No-one loves paying taxes. But when it comes to your crypto assets, there are some strategies you can employ to make sure you don’t pay any more than you have to.
1. Buy crypto in an Investment Retirement Account (IRA)
Did you know you can buy crypto through an IRA and receive the same tax benefits? Just like with other assets, if you buy crypto through an IRA, the tax will be paid at your income tax rate at retirement. If your income when you retire is lower (which is often the case), you will pay a lower tax rate on your investments. We discussed investing in crypto through an IRA in a webinar we hosted with Alto IRA. You can see the crypto advisor tax webinar replay here.
2. Manage your timing
Be aware of how long you have held onto your crypto assets. The IRS applies a different capital gains tax rate to short-term investments and long-term investments. The actual rate depends on your income level, but the maximum rate for long-term capital gains is substantially lower than that for short-term gains. If you hold onto your investments for less than one year, your maximum capital gains tax rate is in the order of 37%. However, if you hold for more than a year, the maximum rate is closer to 23%. Well worth the wait.
3. Offset gains with losses
Given the volatility of many crypto assets, it might be a smart strategy to offset income with losses if you’ve experienced crypto losses during the year. You can apply up to $3,000 of losses to offset income or the losses can be carried forward. Be sure to take into account your cost basis when making your calculations.
4. Donate to charity
Donating crypto directly to a charity provides a tax deduction and avoids a capital gains tax obligation. Instead of selling the crypto and then giving the money to charity, with this strategy you would contribute crypto directly to the charity. You would want to donate crypto assets that have gone up in value so that you can donate more and avoid paying capital gains tax on your appreciation. You can take a $300 deduction if you are single or married filing separately or a $600 deduction if you’re married filing jointly. You can deduct higher amounts if you itemize. This can be done directly via a service such as The Giving Block. They make it simple to donate to your favorite charity, and handle obtaining your tax documentation as well.
You might want to consider organizing your giving via a donor-advised fund. If you want to donate a certain amount to charity over a period of time, a donor-advised fund allows you to take the entire donation as a tax deduction in the first year, but then contribute to the charity over time. The charity just needs to be a registered nonprofit. Additionally, the funds in the account can grow tax-free.
Many of the estate planning tools that are advantageous for large equity liquidity events can be applied to large crypto gains. Charitable Remainder Trusts (CRT) is a vehicle where you make a one time contributions to a trust. You then receive income from the trust on an ongoing basis, as determine by the trust. The rest of the contribution goes to charity. This is usually done when you are at a low income tax rate so that you save in income tax on those distributions. You can also be eligible for a deduction based on the fact that the CRT’s assets will pass to charities. For residents in high tax states, setting up trusts in certain other states can enable you to avoid taxation by removing the asset from your estate. This is also applicable to other crypto-based technology like Non-Fungible Tokens, crypto-mining, and interest received.
Crypto Assets Alongside Your Other Assets: Help from CPAs and Financial Advisors
Harness Wealth works with tech founders, employees, and VCs — these folks were typically very early adopters of crypto given their industry. We’ve seen crypto make up increasingly sizable portions of investment portfolios. As this happens, there are not only tax questions but overall investment management questions that arise, particularly around risk.
A clear understanding of your personal tax responsibilities is an important part of participating in the growing crypto economy. We can help you find both crypto tax and financial advisors that will ensure that your crypto and overall assets are protected.
If you’re not ready to find a crypto focused advisor yet, you can learn more about taxable crypto events and how CPAs can help here.