5 ways to reduce crypto taxes ,Here’s how to minimize crypto taxes to keep more of your money and make more. To do this, you must first have a basic understanding of how taxes work for cryptocurrency gains. Then you can start thinking about ways to lower or get rid of your tax bill. The tips and information below should help you manage your crypto taxes and get ahead financially.
What exactly are crypto taxes?
For federal tax purposes, cryptocurrency is considered “property.” The IRS considers it a capital asset for the average investor. So, crypto taxes are the same as taxes on any other gain from selling or exchanging a capital asset.
1.Wait until your short-term profits turn into long-term profits.
Capital gains vary by cryptocurrency ownership time. Long-term cryptocurrency gains reduce taxes. Keep your cryptocurrency for a year before selling it to reduce capital gain tax.
One example: Mary, a single taxpayer, earns $70,000 in 2022. She also made $5,000 selling cryptocurrency. If the gain is short-term, she’ll have normal income of $75,000. After taking the standard deduction, her total taxable income is $62,050, which puts her in the 22% tax bracket and means she owes $9,268 in taxes. But if the gain is a long-term gain, the $70,000 of ordinary income, minus the standard deduction, is still taxed at the 22% rate, but the $5,000 of capital gain income is only taxed at 15%. That means a total tax of $8,918, or a savings of $350.
2. Balance capital gains and capital losses
The taxes that crypto investors have to pay can also be lowered by offsetting capital gains with capital losses. By subtracting losses from taxable gains on crypto assets you sold during the year, this is done.
But beware: this strategy has its limits. When you take a loss on an investment, you must first cancel out other losses of the same kind. For example, short-term losses lower your short-term gains first, while long-term losses reduce your long-term gains.
After that, you can use net losses of one type to cancel out gains of the other type. If you have more short-term losses than gains, you can offset any remaining long-term capital gains.
Also Read: What Exactly Is Mutual Fund?
3. Sell in a low-revenue year
When waiting for your short-term crypto gains to become long-term, you might also want to think about another timing factor: deciding to sell in a low-income year.
Use a net capital loss to reduce your regular income. This strategy limits annual capital loss to $3,000. It can offset future gains or reduce your regular income by up to $3,000.
Selling in a low-income year reduces short-term and long-term gains taxes. Short-term gains, taxed as regular income, lower other income and tax bracket.
If you retire and sell short-term assets, your tax bracket may be based solely on the proceeds. If you have long-term capital gains, a lower overall income can also mean a lower tax rate on those gains. The long-term capital gains rate you pay depends on your taxable income: 0%, 15%, or 20%. Thus, if you have less taxable income, your long-term capital gains tax rate will be lower.
4. Lower your income that is subject to taxes
Another tried-and-true way to reduce your taxes is to lower your taxable income. This is similar to selling investments that have gone up in value in a year when your income is low. This means looking through the tax code for deductions and credits that can lower your taxable income.
For example, you can pay for expensive medical procedures, put money into a traditional IRA or 401(k) plan, put money into a health savings account, or give money or property to charity. You may also be eligible for a number of other tax deductions and credits. You could even ask a tax expert to help you find even more ways to save money on your taxes.
5. Invest in cryptocurrency with a self-directed individual retirement account
Investing in a tax-deferred or tax-free Self-Directed Individual Retirement Account is another way to lower your crypto taxes (SDIRA). When you may have a lower taxable income in retirement, or now, when you put money into your Roth SDIRA, expecting higher taxes in retirement.\
Hopefully these 5 ways to reduce crypto taxes will help you save your money.
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