How not to pay taxes on Bitcoin

How not to pay taxes on Bitcoin

Bitcoin taxation remains a subject of contention between government regulators and crypto investors worldwide. Most government agencies describe Bitcoin as an asset, liable to property taxes like other ordinary investments. However, the tax implications usually vary according to the type of transactions conducted in Bitcoin. Visit Immediate Edge for more information on bitcoin trading.

Also worth noting is that Bitcoin has several unique properties and use cases that could impact tax exceptions in some cases. Knowing the particular Bitcoin transactions not subjected to taxation will help you make sound investment decisions. The following are some cases whereby you will not be required to pay taxes.

Converting from one Crypto to another 

Some people have argued converting one cryptocurrency to another, from Ether to Bitcoin, should be classified as a like-kind transfer, according to the Internal Revenue Code Section 1031.

The IRS allows companies and individuals to defer income tax on such transactions.

Several crypto investors took advantage of that provision to defer their incomes from crypto trades during the early stages of crypto trading. However, a 2021 Office of the Chief Counsel’s memorandum ruled that such transactions do not qualify as a like-kind exchange. Thus, the practice is no longer viable for deferring income tax on Bitcoin.

Effective ways to avoid paying taxes on Bitcoin 

Crypto is still a relatively new industry, and government agencies may also change their stances on crypto taxes over time. However, the following are the most effective ways to pay zero taxes on Bitcoin based on the current market environment.

Buying Bitcoin in an IRA 

Purchasing crypto in a self-directed IRA usually comes with significant tax advantages. Many IRAs will allow you to put money on traditional investments such as stocks, mutual funds, or ETFs. Self-directed IRAs are specialized, enabling you to invest in unique assets like virtual currencies, real estate, and precious metals.

The tax benefits will mainly depend on your situation and the type of IRA. Conventional IRAs may let you make tax-deductible contributions, but withdrawals in retirement will attract ordinary income taxes. You will be required to pay post-tax money, but withdrawals are usually tax-free.

Declaring your Bitcoin as income 

Receiving Bitcoins as a payment for goods and services or mining cryptocurrency bears different tax implications. Government agencies usually treat such funds as income and require taxpayers to record and report their fair market value when filing taxes. Such revenues attract tax as ordinary incomes, often higher than capital gains taxes.

The basis of the received Bitcoin mainly depends on the prices when you receive the payments. You will use that basis to calculate the capital gains taxes attained from disposing of the crypto.

Holding Bitcoin for the long term 

Most government agencies stipulate you do not owe any taxes on Bitcoin if you hold the tokens as an investment and are not generating any income. Thus, refusing to sell your Bitcoin throughout the year can enable you to avoid taxes on the held crypto. However, you may still want to sell your Bitcoin in the future. Then, you should ensure those Bitcoins have been kept for more than one year to lower the tax burden. Such cryptocurrencies qualify for relatively lower long-term capital gains taxes.

Several other ways exist to avoid taxes on Bitcoin, including selling the assets during low-income years, donating to charity, gifting your Bitcoin to family and friends, and offsetting crypto gains with losses. Nevertheless, the tax laws vary across states, countries, and regions. So, take some time to research the crypto taxation laws in your country then choose the most appropriate approach.

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