Five Ways to Reduce Your Crypto Tax Bill
If you were a crypto investor lucky enough to come out of 2018 with profits, you will incur a tax bill. Don’t fret, there are ways to reduce your tax bill from crypto profits.
1. Track your tax lots while trading
Keep track of your tax lots while you trade. For example, when you exchange BTC or ETH for another cryptocurrency, make sure you’re selling the tax lots that you’ve held for a over a year, if possible, for long-term gain treatment. Also focus on lots that you’ve paid the most for, thus resulting in the lowest tax liability on each trade.
This is what savvy investors, private wealth managers, hedge funds, etc do with stocks and bonds, as opposed to using simpler accounting methods like FIFO or LIFO.
It can be quite cumbersome to manually calculate crypto taxes under all these methods, so TokenTax makes it easy for you. Our patent pending algorithm takes into account your exact long-term and short-term capital gain marginal tax rates and calculates your tax liability using all the accounting methods to identify which tax lots will result in the lowest liability before making the trade.
2. Offset crypto gains with other capital losses
Crypto tax gains are categorized under capital gains and losses. So are other investments you may have. If you incurred losses trading stocks or in disposing of real estate, you can use these losses to offset the crypto gains you had during the same tax year.
The S&P returned -6.24% in 2018, so it’s very likely that you could have losses in your stock investments that can used to offset your crypto capital gains.
3. Use Tax Loss Harvesting
Tax Loss Harvesting is a legal way to minimize your taxes for the tax year. The goal is to liquidate trading positions based on the loss of the position. If you didn’t have any gains, it can be used to offset ordinary income.
In order to enact this strategy, you need to monitor your unrealized gains and losses, then conduct trades that allow you to realize the gain/loss. The easiest way to do this is to use the TokenTax Tax Loss Harvesting Dashboard.
4. Optimize for long term investing over short term trading
Crypto taxes fall into the capitals category. As such, there are two types: long term capital gains and short term capital gains. Long term capital gains are positions held for 365 days or more. Short term capital gains are positions that are held for less than 365 days.
Long term gains are taxed at a lower rate than short term gains, as short term capital gains are taxed at your ordinary tax rate while long term capital gains are taxed anywhere between 0% – 20%. By holding positions for more than 365 days, you pay a lower tax rate.
5. Keep accurate and detailed records
In order to make sure that you are paying an accurate tax amount, you must keep a log of all your cost basis. You need to collect your trade date, the amount in USD of your crypto acquisition, the date you sold the crypto and the proceeds from the sale. Then, this all needs to be converted into USD. What if you traded crypto to crypto? Then you need to calculate the implied USD rate for each trade.
It can all be quite complex. Luckily, TokenTax takes your crypto trade records and reconciles this information in minutes. Our support team works 24/7 to make sure your data is being processed correctly, and then we generate your tax forms for you.
We've helped users who have lost data, whether making successful last-ditch API pull requests to Liqui as it shut down or creating IRS-friendly synthetic trades for lost data.
TokenTax does the work so you don’t have to.
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