Planning in advance to prepare for your cryptocurrency tax liabilities is crucial to ensure that you report your taxes accurately and pay the least amount of taxes as legally possible.
You need to ensure that you are not only properly reporting your transactions in the correct character and format and that your accounting calculations are accurate and verifiable but also that you have used every legal strategy available to you to minimize the taxes on your cryptocurrency gains.
Start Tax Planning Well Before Large Sales
The first key to tax planning for cryptocurrency is timing. Most strategies and considerations need to be addressed before you sell any of your crypto assets. It is key to work with an experienced cryptocurrency CPA to tax plan for your portfolio well before you are planning to sell.
ST v. LT
One of the first basic tax considerations when planning for your portfolio is understanding the tax character of any protected sale. Any asset held over 365 days will receive a LT capital gains tax rate which is usually much more favorable than the ST capital gains rate. It is crucial to consider this for any assets you are planning to sell that are approaching this 365 day threshold.
Loss Harvesting & Wash Sales
Since cryptocurrencies are generally classified as property, wash sale regulations should not currently be a concern for investors. This means investors can sell an investment to realize a tax loss, only to buy it back immediately thereafter. This will give you a tax benefit because you will realize a loss on the sale while not changing your overall position in the asset since you repurchased it.
This is a great tax planning tool during bear markets.
Using opportunity zones can be a beneficial strategy for deferring capital gains on sales of cryptocurrency.
The capital gains from the sale will have to be reinvested into an Opportunity Zone Fund within 180 days after the sale. If the capital gains are reinvested the taxes due are deferred until the earlier of the date on which the opportunity zone investment is sold or exchanged or Dec. 31, 2026.
Additionally, up to 15% of the deferred gain is permanently excluded from income if the opportunity zone investment is held for more than seven years.
Additionally, any post-investment appreciation in the QOF is permanently excluded from income if the investment is held at least 10 years.
Using various types of tax advantaged trust structures can be a beneficial strategy for eliminating or deferring capital gains on sales of cryptocurrency. There are many different types of tax advantaged trust structures that can be used depending on your specific facts and circumstances.
A full description on these types of trust are outside the scope of this article but two worth mentioning are Charitable Remainder Unitary Trusts and Deferred Sales Trusts.
These types of structures differ depending on the specific type of trust but common features of these set ups include contributing money to a trust, selling the cryptocurrency within the trust to avoid personal tax liability on gains then receiving an income stream from the trust for a predetermined time period.
The potential tax benefits are as follows.
- The sale or exchange of cryptocurrency is completely tax-free
- You only pay tax each year on the annual payment you receive from the trust. This payment would be taxed at favorable capital gains rates. Depending on the amount of your other annual income, this strategy will likely keep you in the lower capital gains brackets.
There are many technical considerations when tax planning for trust and cryptocurrencies that should be discussed directly with your CPA.
Cryptocurrency Income & Business Operations
If you are operating a business that accepts cryptocurrency there may be other tax planning considerations outside of this article which can benefit your operations. More to come on this in the future.
If you are holding substantial cryptocurrency assets at a low cost basis and are looking for effective long term tax planning and estate planning strategies, Camuso CPA can help! Please feel free to give us a call for more information about cryptocurrency and other tax planning services. One of our friendly and knowledgeable representatives will be happy to answer any questions that you may have.
Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transactions. It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.
Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency as one of the first CPA firms working in the space since 2016. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.