Crypto Tax Planning in the US: A Beginner’s Guide

Crypto tax planning is the process of organizing your crypto transactions and holdings to minimize your tax liabilities as much as possible.

As a crypto investor or trader, tax planning can involve a range of strategies, such as keeping track of your trades and purchases, maximizing your deductions and credits, choosing the appropriate tax filing status and more. We’ll dive deeper into these topics shortly. 

Note that crypto tax planning is not the same as tax evasion. It’s more about taking advantage of tax-saving opportunities within the legal boundaries. 

But why put so much time and effort into planning your taxes? Can’t you just pay your taxes and be done with it? Well, while paying taxes is necessary, paying more than you have to is not. 

For example, say you bought some Bitcoin in January for $1000, and now it’s worth $5000. If you sell it now, you’ll owe capital gains tax on the $4000 profit. But if you hold onto it for more than a year and sell it as a long-term investment, you may qualify for a lower capital gains tax rate. 

It’s just one example. But there are countless other instances where a little planning and choosing the right tax-saving strategies can go a long way and save you a significant amount of money.

Understanding Crypto Taxes in the US

Crypto Tax Planning in the US

Before we jump on to the actual tips, let’s quickly go over how crypto taxes in the US work. 

Firstly, the IRS views crypto as a property for tax purposes. Therefore, every time you sell, swap, spend or dispose of your cryptocurrencies, you’ll have to pay capital gain taxes. 

On the other hand, if you receive cryptocurrencies as a form of payment for your products and services (also includes mining and staking rewards), you’ll pay ordinary income taxes. 

You can also claim your losses to offset your gains or deduct business expenses from your total taxable income, given your crypto-earning activities qualify as a business.

As for calculating crypto taxes, it’s pretty simple:

Subtract the acquisition cost from the selling price (or FMV) to calculate capital gains. Needless to say, the accounting method you choose will affect your results, but most American taxpayers use the FIFO method. 

And if you receive crypto as income, its FMV at acquisition will be considered taxable income.

Check out our in-depth guide on crypto taxes in the US for more. 

Expert Tips for Crypto Tax Planning

The following are some key principles that should take care of most of your crypto tax planning. If you get these down, you’ll already be ahead of the curve. 

Knowing your Tax Bracket

Knowing your tax bracket can help you plan your investments accordingly. 

For example, if you’re in a higher tax bracket, it might be worth considering holding onto your crypto investments for over a year since long-term capital gains tax rates are usually lower than short-term capital gains tax rates.

On the other hand, lower-income taxpayers may have access to more tax credits, allowances and deductions. 

If you’re married, how you file your taxes can also affect your tax bracket and tax rates, so make sure you explore your options and optimize your filing status to your advantage.

Overall, understanding your tax bracket is a crucial first step in crypto tax planning. 

Keeping Track of your Crypto Transactions

Keeping track of your crypto transactions is essential for effective crypto tax planning. Failing to do so can result in missed opportunities for deductions, penalties, and even legal consequences. 

But you can avoid all that by staying organized throughout the year and recording all your transactions, including buying, selling, trading, and even receiving or sending cryptocurrency as payment. 

The best way to do it is using a crypto tax tool, like Bitcoin.Tax. Bitcoin.Tax can automatically track your transactions and generate reports that help you calculate your tax liabilities and identify deductions and other tax-saving opportunities.

Understanding Tax Deductions and Credits

As a crypto investor or trader, it’s crucial for you to understand deductions and credits for effective crypto tax planning and minimizing your tax liabilities

Understand that you can deduct your capital losses to offset your gains. Now, one way to use this information would be to claim your losses as you incur them. Or you can deliberately sell your non-performing assets to incur losses and offset gains. This is called tax-loss harvesting and is one of the most effective strategies to reduce your tax bill. 

Similarly, you can also deduct business expenses from total taxable income to lower crypto tax liabilities. As mentioned before, if your crypto-earning activity qualifies as a legit business, you can deduct expenses such as equipment, office rent and marketing costs.

Beyond these, you can also utilize your personal allowance by staying below $41,675 (in 2022) in total taxable income. So, you can plan your investments and sales to stay below the threshold and avoid paying capital gain taxes altogether. 

Finally, donating crypto is also an effective tax-saving strategy. Crypto donations are not only tax-free but also tax-deductible. This means you can deduct the amount you donate while supporting charitable causes. 

Consider Consulting a Tax Professional

Although this blog post is about crypto tax planning, let’s admit it, tax planning isn’t exactly the most exciting part of trading or investing in crypto. 

