How to Avoid Capital Gains Tax on Cryptocurrency? Expert Tips and Tricks

Are you considering shifting from cryptocurrency trading to conventional money-making for its low tax criteria? If yes, break down the impacts it will have on your trading career. Earning physical cash is believed to be an essential part of living your life. If made a daily practice, it will further reduce the chances of earning low with zero profit. Why not study ways and research strategies so that you can continue crypto trading without paying attention to hefty taxes? In case, you are into knowing how to avoid capital gains tax on cryptocurrency, here is the answer you need.

Cryptocurrency is a versatile form of digital money that gives you double the profit compared to physical cash. The aim is to provide maximum and quick gains. Although it comes with tax burdens, you can use tips, such as tax-loss harvesting,

As a team of tax experts, we are ready to guide you on how to reduce tax on crypto. In addition, you will learn about several tax strategies so that you implement them and make the best out of your cryptocurrency trading career with little tax submission.

How Does Crypto Tax Work?

As long as you hold crypto and notice no gains or losses, you are not eligible to pay cryptocurrency tax. On the other hand, when you begin trading, that is selling or buying digital assets, you must pay attention to reporting the transactions to the government organizations, for now, you pay tax every time you make a profit. It is indeed similar to report revenue of stock or other investment sale.

Crypto tax works when you record the buying and selling history of cryptocurrencies and calculate whether you make a profit or loss. If you gain profit, a tax report on your tax return becomes obligatory. So, it is crucial to keep a clear document of everything while following the tax rules to avoid trouble, if any.

How to Avoid Tax on Crypto Gains?

First things first, you cannot avoid crypto taxes logically. But, you can follow certain ways to make capital gains tax almost to nill. Are you looking for the easiest ways to reduce crypto taxes? If yes, look no further. This guide explains every bit of information that you need to know.

1.       Use Tax-Loss Harvesting Strategy

One way you can reduce your thousand-dollar bill is by selling your cryptocurrency. However, there are conditions for doing it, such as selling crypto assets when it has declined in value. What happens is when you sell at a loss, you have the opportunity to offset other investment gains using that loss. It includes any assets, stocks, or up to $3000 of your income.

 The best thing is that you can even carry loss to future tax years if it is bigger than the amount mentioned above. While you cannot buy the stock after selling it at a loss before 30 days, this is not with crypto. You can not only sell it in the first place but also buy the same crypto asset without any limitations.

2.       Invest for the Long-term 

Another tip you can follow to avoid huge crypto taxes is to get hold of the crypto for at least one year before selling it. The benefit of doing it makes you qualify for long-term capital gains. Because rates of long-term capital gains are lower than the short-term rates, investing in crypto for more than 12 months brings you low tax to pay.

Warning: You may miss profits for holding too long. Because holding cryptocurrency may get you tax benefits, the risk of market unpredictability never fades.

3.       Buy and Sell Cryptocurrency using Tax-deferred Accounts

The idea of avoiding taxes relates best to using retirement accounts. These tax-advantaged accounts, help you buy, sell, and invest in cryptocurrency. You can either buy crypto ETFs to reduce tax liabilities. The other way is to go for self-directed IRAs and put your retirement savings into investments, such as real estate, gold, or cryptocurrencies.

Additionally, you can contribute up to $7000 per year to these accounts if you are under 50 of age. Many retirement accounts,such as IRAs and 401-ks actively work making your life easy without triggering crypto taxes.  

4.       Claim Profits and Sell Crypto in a Low-income Year 

One of the suggestions on how to avoid capital gains tax on cryptocurrency is claiming profits in years that produce low income. In simple words, a low-income year has a low tax to pay on your crypto profits. What you must do is to sell your digital money in years when you are a student, between jobs, and not earn much.

However, the tax rate depends on how much you earn in income for the specific year. So, by selling when your income is low, you can reduce your tax bill and keep more of your cryptocurrency gains. This is a smart way to optimize your taxes and save money.

5.       Hire a Crypto Professional

Stressing over how can you deal with tax payments may take a toll on you. The best idea is to hire a professional accountant to make things easy for you. In this regard, many crypto-specialized are available and have a knack for cryptocurrency rules and regulations in response to taxes.

Although it costs you money, it can ensure you meet tax obligations. In short, consulting a certified public accountanthelps you take advantage of available tax savings opportunities.

6.       Give Cryptocurrency Gifts 

Gifting with physical cash brings happiness. But, when it is done with cryptocurrency it has more benefits. Firstly, the person who receives the crypto gift is not required to pay tax. Secondly, it overall helps in the reduction of tax liabilities.

