There are MANY online claims circulating claiming you can avoid paying taxes on your Crypto. You actually do have to pay taxes on your crypto. BUT there are ways that are legitimate loopholes which allow taxpayers to avoid paying their fair share of government fees and duties. So far as we know at this time.
Personal property is stuff you're used to, such as stocks, bonds, and your house or car. When you purchase these things, they have a cost basis, which is the amount you paid for them. So very important that we know how much you paid for your cryptocurrency.
When you then sell any personal property you pay taxes in the form of capital gains on the difference.
Say you bought your Bitcoin at $10,000. You have one Bitcoin. You sell it a year later for $20,000. You sold it for the full fair market value of $20,000. That means you made 10,000 of cash from the Bitcoin you sold. $20,000 - $10,000 (cost basis) = $10,000 gain (capital gain). So you see, this will create a $10,000 capital gain.
Much like a stock or a bond, you're going to be subjected to short or long-term capital gains rates, depending on how long you hold the crypto asset. If you hold it for under a year, it'll be short-term capital gains generally taxed at your income tax rate, though some state taxes are different. If you hold it for 365 plus one day, you're going to get long-term capital gains rates.
Long Term Capital Gains Rates are generally more favorable, though again, many states differ in how they treat long-term versus short-term capital gains at a federal level. This means instead of income tax rates, you're going to be paying a lower capital gains tax rate of 15 or 20%, depending on your tax brackets.
Well the easiest way is just not to sell your coins. If you take your Bitcoin and you hold it, you're a HODLer; you're not going to pay any taxes on that Bitcoin as it grows. It's a capital asset, just like a stock. Many wealthy elites have used this exact strategy to grow their wealth. Think about Jeff Bezos. Bezos just holds his Amazon stock (or most of it) indefinitely. If he needs to buy something, he borrows against his stocks. His stocks keep growing (ideally outpacing the interest), and the debt can get paid when he dies. That's how he pays less tax than many Americans, even though he's one of the wealthiest.
There's a reason that we have things like stepped-up cost basis and various tax strategies for stocks disposition. It's because you can get enormous differences between the cost basis of what you paid for it and its full market value. However, you don't have to pay any of those taxes until you actually sell the asset. So HODLing is an excellent way not to pay taxes.
But let's say you want to be a mostly hodler. But you don't want to hold ALL of your Crypto. And you'd still like to try and hit that zero-tax bracket. Here's how you do it, wash sales. For now, Crypto is not subject to the wash sale rule. This is super important; everything is timing in the crypto space. The "Build Back Better" plan did include a change to update wash sale legislation, but it has not passed Congress yet. Until that bill goes through, you can sell cryptocurrencies that are at a loss.
You sell and capture a loss if you are down on the position. You then repurchase that cryptocurrency back. You generate the loss on the crypto you sold and get to own the cryptocurrency still. You can use that loss to offset another gain. You can exit a position slowly with losses from your other crypto positions and pay no taxes. You will cancel out the gains on your Crypto from the position with the losses from the wash sale that you make. This strategy is called tax-loss harvesting. It's an advanced tax strategy, but it's definitely a very valuable thing to do with Crypto right now as it's not subject to a special rule that disallows this for stocks and bonds. Hopefully, this is helpful, many more tips to come.
Quite a few crypto deals are really intricate. The primary takeaway, though, is that you enter a taxable event the moment you sell your cryptocurrency or exchange it for another cryptocurrency. That deal must be recorded in your books. If you need help with your crypto taxes, reach out to the experts at Vincere Tax.