dollar-cost averaging). There are two primary reasons for this. The first is that in most countries, including the US, if you hold your crypto for more than a year, the capital gains tax is considered long-term when you sell. Generally, long-term capital gains are only taxed at about 0% – 20%, while short-term gains are taxed at about 10% – 40%, all depending on your income. The second reason and this is not financial advice, is that we are still in the early stages of crypto, so it’s probably best to HODL projects you believe will do well in the future.

3. Split your gains between two years

If you wish to cash out, capital gains tax will differ depending on how much of your gains you decide to cash out. For example, say you made $1000 worth of gains. If you were to claim all of those gains in one year, you may be taxed at 20%, but if you were to claim them across two years, you may be taxed at 15%. Once again, this depends on your income.

4. Tax Loss Harvesting

Because crypto is considered an asset (like property or stocks), you only recognize a capital gain when you sell, trade, or spend it. Tax loss harvesting can be used to offset other capital gains. Imagine you lost $500 by buying $SHIB at its peak last year but made $2500 worth of gains on $LUNA. You could sell the $SHIB at a loss, and then you would only be paying capital gains tax on $2000 if you were to cash out all of the $LUNA, thus cutting your crypto tax liability. At the time of writing, tax loss harvesting is still legally doable in the US, but that may change in the future.

5. Use a crypto tax software/hire a professional

If you’re an intense crypto swing/day trader, the best option for you probably to have a crypto tax tracking software and/or to hire a professional. I won’t get into which software to use (CoinTracking is a good one), but DYOR, so in the future, you don’t get audited by the IRS.

Crypto Havens

This section could warrant its own article, but if you’re a whale, a good crypto tax tip you may want to consider moving to a country that is less strict when it comes to crypto taxation. Let’s briefly go through some of the top countries that are “pro-crypto” when it comes to taxation.

The Cayman Islands is considered one of the most attractive spots for crypto start ups and individuals because of their relaxed laws on capital gains taxes. Furthermore, the monetary authority in the Cayman Islands recognizes the importance of fintech businesses and crypto start ups; therefore, they have created a relaxed tax environment so the local sector of these businesses can thrive.

If you want to remain in a US territory, a good option may be Puerto Rico. The territory is actually considered to be a foreign country to the US when it comes to federal income taxes. Certain eligible investors and businesses specifically do not have to pay capital gains on assets they obtained after moving there.

The last country that should be mentioned and discussed in more detail is Switzerland. They are one of the most well known global tax havens because of their easygoing tax and privacy laws. They permit wealthy individuals to pay low taxes, and crypto transactions are actually treated as traditional transactions, where all crypto trading gains and losses are tax-exempt for individual traders/investors (businesses are taxed). The growth in crypto adoption and startups is proportionally incredible in the country and recently, a city in Switzerland is aspiring to be the first Bitcoin City in Europe.

Other countries to consider are Antigua, Barbados, Germany, Malta, and Slovenia. Of course, always do your own research if you plan to move to another country to lighten the load of crypto taxation. Lastly, I forgot to mention that El Salvador might be the place for you if you’re a Bitcoin maxi!

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