Lowering Your Bitcoin Taxes

The price of Bitcoin is hitting all-time highs as more and more people flock to invest in it. Lots of investors are having massive gains and need to consider the hardest question about their investment: do I hold, buy, or sell now?

If you choose one of the former two options, you do not have to worry about bitcoin taxes yet. However, if you choose to sell, you will have the IRS looking at you since the sale is a taxable event. The good news is that you can lower your taxes by creating a strategy in advance. While you will have to pay taxes on selling your investment, you can lower your taxes by planning in advance. Here are some strategic options to let you keep more of those Bitcoin gains.

Hold your investment for over one year

Selling your Bitcoin before the one-year holding period is up can drastically increase the amount of taxes you have to pay. If you held your Bitcoin for a year or less, you will face short-term capital gains tax rates. If you hold an investment for less than one year you will face the short-term capital gains tax, and those rates are the same as money earned through wages, which can be up to 37% for high-income earners.

If you believe Bitcoin will continue to rise, holding for over the one-year period will greatly reduce your tax rates. You will only have to pay the 0%, 15%, or 20% long-term capital gains tax rates that investors who are loyal pay.

Holding your investments for over a year can drastically shrink your required tax payments. The difference between short and long-term capital gains can lead to thousands of dollars in savings for higher-income investors and is still a huge difference for lower-income investors.

Tax Loss Harvesting

If you have massive gains on your Bitcoin investment, it is possible to reduce the tax your required to pay through tax loss harvesting. Tax loss harvesting is a popular strategy that lets you offset your short and long-term gains of the same type and use the remainder to lower other types of taxes.

Let’s say you bought Bitcoin at $13,000 and sold it three months later for $23,000. For example, if you bought Bitcoin at $11,000 and you sold a few months later at $21,000 you would have earned a $10,000 short-term capital gain. However, if you have a $12,000 short-term capital loss from another investment, this can lower your Bitcoin profits and lead to a total capital loss of $2,000. Because your total losses exceed your gains, you do not pay any taxes.

You can deduct up to $3,000 of net capital loss from your income taxes every year. If your capital losses exceed $3,000 you can carry the loss forward and use it for future years until you have used the entire loss amount.

Give Bitcoin as a gift

The IRS gift tax rules allow you to give Bitcoin or other crypto valued at less than $15,000 without having to pay taxes. The exemption is per recipient and can be applied to both 2020 and 2021. If the value of the gift is over $15,000 you will be required to complete the IRS Form 709 when you are completing your annual taxes. However, completing Form 709 does not necessarily mean you will be having to pay taxes. If you have not gone over the lifetime gift tax exemption of $11.7 million in 2021 you will not have to pay taxes on Bitcoin as a gift.

For Bitcoin to count as a gift, you must give it to someone without receiving anything in return or the value of what you receive must be much less than the value of the Bitcoin.

A great thing for the recipient is that receiving the gift is not a taxable event and gift recipients do not have the report the Bitcoin gift until they decide to sell. When you are giving Bitcoin as a gift, it is important to make sure the recipients know the cost of the Bitcoin they are given so they can properly calculate gains and losses.

Choose the best tax strategy for you

It is easy to get excited by quick gains in the world of cryptocurrency and forget about taxes.  Before you buy or sell crypto, create a strategy for managing your investment taxes to maximize your gains.

If you have been paying attention to Bitcoin over the last five years you know that it is an incredibly volatile investment. The risks are large, but the gains in the last few months have been even bigger. Make sure to capitalize on your investment as much as possible by choosing the best tax strategy for you. If you have any additional questions, please don’t hesitate to contact us.