For years, I tried to understand the tax system. If you think about it, you will most likely pay taxes for the rest of your life. So, it’s good to have a general understanding of it, especially when it comes to cryptocurrencies.
You’ve probably heard stories about how Warren Buffett pays fewer taxes than his secretary. Once I heard that, I figured I need to get smart on this topic.
I don’t have formal education on taxes but learned everything on my own. Plus, I also worked with people smarter than me on this subject. Sometimes you have to do this especially when taxes are not your specialty.
Sure, you can use a tax program such as Turbo Tax but I wanted to talk to a real person who was an expert in this. You can be cheap and use a tax program or you can work with someone who is knowledgeable in this.
Plus, I bet you didn’t know you could write off some of your tax preparation expenses.
That means less money going to the IRS that you keep in your pocket.
Now, let’s talk about crypto taxes.
In general, cryptocurrencies are treated similarly to stocks when it comes to tax expenses.
If you made a gain on your cryptocurrency from when you first bought them, then you’ll owe money.
But, here are three general rules you need to know.
You can pay a lot in taxes today, pay less in taxes tomorrow, or use this little secret to pay even less.
Pay a lot in taxes
Like stocks, the longer you hold your crypto, the less you’ll owe in taxes. So if you hold your crypto for a year or more, this is considered a long-term investment.
This sounds simple but requires a lot of discipline so you avoid the temptation to sell. Then with the up and down swings in the market, this requires you to know your numbers on how much you bought your crypto for.
When you do this, your taxes are looked at a lower rate.
A good way is to log your purchases on an excel sheet, opening your exchange every time to verify your purchase price or a cryptocurrency app such as Blockchain. I recommend the last option.
Pay less in taxes tomorrow
I’m sure you want to pay less in taxes and you should. Just be careful because some investing habits make you pay more.
People who day trade or swing trade may make money faster from their cryptos. But one thing that will get them is the taxes.
A day trader buys and sells their crypto in minutes to hours. A swing trader buys and sells their crypto over a period of days, weeks, or months.
In both cases, they will probably pay the higher tax rate.
If you hold your cryptocurrencies for a year or more, you’ll pay the lower interest rate as compared to the day or swing trader.
This requires you to know your sell point for your cryptocurrency. This could require you to wait longer but in the end, you’ll pay a lower tax rate.
While doing this, it is a good way to add more cryptos to your portfolio.
This is how you’ll increase your wealth.
How you can pay even less in taxes
This is a little secret that some investors may not be aware of. I use this tactic often, especially when the market takes an unexpected drop.
You can use this method to lower your cryptocurrency tax bill.
If the market drops and your investment is less than when you first bought your cryptocurrency, this is a good time to consider doing this.
When you sell a cryptocurrency that is less than what you purchased it for, you can use the losses to offset gains on other trades.
You can do this as many times as you like but the IRS has a limit of $3,000 that you can write off according to CoinDesk.
This is a good way to lower your taxes on cryptocurrency gains you made.
Final thoughts
I am not a tax professional so I encourage you to read the IRS tax law and also work with a qualified tax professional. The last thing you want is the IRS coming after you.
The more knowledge you know, the better off you’ll be.
Do you know any other crypto tips you can share?
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.