Ought to I promote my cryptocurrency earlier than the year-end or after the year-end?
The US tax system works on a calendar 12 months. This implies the taxes due in your monetary exercise between January 1, 2020 to December 31, 2020 might be due by April 15, 2021. Taxes due in your monetary exercise between January 1, 2021 to December 31, 2021 might be due by April 15, 2022. Since we’re on the finish of the 12 months, you’ll be able to take into account promoting a few of your crypto positions any minute after December 31, 2020 to well push the tax legal responsibility to the 2021 tax 12 months.
This technique is much more efficient in case your earnings tax bracket goes to be decrease in 2021 as a consequence of a change in profession, private life (Ex:- taking a 12 months off from work, transferring to a state with no earnings taxes), or retirement.
I’ve lots of cash bought at totally different occasions at numerous costs. Does it matter which cash I promote for taxes?
Sure, the precise coin you might be promoting has a serious affect in your tax invoice. It’s because you paid totally different costs for them and held them for various durations.
Typically talking, promoting the cash which you held for greater than 12 months (long-term) offers you higher tax charges in comparison with promoting cash that you simply held for lower than 12 months (short-term). Lengthy-term income might be taxed at both 0%, 15%, or 20% versus strange earnings tax charges which could possibly be as excessive as 37%.
Additionally, should you can particularly establish the coin you might be deemed to be promoting, you’ll be able to promote the cash for which you paid the very best quantity first. That is known as Highest in, First out Accounting (HIFO) and can generate the least quantity of capital beneficial properties for many taxpayers. In keeping with the IRS (A39), you should utilize this Particular ID methodology solely in case you have details about all of the 4 standards listed beneath.
1) the date and time every unit was acquired
2) your foundation and the truthful market worth of every unit on the time it was acquired
3) the date and time every unit was bought, exchanged, or in any other case disposed of
(4) the truthful market worth of every unit when bought, exchanged, or disposed of, and the amount of cash or the worth of property obtained for every unit.
In the event you use cryptocurrency tax software program, you’ll be able to simply fulfill the above IRS standards and decide HIFO accounting methodology with only a click on of a button.
How can tax loss harvesting assist me with my tax invoice?
Though the crypto market has been good particularly over the past quarter of 2020, you might have cash the place your price foundation (how a lot you paid) is greater than the present market worth. December is a good time to promote them to reap tax losses. You should use these losses to offset your each cryptocurrency and inventory associated capital beneficial properties occurred throughout 2020.
One other factor to notice is that the Wash sales rules are not applicable to cryptocurrency as a result of it’s handled as property (versus shares or safety) by the IRS. This implies that you could promote your dropping positions to reap tax losses and rapidly purchase again in at a lower cost if you wish to preserve the place. In the event you had been to do that in your inventory portfolio, you’d have to attend at the least 30 days. If not, the IRS will disallow the loss.
Can I get a tax deduction for crypto donations?
Donating cryptocurrency to charities is among the uncommon conditions the place you may get two tax advantages without delay.
By donating cryptocurrency to charities:
- You get to bypass the capital beneficial properties taxes on appreciated cryptocurrency holdings and,
- You get a deduction on Schedule A which is able to cut back your each crypto and non-crypto associated taxable earnings
The quantity of deduction you get on cryptocurrency donations is determined by how lengthy you held the coin. In the event you donate cryptocurrency which you held for greater than 12 months, you get a tax deduction equal to the market worth of the coin on the time of the donation. If the holding interval is lower than 12 months, your deduction would be the lesser of your price foundation or the market worth on the time of the donation.
Observe that this tax profit is accessible provided that you itemize in your tax return. Make sure that to donate earlier than the top of the 12 months to get a deduction in your 2020 tax return.
Are there any advantages to gifting cryptocurrency?
Immediately gifting cryptocurrency lets you share your wealth with others with out triggering a taxable occasion to neither social gathering. At any given 12 months, you’ll be able to reward as much as $15,000 of property to a vast variety of individuals.
For instance, say you will have 1 Bitcoin (BTC) bought at $2,000 and now it’s price $20,000. In the event you had been to reward this to somebody, you’ll not must pay capital beneficial properties taxes on $18,000 ($20,000 – $2,000) price of beneficial properties. The donee is not going to must report any earnings both. Nonetheless, should you had been to money it out and reward the USD proceeds, you’ll have to pay capital beneficial properties taxes on $18,000 price of beneficial properties.
In the event you’d prefer to reward greater than $15,000, you’d must file a Form 709 with the IRS disclosing details about your reward. There gained’t be any taxes it’s important to pay instantly so long as it’s beneath the lifetime reward tax exclusion of $11.58 million.
Disclaimer: This publish is informational solely and isn’t meant as tax recommendation. For tax recommendation, please seek the advice of a tax skilled.