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Cryptocurrency Taxes: 4 Strategies For Traders


Ever since the massive increase of Bitcoin’s price in 2009, investors from all around the world have taken a keen interest in cryptocurrency. Most of them weren’t successful, but a considerable number of investors were still able to turn crypto into significant profits. While there are several reasons why one may fail to profit from crypto, taxes might’ve played a huge part in this scenario.

While it was mostly manageable for investors, taxes were especially an unfortunate dilemma to traders who operate through buying or selling–two undertakings that both yields taxes.

If you’re one of these individuals, you’ve probably stopped to think about how you can cut down on cryptocurrency taxes. Unfortunately, even the best of the best traders out there are unaware of how cryptocurrencies are taxed by the Internal Revenue Services (IRS). However, this guide will show you common tax strategies that should apply to cryptocurrency taxes.

Bitcoin BTC cryptocurrencies with rising bullish graph laptop display in background. The bitcoin stock trading background concept.

Capitalize Your Losses From The Previous And Current Years

As you may already know, when you suffer from a loss when investing in any type of property, you can deduct those losses from your taxes. Since cryptocurrency is technically a property, you can capitalize on any losses you incur from the current and previous years–be it from trading or other sources. However, you can only deduct USD$3,000 each year on your taxable income/capital gains.

Suppose you suffered from a loss of USD$15,000 due to bad decision-making in 2015. You can then use that loss and deduct USD$3,000 on your taxes every year from 2016 to 2020.

By doing so, you’re essentially saving USD$3,000 every year. For that reason, while it might be painful at first, you must always ensure that you have a record of your past and current losses.

Wait Until Your Investments Anniversary Before Selling

The IRS may treat cryptocurrency earnings as either capital gains or business income. Business income is when you earn crypto by exchanging it with goods and services. Capital gains, on the other hand, are any profit made by selling an asset at a higher price than what you bought it for. Since you’re a trader, what you’re earning is capital gains. Capital gains can either be long-term or short-term.

Short-term refers to any profit made by selling an asset that you’ve kept for less than a year, while long-term capital gains are any profit resulting from the sale of assets held for over a year.

At first glance, it may not seem like a big deal, but it’s worth noting that each type differs when it comes to the tax rate. For your reference, long-term capital gains have a tax rate of 0% to 20% in the United States. Meanwhile, the short-term tax rate may go from 24% up to 37%, which is considerably higher.

On that note, if you’re a trader, consider engaging in long-term trading or position trading. That way, you can hold on to your assets for over a year before selling them to cut down on taxes.

Time Your Trades With The Current Tax Rate

Every business person, entrepreneur, and investor know that tax rates are dynamic–it can be relatively high in some years or it can be extremely low in other years. For example, in 2014, it wouldn’t be strange for an investor to pay zero taxes on capital gains, yet after two years, the average rate went back to 15%. If you intend to use the previous strategy to minimize your taxes, you might as well wait for a lower tax rate before selling your assets or buying new ones.

Invest Your Earnings To A Self-Directed Retirement Plan

Zero taxes is a dream come true for most, if not all, traders. Unfortunately, not everyone can predict the capital gains tax rates for each year. But timing your trades isn’t the only way to pay zero taxes.
If you can invest your earnings on a retirement plan, such as the Roth Individual Retirement Account (IRA) or 401(k), you might reduce your taxes significantly or even avoid tax liabilities altogether. Of course, doing so might be tricky, as it’s different from investing your earnings in a brokerage account. Moreover, take note that you won’t keep 100% of your earnings. There are also fees, but they shouldn’t be as high as what you would have to pay for taxes.

Regardless, it’s one of the best strategies if you want to cut down on taxes. Besides, you’re bound to open a retirement plan in the future anyway. Think of it as moving ahead of time.

Wrapping Up

Filing a tax return is perhaps the most frustrating part of being a crypto trader. Not only is the process burdensome and time-consuming, but the act of filing taxes will also ultimately reduce your earnings. Unfortunately, every trader is legally obliged to file their earnings. However, with this guide, you should be able to at least cut down on your taxes or even defer them entirely.

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