Additionally, you always have the option to decide what amount you want to gift. For instance, when you gift cryptocurrency under $16,000, it does not trigger income tax. Whereas, if the gift exceeds the mentioned amount, you must submit a gift tax return.

Note: The receiver must keep a record of the gift’s value and the time he received it. This will prove fruitful when selling it in the future.

7.       Give a Cryptocurrency Donation 

Imagine a scenario, where you want to sell cryptocurrency, want to claim profits in high-income years, and do not prefer holding it for the long term. Still, how can you avoid capital gains tax, as it becomes obligatory in all the circumstances mentioned above?

Looking at the other side of the coin, you can donate cryptocurrency. Not only do you help others but also you can reduce tax values. Donating digital money does not require capital gains tax submission. In this regard, your donation can be tax deductible depending on to which organization you donate cryptocurrency, and what your financial situation is. It further lowers your tax bill by 30 to 50% of what you are earning. Donating crypto without converting it will be a generous move.

8.       Take out a Cryptocurrency Loan 

Another option you must implement for reducing tax bills is obtaining a loan by using your cryptocurrency as security. While selling digital assets may validate taxes, taking out a crypto loan ensures that you get the needed cash without triggering the tax.

Pro Tip: you must choose a trustworthy platform so that you access the funds you require while not losing the crypto assets.

9.       Move into a Tax-Free Country

It may sound absurd but migrating to a country or state with lower tax rates is beneficial when concerning thousand dollar tax bills. In this regard, many countries like Alaska, Florida, New Hampshire, South Dakota, Texas, Washington, and Wyoming have no income tax obligations.

10.   Keep Careful Records of your Crypto Transactions 

Keeping records of your crypto transactions may not help reduce the tax bills directly. Instead, it lets you gather all the records while analyzing and filing the tax. Remember, your crypto records must contain information on the prices at receipt and disposal followed by the purchase and disposal dates.

11.   Consider a Tax-free Exchange

Do you spend all your time and energy finding ways to reduce tax bills? It is time to consider and search for tax-free cryptocurrency exchanges. They offer tax-free transfers among different cryptocurrencies. At the same time, there are some tax-friendly cryptocurrencies including Index Funds or ETFs, Stablecoins, and Cryptocurrencies with low volatility.

What is the Best Tax Calculator for Crypto? Crypto Tax Software

The above-mentioned suggestions are purely physical. Do this and that to delay crypto capital gains tax. Doing all the work regarding crypto taxes on your own may be hectic and tiresome. Why not entrust the matter to crypto tax software? These are the tools that import all the crypto exchangesfrom exchanges and personal wallets. Although there are many software works in the market, some reliable ones are TokenTax, CoinLedger, and Bitcoin.Tax,CryptoAccountant, and Coinpanda.

The primary aim is:

·       Save time in preparing crypto tax filing and spreadsheets in the blink of an eye.

·       Import transaction data from various exchanges and wallets.

·       Calculate gains, losses, and income.

·       Generate tax reports, such as Form 8949 and Schedule D.

·       Optimize tax strategies (e.g., tax-loss harvesting)

How is a Cryptocurrency Exchange Different from a Cryptocurrency Wallet?

Cryptocurrency exchange and cryptocurrency wallets are different entities. Trading crypto means deciding on a reliable exchange platform and a personal wallet. Indeed, it takes your entire day if you do not know the associated factors to determine why both are best for you.

When analyzing the crypto exchange and crypto wallet, the primary difference is the services they offer. The former is a marketplace offering you to sell, buy, and invest your digital assets. Whereas, the latter is software known for storing, sending, and receiving your cryptocurrencies. Apart from this, there are four major differences that you need to know.

Functionality

Exchange: it eases crypto transactions, offering trading pairs, analysis tools, and charts.

Wallet: it gives authority to control funds, and hold private keys.

Account Management

Exchange: right after selecting the crypto exchange platform, you need to log in by creating an account.

Wallet: it usually requires no account creation.

Asset Control

Exchange: crypto exchanges are famous for holding assets temporarily when a trade happens.

Wallet: Holds crypto assets for a long time. At the same time, you have full control over accessing it.

Analogy

Exchange: you can assume cryptocurrency exchange as a bank’s trading desk.

Wallet: A crypto wallet behaves as a personal bank account.

Conclusion

Saving profits without paying taxes seems impossible. But not now. You can surely win this challenge with our expert guide on how to avoid capital gains tax on cryptocurrency. Now you have complete information, implement it and go on with the life-changing opportunity of cryptocurrency trading.