Trade in cryptocurrency assets can be highly profitable; however, investors must understand how the IRS treats these assets – including recognising taxable events and recording gains/losses.
Taxable events for cryptocurrency transactions include selling it for fiat currency, trading one coin for another and using cryptocurrency to purchase goods or services. Furthermore, moving coins between wallets is also considered taxable and requires record keeping.
Investing in Cryptocurrency
Cryptocurrency offers investors an exciting, novel, and potentially volatile asset class to add to their portfolios – but before making their decision, investors should carefully assess whether this speculative investment matches with their portfolio goals and risk tolerance.
Cryptocurrencies generally aren’t subject to the same safeguards that apply to registered securities; unlike stocks for instance, cryptocurrency investments don’t fall under the purview of the Financial Services Compensation Scheme (FSCS).
Investors must consider where and how they wish to store or trade their coins, with diversification being an often recommended approach as different cryptocurrencies’ values can fluctuate at different rates – helping mitigate risk in any one coin and simplify tax calculations, since gains or losses in different currencies are taxed differently.
Taxes on Gains
As with any investment, selling cryptocurrency for more than you paid can result in additional tax obligations. Gains must be reported on Schedule D (Form 1040), and may be taxed both federally and locally, depending on how long you held onto it.
Holding crypto for long enough or selling at a loss may reduce your tax liability, while investors using tax-advantaged retirement accounts could potentially further lower their taxes by using it as collateral against taxes owed.
As another way of lowering your tax bill, cryptocurrency donations can also help. But you must ensure you report accurately on transaction activity and select an appropriate cost basis method from all available ones; professional advice might be beneficial in making this choice.
Taxes on Losses
Cryptocurrencies offer investors some anonymity; however, that doesn’t exempt them from tax obligations. The IRS considers cryptocurrency property and any sale or trade can trigger capital gains taxes as well as transactions using cryptocurrency to purchase goods and services being taxed as income events.
IRS enforcement and surveillance efforts to counter crypto tax evasion have increased, yet it remains crucial that we remain aware of potential pitfalls and work with a tax professional. Record keeping for cryptocurrency transactions, including tracking cost basis and noting effective realized prices when selling, is vitally important; blockchain solutions platforms allow you to organize this data easily. You should also track transactions history when moving assets between online exchanges or offline cold wallets.
Tax-Advantaged Retirement Accounts
Cryptocurrency investments have quickly grown popular, and many investors wish to incorporate cryptocurrency investments into their retirement strategies. But doing so requires special care and planning.
Cryptocurrencies present a high degree of volatility, making them risky investments, particularly for those nearing or already in retirement. Investors should carefully weigh any benefits of adding cryptocurrency to their portfolio against needs, risk tolerance, and financial goals before making their decision.
Retirement accounts such as traditional and Roth IRAs provide tax-deferred growth. Furthermore, some providers now offer “Bitcoin IRAs,” enabling retirement savers to invest cryptocurrency through their retirement account funds. But investing in one requires additional diligence due to fiduciary duties owed by plan fiduciaries; therefore it should only be undertaken by investors with long-term outlook on investing.
Tax-Advantaged Charitable Donations
Cryptocurrency investors who seek to make an impactful contribution may be surprised to learn they can also reduce their taxes come tax season. The IRS considers cryptocurrency a capital asset, so donations of appreciated coins to charity may help offset capital gains taxes.
Donating cryptocurrency directly to an established charitable organization may help investors avoid capital gains taxes that would be payable upon selling these assets, especially those who have seen significant appreciation in their digital holdings. Donating directly is especially advantageous for investors with digital holdings that have appreciated significantly over time.
As with any tax-advantaged investments and deductions, it’s always advisable to consult a qualified advisor prior to making any decisions. With proper planning, however, it may be possible to both maximize philanthropic impact while simultaneously minimizing taxes – CoinTracking makes this easy with their fully automated crypto tax software and carefully tailored tax reports.