The IRS tax return deadline isn't until April 18, 2023, but the window to make some 2022 moves ends on December 31. For example, you must harvest tax losses or step up your basis before year-end. You should also start looking for a crypto accountant and consolidate your transactions to streamline your tax filings when the time comes.
Let's look at five year-end moves to reduce your crypto taxes and how ZenLedger can help smooth the process.
#1. Harvest Any Tax Losses
Nobody likes to lose money, but tax-loss harvesting can cushion the fall and save you thousands of dollars on taxes. By selling assets to realize a loss, you can offset other capital gains and up to $3,000 in ordinary income in the current tax year. You can even carry forward any losses you don't use into future years.
Unlike stocks, cryptocurrencies aren't subject to the Wash Sale Rule, which prohibits investors from repurchasing a substantially identical security within 30 calendar days before or after the sale. As a result, there are few limits to crypto tax-loss harvesting opportunities.
ZenLedger's tax loss harvesting tool automatically analyzes your trade history across wallets and exchanges and provides a list of tax savings opportunities to take advantage of before the December 31 deadline.
The 2022 crypto winter means that many investors are sitting on substantial unrealized losses, so it's a great idea to harvest those tax losses before December 31 and offset taxes this year.
#2. Consolidate Your Transactions
Many crypto traders and investors have assets spread across different wallets and exchanges. For instance, you might collect NFTs and keep a little spending money in a Metamask wallet but keep your long-term investors on an exchange or a hardware wallet. As a result, consolidating these transactions into one place is a necessary starting point.
ZenLedger Labs connects with your accounts, making it easy to manage your portfolio from a single dashboard. You can also analyze the broader crypto markets and build research portfolios to test new strategies.
Additionally, ZenLedger's Grand Unified Accounting aggregates your entire transaction history into a single, easy-to-read spreadsheet. You can see the transaction date, amount, USD equivalent, transaction fees, and the associated calculated tax. You can use that information to support your tax preparation or defend yourself in an audit.
#3. Step Up Your Basis (If in a Low Bracket)
Your capital gains tax rate and the amount of tax you pay depend on your income. If you anticipate a higher income bracket next year, consider stepping up the cost basis of certain crypto positions. Doing this can take capital gains off the table at a lower tax bracket.
For example, suppose you have an unrealized $10,000 gain in Bitcoin, but a new job promotion will push you into a higher tax bracket next year. Rather than sell the Bitcoin and pay a higher tax rate, you might sell the Bitcoin in the current tax year and repurchase the position in your portfolio. As a result, your cost basis resets to the current price.
There are two caveats to remember if you do this, though.
- You will have to pay ordinary income tax if you sell a short-term position. But, if the holding becomes a long-term position next year, you will owe the lower capital gains tax rate. Therefore, if you have held a position for less than a year but don't plan on selling for a while, you should avoid stepping up the basis.
- Volatile cryptocurrencies could fall in value over time. If you're not confident the price will rise next year, you should hold off on stepping up your cost basis until prices fall.
On a related note, if you inherit crypto assets, the cost basis of your crypto will automatically be stepped up to equal the fair market value.
#4. Find a Crypto-Friendly Accountant
ZenLedger makes it easy to prepare your crypto taxes each year. With its TurboTax integration, most taxpayers can complete their returns without the help of a dedicated accountant. You don’t have to worry about downloading forms from exchanges or manually entering transactions into online forms to compute what you owe.
However, if you have a lot of trades, use decentralized finance protocols, or hold a portfolio of NFTs, consider seeking an experienced accountant capable of optimizing your tax savings. The best accountants can assess your entire financial picture to minimize your tax liabilities and ensure that you accurately compute what you owe.
Unfortunately, most accountants lack experience with crypto assets. And as a result, they can rack up several billable hours and are more prone to mistakes.
If you need to work with an accountant, we can also introduce you to a crypto tax professional with returns signed by a tax attorney, CPA, or enrolled agent. These plans start at $3,500 for a single year, or you can book a consultation for $295 per 30-minute session.
#5. Max Out Your Crypto IRA
Many crypto traders and investors use self-directed IRAs – also known as crypto IRAs – to invest in crypto assets in a tax-advantaged way. While conventional IRAs prohibit crypto assets, SDIRAs enable anyone to invest directly in cryptocurrencies, NFTs, or other assets and realize the same tax benefits as a traditional IRA.
The SDIRA contribution limits for 2022 are $6,000 for individuals under 50 and $7,000 for individuals over 50. However, you must have earned income to contribute to an IRA, and your taxable earned income cannot be less than your contribution limit. And IRA contribution limits start to phase out based on your income and existing retirement plans.
If you still haven’t made all your 2022 contributions, you’ll be glad to know that you have a little extra time to max out your crypto IRA. Under the IRS guidelines, you can make 2022 IRA contributions until April 18, 2023, and still have them count toward the 2022 tax year.
The Bottom Line
The tax return deadline isn't until April of next year, but you only have until the end of the year to make some tax moves. At the same time, it helps to enter tax season with all your records in one place and an accountant lined up. Finally, it isn’t ever a bad idea to max out any crypto IRAs sooner rather than later, even if the deadline isn't until April 2023.
If you trade crypto assets, ZenLedger can help you aggregate transactions, compute your capital gains, and auto-populate the forms you need each year. You can even identify tax loss harvesting opportunities throughout the year to lower your tax burden.
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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax or other advice specific to your particular situation.