As the end of the year approaches, there are still ways to reduce cryptocurrency tax bills, financial experts say.
The IRS generally defines cryptocurrency as property for tax purposes, and investors must pay levies on the difference between the purchase and sales price.
If there’s a profit on assets held for less than one year, it’s a short-term gain, subject to regular marginal tax rates from 10% to 37% for 2021.
More from Personal Finance:
How to pay 0% capital gains taxes with a six-figure income
Inflation pushes income tax brackets higher for 2022
This risk-free bond pays 7.12% annual interest for the next six months
And currency owned for more than one year may qualify for lower long-term capital gains rates of 0%, 15% or 20%, depending on income.
While buying currency isn’t a taxable event, someone may owe levies by converting it to cash or another coin, using it to pay for goods and services, receiving payment for work and more.
1. Tracking gains
One of the biggest challenges for cryptocurrency investors is tracking gains and losses, said Shehan Chandrasekera, a CPA and head of tax strategy at crypto tax software company CoinTracker.io.
That’s because many exchanges won’t send Form 1099-B detailing annual proceeds, forcing investors to calculate annual profits or losses on their own.
And it’s normal for investors to have multiple wallets across different exchanges, he said, further adding to reporting challenges. But investors still must disclose their taxable transactions.
“You as a taxpayer are responsible for reporting all of your income, whether there are tax documents for it or not,” said enrolled agent Adam Markowitz, vice president at Howard L Markowitz PA, CPA in Leesburg, Florida.
“The problem people are the ones who buy a piece of bitcoin every time they get paid and then turn around and convert that bitcoin 72 times to different things,” he said.
The best way for high-volume traders to get organized may be investing in tracking software, including versions from previous years, depending on their activity, Markowitz said.
While there may be discrepancies, the software may offer an estimate of yearly gains or losses since “99.9% of cryptocurrency users have zero clue,” he said.
2. Wash-sale loophole
If someone expects taxable gains for 2021, they may take advantage of a loophole allowing them to offset some profits with losses.
Currently, digital assets are not subject to the so-called “wash-sale rule,” stopping someone from selling a losing investment to write-off the loss against other gains and keeping their exposure by rebuying a “substantially identical” asset within 30 days.
“If the market is down, it’s a good time to harvest those losses,” Chandrasekera said, and some investors have already been watching for opportunities.
For example, if someone bought bitcoin at $60,000, they may take advantage of the loophole by…
Read More: 4 year-end moves to slash your cryptocurrency tax bill