By EWN • 21 March 2022 • 10:02
Several government regulators define Bitcoin as property, liable to taxation like ordinary assets. However, specific taxable events must occur to make a company or an individual eligible for Bitcoin taxes. For instance, using Bitcoin to pay for goods and services or trade other cryptocurrencies is taxable with significant tax implications. If you are interested in bitcoin trading, visit BitIQ.
Due to Bitcoin’s unique qualities and diverse use cases, the tax rates vary based on the particular transaction or event you engage in within a given tax year. Nevertheless, tax is a liability that could significantly impact your returns on investments. The following article outlines how to reduce or eliminate Bitcoin taxes.
The United States’ tax code provides a lesser-known 0% tax rate for long-term capital gains. Eligibility for that provision mainly depends on an individual or a company’s filing status, annual income, and the duration they have held the crypto before selling it. Married spouses who file for taxes jointly could make up to $80,000 in Bitcoin profits without taxes. However, it only applies to those who transact Bitcoin through US-based crypto platforms. Donate Bitcoin to Charity
Donating your Bitcoin to aid organizations and charitable foundations could earn you tax deductions. Giving out crypto assets held for more than one year to a charity attracts a tax deduction equivalent to their fair market value at the time of the donation. Besides, you also won’t have to pay any taxes on the capital gains of the donated Bitcoin. Here’s an example of how it works.
Imagine X donating 1 Bitcoin to a charity organization. He purchased Bitcoin at $1,000 per token four years ago. Bitcoin’s price during the donation time is $10,000 per coin. X will deduct $10,000 as a charitable donation on Schedule A, bypassing capital gain taxes on $9,000. Alternatively, X would have to pay capital gain taxes on the $9,000 profits if he sold his 1 Bitcoin and donated the proceeds to charity in fiat currencies.
However, the tax laws for crypto donations can also be complex. Thus, consider consulting with an expert before making large donations in Bitcoin.
Crypto also allows users to harvest tax losses more aggressively, impacting higher tax savings that can be re-invested into your portfolio. Unlike stocks and securities, several government agencies treat Bitcoin as property. That means they are not subject to strict sales rules. It allows you to sell your loss positions for tax reprieve then quickly re-acquire them without waiting 30 days. Those harvested losses can go a long way in offsetting the capital gains on your Bitcoin.
Self-directed IRAs are also great tools for crypto investing and deferring taxes until retirement. You may not entirely avoid taxes, but an SDIRA allows you to generate compound crypto profits on your portfolio without paying taxes on them at present. Not paying taxes on current trades means you get to keep the tax money in compound profits. That could significantly increase your overall return potential in the long term. Besides, you will also get tax savings when you cash out during retirement due to the lower tax rates.
Overall, various ways exist for reducing or eliminating Bitcoin tax rates. Nevertheless, experts recommend holding Bitcoin in a Qualified Opportunity Fund for at least ten years as the best way to avoid crypto taxes altogether. But understand the crypto industry dynamics and other factors to determine what works best for you.
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