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US Tax

5 Strategies for Minimizing your US Crypto Tax Bill

There's still time for US individuals to optimize their crypto taxes before the end of the 2022 Tax Year.

Samantha Adams

Thu Dec 01 2022

We know that the IRS are getting more clued up on crypto and cracking down on crypto taxes. Tax avoidance is fraud but here are some strategies that can be implemented to help crypto investors reduce their tax obligation both short and long term.

1. Hold crypto long term to take advantage of a lower tax rate

The capital gains tax rate is lower (0-20%) for long term property compared to short term (10-37%). If you expect your assets to hold their value and don’t need to make a disposal it makes sense to hold on to your crypto for longer than 12 months so you pay the lower (long term) rate.

US CGT Examples

The rate of tax you pay is based on your income so if yours varies year to year then think about timing disposals to take advantage of lower tax rates.

2. Tax loss harvesting

If your crypto has decreased in value then you could sell it at a loss and offset any capital gains.

Tax Loss Harvesting If you invest in stocks you may have heard of the Wash Sale Rule. This states that if you were to purchase the same asset within 30 days before or after the disposal the loss would not apply. As the IRS define crypto assets as property not securities this rule doesn’t currently apply to crypto, so you could buy back the same asset and your loss still stands. This oversight has been recognised by government meaning that 2022 could be your last chance to take advantage before legislation changes and it is disallowed.

Think it feels a bit dodgy? To avoid a wash sale you could wait for the 30 days to pass before buying the same asset back or instead of selling trade it for another asset that is closely correlated in price.

3. Gift some crypto

Did you know you can gift crypto without facing any tax liability? (You do need to submit a gift tax return for gifts to the same recipient that exceeds $15,000 FMV). The recipient also receives the gift tax-free but should note the FMV on receipt and your cost basis to assist with calculating their capital gain on disposal.

Christmas is coming - who’s on your nice list?!

4. Donate to charity

Donation Example

Contribute to a good cause and lower your tax bill! Crypto donated to a qualified charity (501(c)(3) status) is not considered a taxable disposal by the IRS and can be claimed as a charitable deduction.

  • If the cryptocurrency was owned for over a year then your charitable deduction is the FMV at the time of donation
  • If the crypto was owned for 1 year or less your deduction is the lesser of your cost basis or the FMV at the time of donation.

Donations of over $500 should be reported on tax return form 8283. It’s not necessary to report smaller donations but good practice to keep a record, just in case the IRS ever ask for evidence.

5. Invest in a crypto IRA

If you want to diversify your retirement fund and don’t mind a little risk, (let’s face it crypto is volatile) then investing into a crypto IRA can put you at a great tax advantage. There are two types of IRA - Traditional and Roth and both offer slightly different benefits.

  • A traditional crypto IRA comes with immediate tax benefits as your annual crypto contributions are deducted from your taxable income and you defer paying taxes until you withdraw your funds on retirement.
  • With a Roth IRA your contributions are not tax deductible but you’ll be at an advantage when you access the funds later on in life as you avoid the capital gains tax.

Services to help you stay on top of crypto taxes

Crypto tax planning is a thing! Put some thought in and you can really make the most of your tax allowances. In this blog we’re only just hitting the surface - find yourself an experienced crypto CPA and make use of tax software like Recap to get ahead of the IRS.