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Crypto Tax Planning

Tax Planning Strategies for Crypto Traders & Investors

Discover seven easy ways to optimize your crypto taxes.

Nobody likes to overpay their taxes. But, failing to report crypto transactions properly can result in steep penalties and interest charges from the IRS. Fortunately, there are several steps you can take to reduce your crypto tax liability without any dicey accounting. All it takes is a little planning and the right tools; you could save hundreds or thousands each year.

In this article, we’ll cover seven easy steps to minimize crypto taxes and ensure you don’t pay more than you need to.

Crypto Taxes 101

The IRS treats crypto as property for tax purposes. So, when you sell a crypto asset, you must determine the cost basis (purchase price) and pay capital gains taxes on any profit.

You must report every crypto transaction, including the purchase price, sale price, date, and capital gain or loss, on Form 8949. Then, you add the totals and carry the final result to Form 1040 Schedule D, which factors into the rest of your tax calculations.

Coinbase or other reputable exchanges may provide some of the information you need. However, if you use multiple wallets, exchanges, or DeFi protocols, combining transactions chronologically and matching purchases with sales quickly becomes a challenge.

Reduce Crypto Taxes
ZenLedger makes connecting your wallets and exchanges easy for automatically importing transactions. Source: ZenLedger

The easiest way to file taxes is using crypto tax software like ZenLedger – especially if you trade across multiple wallets or exchanges. The software automatically aggregates transactions across these platforms, computes your capital gain or loss, and populates your necessary IRS forms, saving you time and money.

Now that we’ve covered the basics let’s look at a handful of specific strategies you can use to cut down on your tax liability each year.

#1. Hold More Than a Year

Want to cut your tax bill by up to 12%? It’s easy: Hold an asset for longer than a year before selling it. Doing so will generate long-term capital gains taxable at a lower rate than short-term capital gains.

Suppose you earn over $170,000, pushing you into the 32% tax bracket, and you decide to sell $10,000 in Bitcoin. If you’ve held the Bitcoin for less than one year and sold it, you will owe $3,200 in tax on the $10,000 gain. But if you sell after holding the Bitcoin for one year, the tax bill drops to $2,500 – a $700 or seven percent savings.

#2. Harvest Tax Losses

Nobody wants to lose money on crypto investments. But if you do, be sure to harvest your tax losses. By selling a losing position, you can realize the loss and use it to offset other capital gains or up to $3,000 in ordinary income each year. And if you can’t use it this year, you can carry the loss over into future years.

Even better, unlike the stock market, crypto assets don’t fall under the so-called Wash Sale rule that prevents you from immediately repurchasing the asset after realizing the loss. So, you can instantly replace the coins in your portfolio after realizing the loss. As a result, it makes sense to always look for opportunities to harvest losses throughout the year.

However, there’s no guarantee that tax loss harvesting will stick around forever. In fact, Biden’s new budget plan could close the crypto tax harvesting loophole if approved.

#3. Sell During Low-Income Years

Your tax rate typically depends on your income. So, another way to reduce your tax burden is to sell during low-income years when your tax rate is lower – especially when it comes to short-term capital gains.

For instance, suppose it’s December, and you have an Ethereum position you’ve held for six months. If you plan to earn less next year (maybe you’re retiring or switching jobs), you might wait to sell until January 1st to sell in order to realize a lower tax rate.

#4. Use an SDIRA

Most IRAs and other retirement accounts don’t permit crypto assets. But a particular type of IRA, a self-directed IRA or SDIRA, does. By holding crypto in an SDIRA, you can defer taxes until you sell or pay taxes immediately and avoid tax on any capital gains.

SDIRAs provide the same tax benefits as conventional IRAs but may cost more to set up and operate over time. So, talking with a tax professional is critical to determining if it’s the right fit for your situation.

#5. Gift Crypto to Family

Many people financially support their children or other family members at some point. But gifting crypto rather than cash can help you lower your tax bill and provide the same support.

The IRS allows individuals to gift up to $15,000 per share, per recipient, without incurring any gift tax. Of course, there are a few rules. For example, you must still pay capital gains taxes if you gift crypto to children under 18 since the IRS views that as taxpayers trying to use a loophole. So consider speaking with a tax expert before using the strategy.

#6. Donate Crypto to Charity

Do you donate to charity? If so, donating your crypto assets instead of cash can help you realize a double tax break.

If you itemize your tax return, you can deduct your charitable contributions, and you will not owe any capital gains taxes on the appreciation of your donated assets. At the same time, the charity won’t have to pay capital gains taxes, so it’s a win-win for both parties.

#7. Move to a Low-Tax Jurisdiction

Remote work has made moving more manageable than ever. And some moves can significantly reduce your tax burden – especially regarding crypto assets.

Alaska, Tennessee, Wyoming, New Hampshire, Florida, South Dakota, Texas, Nevada, and Washington have no state income tax. Depending on where you’re moving from, that could save you thousands of dollars annually. That said, states like New Hampshire still tax some interest, and other exceptions exist. So, it’s essential to do your due diligence before packing up.

The Bottom Line

Crypto taxes can quickly add up to take a bite out of your returns, but there are steps you can take to reduce your tax burden. While some strategies are simple (like holding assets longer), tax-loss harvesting and other advanced techniques involve some tools and planning.

In addition to these consumer-facing tips, crypto miners, NFT artists, and other businesses can minimize their tax liabilities by taking advantage of tax deductions and following many of the same tips discussed above.

If you buy, sell, or trade crypto, ZenLedger can help you aggregate transactions across exchanges, compute your capital gain or loss, and generate the tax forms you need to file.

Get started for free!

“This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.”

Justin Kuepper

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