Cryptocurrency or digital money looks to be the future of economic assets and a reliable investment platform. It is also fast becoming an acceptable means of exchange and transaction in many countries of the world. Many individuals are now securing more crypto coins with the potential to increase in value which will pay dividends in the long run. In this present age, every asset or service always comes with a tax. Generally, whenever there is a production of wealth, there will inevitably be an increase in taxes. Sadly the tax fees and crypto charges constitute an issue for most investors. The rates on some digital currencies are often astronomical and expensive for an average investor. Luckily, there are tax codes that manage the tax rates on currencies and allow you to save more money on crypto charges.
This article will cover everything you need to know on how to avoid tax charges on your crypto trade the right way.
How Cryptocurrency Taxes work
Paying taxes is one of the duties and obligations expected of a citizen of any country. For every income, there is a form of tax attached which you must pay. Even commodities have Value Added Tax(VATs) on them.
Cryptocurrency has become a valuable asset to have in the modern age and a recognizable ‘means of income’ or property. Therefore, it also shares in tax deduction just like any other acquired asset. The increased popularity and financial development of cryptos have prompted an increment in its taxes. The taxes paid on Cryptocurrency are seen as capital gains tax.
Capital gains tax comes in two forms which are short-term and long-term capital gains tax. The duration of time you hold on to an asset determines the amount and kind of capital gains tax you will pay. Since Cryptocurrencies are considered assets, this very much applies in this case.
Short term Capital Gains Tax
This is a form of capital gains tax that triggers when you trade an asset (in this case Cryptocurrency) for more than you purchased it. This tax only comes into effect if you held the crypto for not more than a year. The tax rate will be taxed like a typical wage income. Tax percentages may range between 10%-37%.
Long Term Capital Gains Tax
On the other hand, taxes on Cryptocurrencies are considered long-term capital gains tax if you hold your crypto investment for more than a year. For instance, if you’ve been buying Ethereum regularly for 18 months and then decided to sell some, your tax charges will be seen as a long-term capital gains tax. Therefore you will have to pay a lower crypto tax rate on your Ethereum asset. This is often a more favorable option as you pay less on the tax rate compared to short-term gain. With a long-term capital gain tax, you may pay as low as 0% on tax rates.
How To Avoid Tax Charges on your Cryptocurrency
Every digital currency holds an extra charge rate depending on the popularity and amount of crypto trades. Since crypto is a volatile market and fluctuates in value, there is bound to be a change in taxation in the future. However, the current rates will serve as a basis for our proposed methods to eliminate taxes you may be owing. Now that you understand how cryptocurrency is taxed, let’s take a look at ways to reduce the tax amount you have to pay.
Hold Your Cryptos For Over A Year
The taxation on cryptocurrencies is often dependent on how long you hold onto them before trading. Long-term capital gains tax holds a far better advantage than short-term gains in this regard. By holding your crypto until the duration surpasses 12 months, your tax rates will be considered a long-term gain. This means you will be charged based on a long-term capital gain which incurs far lesser charges. It is difficult and very tempting to sell your coin when it is perhaps at an ‘all-time high’ or the market is bullish. However, the high tax rates in short-term capital gains may in some cases end up deducting a large chunk of the profit you wish to gain. Exercising enough patience will benefit you in the long run as you will be saving a significant amount on tax charges.
Sell in a Low-Income Period
While it is more advisable to hold on to your coins until it converts to a long-term period, you can still get low tax rates during short-term gains. If you decide to sell your crypto while still in short-term capital gains tax then you should only do so in a Low-Income year. Since short-term capital gains taxes on cryptocurrencies are more or less treated like ordinary income, you will get lower taxes on your sale should you sell within a low-income year. The same tax rate on basic will apply to your crypto gains as well.
Selling in a low-income year may help you pay as low as 5-15% in tax on your Cryptocurrency gains.
Gift Your Family
One way to avoid excessive tax charges on your Cryptocurrency is to gift your family or relatives. This strategy will save you the process of paying a gift tax. Everyone is allowed a specific amount you can gift another person in a year with the deduction of extra gift tax charges. However, the recipient must be aware of the terms within the crypto received as they would be liable for the tax fee when they sell it. As long as it is a gift from a family member, the recipient will still pay less than you would pay in tax.
Move To a Different Location
If you have large amounts of Cryptocurrencies and want to avoid the exorbitant tax charges, you may want to consider moving to a country with lesser tax fees and regulations.
While relocating to a new state might not seem like the easiest choice to make, it’s an option that can help you incur fewer tax charges on your investments.
However, this method is pretty complicated and will require several legal documentation and requirements. You should seek the assistance of a professional for more details before considering this option.
Puerto Rico is one of the few countries that beats the US federal tax system and doesn’t charge cryptos as capital gains.
How To Report Crypto Tax Errors
Since Cryptocurrency is quite volatile, you may experience losses on your Bitcoin or any other digital currency. These losses can affect the crypto gains on sales along with the tax fees. Sometimes these fluctuations affect the tax regulations and the application to your crypto gains. This is why it is important to keep proper records and documentation of any transaction or sales.
If you fall short in your tax payments or there is a sign of delinquency, the IRS will not be hesitant to penalize you. Using help Tax negotiations services https://www.curadebt.com/tax-debt-relief/ will be very beneficial for you if you think there are discrepancies with how much the IRS claims you owe.
It would be best to hire professionals to look into all records and transactions which will save you lots of money and time.
There is no doubt that Cryptocurrency is taking the world by storm and a lot of people are investing in them. Cryptos also come with clauses as they are taxed like stocks and any other asset. With this detailed understanding of Crypto gains, you can now avoid excessive tax charges on your sales.