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Wednesday, April 24 2024
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How to Cut Crypto Taxes Down in 2021

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Crypto investors are already battling with the security threats happening lately. The latest challenge arrived when IRS decided to add a single question on cryptocurrency holdings in the 1040 income tax return form of 2020. It asked if the taxpayer traded or exchanged in cryptocurrency in 2019-20.

When Do You Owe Taxes on Your Crypto?

If you are holding cryptocurrency for some time, it will be taxable on several events. So, you have to keep a report of all transactions regardless of how minute they were.

  • Holding cryptocurrency for a short time (STCG), is taxed along with your other income. It will range from 10-37% depending on how long you held it within 36 months. For long-term holdings (LTCG), the cryptocurrency is taxed along with your other long-term capital gains. The rate is 20%. 
  • The second taxable event is when you either trade cryptocurrency with fiat money or other cryptocurrencies. The tax will be implemented on the incrementing value. 
  • The third taxable event is when you buy or sell digital goods and services and, the payment is made in cryptocurrency.

When Don’t You Owe Taxes on Your Crypto?

You need to report about all the transactions done in cryptocurrency even if they don’t add up to your profit or haven’t traded them. For example, if you decide to gift cryptocurrency to someone, you will have to report it even though you won’t be taxed. There are precisely two events when dealing with cryptocurrency where you don’t owe a tax.

  • During loss – If you have a loss during buying and selling in cryptocurrency, your tax is exempted. 
  • Donations – If you received a donation of less than $15,000 in cryptocurrency, you won’t be liable to pay any tax for that.
    The same works for staking of Ethereum to become a validator in ETH2 network. You can find more details on Ethereum 2.0 on Ethscan.

How to Properly Report Cryptocurrency Taxes

The 2019 IRS ruling has made it a cumbersome task for crypto investors to track all transactions and report them correctly in the income tax report. It also applies if you made a payment cryptocurrency to your local supermarket. Failing to which, one may be evicted of tax fraud and, there could be criminal charges against him/her.

You must record all your capital gain and losses on taxes in Schedule D (Form 1040 annex) if you invested in cryptocurrencies by purchasing and selling them. Not all crypto exchanges will provide you with information about transactions. So, you have to keep a book manually.

You can also consult with a tax expert if the process seems to be too complicated.

Ways to Legally Minimize Crypto Taxes

You can legally minimize the crypto taxes in the following ways.

  • Turn your STCG into LTCG. If you have enough patience to hold your crypto wealth for more than the STCG term, your tax rate will drastically reduce. It can also be 0% with a maximum profit of $80,000 if you are married and you file jointly and $53,000 as head of household. 
  • If you donate cryptocurrency that you held for more than a year, you get a reduction in the total payable amount of tax.

 

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