

Cryptocurrency capital gains taxes are becoming a point of interest for governments tax organizations.

Don Fort, the Chief of the IRS criminal investigation unit, recently spoke on a tax conference panel and discussed at length how ‘cryptocurrency is becoming a new area of enforcement.’ Other events like the IRS Coinbase Summons and the IRS warning sent to tax filers is a clear indicator the U.S. crypto traders should be looking closer at the tax implications of their investments.

With this increased scrutiny comes the question: How can I minimize my crypto tax liability while staying in the good graces of the IRS? Here are three strategies you can use to minimize your crypto tax liabilities.

1. Be a long term investor

Cryptocurrency is treated as property by the IRS. Just like stocks, bonds, and other forms of personal property, you incur a capital gain when you sell property for more than you acquired it for. The government taxes these capital gains differently depending on how long you held the investment. Because the government wants to incentivize long-term investing, the capital gains tax rate is less for investments that are held for more than a year and more for investments that are held for less than a year. This means that if you bought Bitcoin, held it for a month, and then sold it, your capital gains tax rate would be higher than if you waited to sell it a year later, minimizing your investment’s returns.

Some may argue, ‘Crypto is so volatile; it doesn’t make sense for me to hold my investment for that long!’

This is a very fair point. Because of the volatility present in the crypto markets, it may make sense for some investors to seek short term gains. However, what if there was a way to ‘cash out’ now but still benefit from the longer-term capital gains tax rate? This is where borrowing against your crypto holding can really pay off and minimize your tax liability.

Selling crypto is a taxable event. Exchanging crypto-for-crypto is a taxable event. But borrowing money against your crypto is NOT a taxable event. This makes lenders like BlockFi a great way to gain access to USD without having to sell your crypto investments.

Let’s say you bought $1,000 of Bitcoin in June of 2017 and saw that investment grow to $30,000. You would face a $29,000 capital gain if you cash out now. Depending on your yearly income (for this example let’s say it is $60,000), you would face a short term capital gains tax on that gain of 25% and would owe $7,250 to the government.

Now let’s say you borrowed $30,000 USD using your Bitcoin as collateral. As part of that loan, you will pay interest monthly. Now you received that same $30,000 that you would have from selling your Bitcoin, but now you will have the benefit of receiving the long-term capital gains tax rate rather than the more expensive short-term one. Instead of a 25% tax rate, you would only pay a 15% rate on that same capital gain. You pay $4,350 instead of $7,250. Obviously, this can have a much more dramatic effect when capital gains are substantial. Additionally, you may have the ability to write off the interest you paid on a crypto-backed loan, reducing your overall tax liability.

2. Keep a detailed record of your crypto transactions

To ensure that you are paying the correct amount of taxes on your crypto capital gains, you should keep detailed records of every crypto transaction that you participate in over the year. The data you need to collect for these records includes the date you acquired the crypto, the dollar value, the date sold, and the proceeds from the sale. You need all of this data to properly calculate your cost basis and to report your gains. If you haven’t been keeping a detailed record of your crypto transactions, it could save you a significant amount of time to use crypto tax software that automatically calculates your cost basis and capital gains liability for you.

3. Work with a tax professional

While calculating your capital gains taxes from your crypto activity is actually quite straight forward, some traders are doing much more than just high-volume trading. If your situation is complicated, leveraging a knowledgeable crypto tax accountant can often save you money on your tax bill. There are specific tax rules and exceptions within the crypto space that professionals can utilize to help you save money.

At the end of the day, it is a good thing that you have a capital gain liability. It means you made money! However, it is important to be responsible and properly file your gains while simultaneously minimizing your tax liability.

One of the best ways to calculate your tax exposure from your crypto trading is by using TaxBit. BlockFi and TaxBit have partnered in order to make crypto taxes easy for BlockFi users. Use this link to start your free trial and get 10% off your tax plan: www.taxbit.com/invite/Blockfi

Please seek an independent and personalized tax professional for financial advice before making any financial decision.