The cryptocurrency market is lucrative, so you don’t have to earn six figures to turn your dreams into a reality. In spite of the ups and downs, the decentralized financial market has an excellent compound annual growth rate, meaning you can’t afford to waste any more time wondering.
Now, it’s your job to learn how to buy Bitcoin, so go. Investing in Bitcoin is a good way to build wealth and security, but it’s also a good way to create a huge bill if you don’t understand how and when crypto gains are taxed. Anonymity doesn’t mean that the handsome profits you make fall under the radar of national tax authorities.
Taxes are due when you sell, trade, or dispose of Bitcoin in any way and earn money. Trying to hide anything from the tax authorities leads to severe legal peril, so lying to the government isn’t a good idea. You should better think about what you can do to minimize your tax liability. Fortunately, there are strategies that can help you save money on your tax bills, such as:
Hold Onto Your Bitcoin for The Long Term
Hold until your short-term crypto gains turn into long-term gains – in other words, don’t sell your Bitcoin, even during very great price changes in the market. The profits you make from selling tokens you’ve held for a year or less are referred to as short-term capital gains.
Conversely, the gains from coins held for longer than a year are called long-term capital gains. The question now is: Why does the difference matter? Well, long-term capital gains enjoy preferential treatment under the tax code as opposed to short-term capital gains, so be patient and hold on to your Bitcoin for at least one year before selling.
For the sake of clarity, buying Bitcoin and holding the investment isn’t a taxable event, as there are no immediate gains or losses, even if the value increases. Equally, if you move your Bitcoin between wallets or from one exchange to the other, you don’t have to report or pay taxes. If you receive Bitcoin as payment for a project, for instance, it’s considered a taxable event.
Getting back on topic, if you’re looking to invest in Bitcoin for the long haul, have a plan and avoid clinging to arbitrary rules. Rather than focusing on short-term movements, you should better have confidence in Bitcoin’s history and don’t pay attention to short-term price fluctuations.
Sell In a Low-Income Year
Eventually, you’ll want to sell your Bitcoin. For maximum profit, you must time the market, which is difficult, if not impossible, not to mention that it could turn out to be a costly mistake. It’s recommended to sell your crypto holdings in a low-income year to ensure a lesser income tax rate for that financial year.
The long-term capital gains rate applies to you, meaning that if you have less taxable income, you have a lower long-term capital gains tax rate. The point is that if you experience losses arising from trading, selling, or disposing of your coins, they’re deducted against capital gains (and up to a certain percentage of your personal income).
Transfer Bitcoin to Your Significant Other
In most cases, a gift is a taxable gift, yet the exceptions prove the rule. More exactly, if you gift $16,000 or less of Bitcoin, you’re not required to report the transaction on your tax return. Nevertheless, if the recipient sells the tokens, they may be subject to capital gains tax; it’s a disposal of beneficial ownership.
This is why your significant other should monitor Bitcoin’s value to calculate gains and losses in the event of future disposal. Bitcoin gains value when demand increases and supply decreases (the same principle applies to all cryptocurrencies).
Sending Bitcoin from one wallet to another involves an exchange of addresses and a transfer of ownership data, which is recorded on the blockchain. Digital transactions are almost real-time, but they need to be verified and recorded in the blockchain before the transferred amount can be spent. You must pay a network fee, which is paid out to miners.
All you have to do is to copy and paste the address to which you want to send the payment, enter the exact number of Bitcoin, and confirm the transaction by hitting the Send button. It’s crucial to double-check the address before finalizing the transaction because even a single typo can lead to irreversible loss.
Fund Your Retirement Account
Major financial institutions have begun to embrace cryptocurrency for retirement plans. The most notable examples are the American 401(k) account and the IRA. 401(k) accounts typically accommodate mutual funds, but now Americans are able to direct funds into Bitcoin.
If you’re trading Bitcoin and have a well-established, low-risk retirement plan that doesn’t depend on digital assets, you can trade Bitcoin inside the 401(k) account to reduce your tax liability, avoiding tax on capital gains. Maybe you have a Roth IRA account. In that case, find a custodian that’s willing to accept cryptocurrency; otherwise, you won’t be able to store your retirement savings in alternative investments.
Regrettably, there’s no equivalent of the aforementioned accounts in Europe. That is, every European country has its own retirement accounts, so you’ll have to use a self-managed investment account for your long-term plans. It’s up to you to figure out how much money you should set aside for the crypto portion of your retirement portfolio.
Self-directed investment is a fantastic option if you’re familiar with investments and have experience trading online; you can trade as soon as your account has been approved and you’ve received funding. We’ve been talking about Bitcoin, but it’s not necessary to put all your allocations into Bitcoin, so explore other options.
Closing Words
While there are no legal ways to avoid cryptocurrency taxes, strategies like the ones discussed above can help you reduce your tax liability. We hope you’ve found this article to be helpful. For more information, it’s recommended to reach out to an accountant who specializes in cryptocurrency.
