Cryptocurrencies, virtual currencies, bitcoin, Ethereum 2.0, WAGMI, staking, mining, lending, and borrowing. There are many crypto-related terms. Most people invest for one of two reasons; income/appreciation or vision of the future. Regardless of the reason, with “great power comes great responsibilities” or as we like to put it “with crypto comes taxes”.
Here are 3 crypto-related tax strategies to use to stay in government compliance while also keeping what is yours your own.
Make use of the 0% tax bracket
Currently, for single individuals with income below $40,400 or married filing jointly couple with $80,800 or less, they can take advantage of the 0% capital gains tax bracket. This bracket allows anyone with income below these thresholds per their filing status to pay 0% tax on long-term crypto capital gains.
The crypto must be held for a minimum of 1 year to qualify as long-term capital gains. For years you know your income will be below, it is a great strategy to sell crypto that qualifies as a long-term capital gain. We recommend every that December you comb through your crypto portfolio and sell items that fit this description.
At the moment, crypto is not subject to the “wash sale rules.” The wash sale rules state any security (often stocks) that is sold at a loss, then repurchased within 30-days, loss cannot be written off until the security is often sold for good or not repurchased within 30 days.
For this reason, it is often recommended to sell your crypto that generated a loss in December and then repurchases the same crypto shortly after. This allows you to take that loss on your tax return while still holding the same crypto amount.
Be warned – Congress has expressed the desire to change this strategy. It is possible in the future this will no longer be available for crypto investors.
Donate or Gift Crypto that has Increased in Value
Donating crypto or appreciated property to a qualified charity is a tax strategy used by many wealthy individuals. This strategy allows you to donate the appreciated asset, receive a deduction if you itemize for the fair market value of that asset, and pay no taxes on the appreciated value.
For example, you purchased Bitcoin during the “Crypto Winter” at $5,000. You held this crypto and it is now worth $40,000. This would usually result in a $35,000 gain taxed anywhere between 0% – 20% depending on your total annual income. Instead of cashing out, you decide to donate this amount to the local charity in need. You will then receive a $40,000* deduction and pay no taxes on your gains.
Note: it is recommended that these appreciated assets are held for a minimum of 1 year.