There has been discussion in Washington DC regarding changes to tax loopholes that benefit crypto investors. These proposed changes are thought to bring in tax revenue of over $20B.
Below are the current strategies some crypto investors employ to legally reduce their tax burden.
- Holding Period: In some jurisdictions, long-term capital gains tax rates are lower than short-term rates. Holding your cryptocurrency for a longer period, typically over a year, may qualify you for these lower rates.
- Wash Sale Rule: Currently you can sell crypto and purchase it immediately (before 30 days) before or after selling it. This strategy is used to realize a loss that can be deducted from their other crypto gains and reduce overall tax burden. (Wash Sale rule does not apply to other assets)
- Like-kind Exchanges (Section 1031): In the United States, before 2018, some crypto investors used to utilize Section 1031 like-kind exchanges to defer taxes by exchanging one cryptocurrency for another similar cryptocurrency. However, the Tax Cuts and Jobs Act of 2017 limited like-kind exchanges to only real property, eliminating this strategy for cryptocurrencies.
- Tax-Advantaged Accounts: Some countries offer tax-advantaged retirement accounts, such as IRAs in the United States, where you can hold cryptocurrencies. Depending on the jurisdiction, contributions to these accounts may be tax-deductible or grow tax-free. However, there are specific rules and limitations associated with such accounts.
- Tax Loss Harvesting: If you have incurred losses on certain cryptocurrencies, you may be able to sell them to offset capital gains from other investments. This strategy is known as tax loss harvesting and can help reduce your overall tax liability.
Reports indicate that the wash sale rule may see the most impactful changes. We will keep you informed of any updates to tax laws impacting cryptocurrency investors.
Keep in mind it is essential to comply with all tax laws in your jurisdiction and report all cryptocurrency transactions accurately. Failing to do so will result in penalties, fines, and/or legal consequences.
Please reach out to our team with any questions.