Sure, if you’re a passive investor dabbling around Bitcoin with less than ten purchases a year, hiring a tax professional may not be for you. 

However, if you’re serious about crypto trading and investing, especially if you make DeFi transactions or if you’re a high-net-worth individual, consulting a crypto tax professional could be one of the best investments you make, apart from that next big crypto everyone is talking about. 

A good crypto tax professional can help you navigate the complex tax rules and regulations and ensure you’re capitalizing on all the tax-saving opportunities while keeping you updated on the latest changes to the tax code and helping you stay compliant with all reporting requirements.

But perhaps the best part of it all is the peace of mind it brings. No more staying up late, googling tax laws and worrying about getting audited. Instead, you can relax and focus on the things you do best. 

So if you’re serious about minimizing your tax liabilities and maximizing your profits, consider consulting a crypto tax professional. It might just be the best investment you make all year!

Check out our guide on choosing the best accountant/CPA for your crypto tax needs. 

Crypto Tax Planning for Traders Vs Investors

Crypto Tax Planning for Traders Vs Investors

The main distinction in crypto tax planning between investors and traders is the difference between short-term and long-term capital gains tax rates. 

If you’re an investor, you would want to maximize long-term gains opportunities, as they generally attract lower tax rates than short-term gains. This means focusing on investment strategies that allow you to hold your crypto assets for more than a year, like HODLing or dollar cost averaging.

Traders, on the other hand, have a different set of challenges. As a trader, you’re always buying and selling, making it impossible to hold your assets for longer than a year. But it doesn’t end there. 

There are different trading styles, like day trading, swing trading, crypto scalping, etc., and each requires varying tax planning and preparation.

Day trading or scalping crypto, for example, involves multiple sales and purchases in a single day, making record-keeping and tax planning critical (and difficult). The last thing you want is trouble with the IRS because you weren’t diligent about recording all your transactions. 

Swing trading, on the other hand, allows you to hold your crypto for days, weeks, or even months, giving you more leeway for tax planning and preparations. 

Also, something to keep in mind, regardless of your trading style, is the wash sale rule. The wash sale rule prevents investors from claiming losses on assets they buy back within 30 days of sales. 

However, in the US, the rule only applies to stocks and securities. And since the IRS considers cryptocurrencies property, the wash sale rule doesn’t apply to them. So, now you can sell your crypto, incur losses to offset gains, and quickly repurchase it (for now). 

Check out our complete guide on the crypto wash sale rule and how to utilize it to save more taxes. 

Overall, whether you’re HODLing or jumping in and out of the market on a daily basis, you must plan accordingly. 

Frequently Asked Questions

1.  How do I report my cryptocurrency on my tax return?

The US financial year runs from 1st January to 31st December. The deadline for reporting your gains, losses and income is usually 15th April (unless it’s a weekend). 

To report disposals, use Schedule D (Form 1040) and Form 8949, while crypto income should be reported on Schedule 1 (Form 1040) or Schedule C (Form 1040). 

You can file your crypto taxes through the post office or online using websites like TurboTax and TaxAct, and integrate them with Bitcoin.Tax to streamline the process.

2. What happens if I don’t report my cryptocurrency gains?

Failing to report your cryptocurrency gains on your tax return can result in crypto tax audits, penalties, interest and even imprisonment. The IRS is pouring a lot of resources and workforce into cracking down on crypto tax evasion. So, ensure you report your crypto taxes timely and accurately. 

3. Can I use cryptocurrency losses to offset other gains?

Yes, you can offset your losses against your crypto gains or gains from other asset classes in the same year or future years. If you don’t have any capital gains to offset, you can still utilize your crypto losses to deduct a maximum of $3000 from your taxable income.

4. What if I received cryptocurrency as a gift or inheritance?

Receiving a crypto gift is tax-free. But when you sell it later, you’ll have to pay capital gain taxes, and determining the cost basis of the gifted crypto can be a complex process. Check out our in-depth guide on crypto gift taxes to know more. 

5. How does cryptocurrency mining affect my taxes?

Cryptocurrency mining can impact your taxes in a few different ways. 

First, the value of the cryptocurrency you receive from mining is considered income and must be reported on your tax return. 

Additionally, any expenses incurred during the mining process, such as electricity costs, can be deducted as business expenses. It’s important to keep detailed records of your mining activities and consult with a tax professional to ensure you’re accurately reporting your income and deductions.