Cryptocurrency is basically a new asset class that creates a vast amount of wealth for early investors. But whenever your luxury is created, there is a chance to end up getting taxed in some way.
If you are a United citizen, you have to owe taxes on the income you earn worldwide. Some people use cryptocurrency as an investment. Under the current internal revenue service, cryptocurrency treates as a capital asset. It means the tax you pay on it is capital gains tax. It also receives as income, which you share more about in a bit. You need to follow some suggestions to save tax on cryptocurrency.
As capital gains is divided into two types that are short term and long term capital gains. They are based on how long have you put the asset in the case of cryptocurrency.
- Short Term Capital Gain : It occurs when you sell cryptocurrency for more than you bring it and held the investment for the years. These are taxed as income tax rate, just like wage income.
- Long Term Capital Gain : These occur when you sell cryptocurrency for more than you bring it and it holds for a longer time like more than a year.
It is necessary to realize that virtual currencies are new, and congress might change the circumstances on crypto taxes in future.
Here are the few ways which you might be able to help reduce or save the taxes on cryptocurrency.
- You should buy crypto in an IRA : First of all, find an IRA that allows you to invest in the cryptocurrency of your choice. Make sure that you understand how to buy cryptocurrency in the self-directed IRA. After setting up your account, your tax benefits will change depending on the tax situation and the type of IRA you open and contribute to.
- Moving forward to Puerto Rico : Puerto Rico helps you to avoid some U.S. federal income tax. It is a U.S. territory with unique tax benefits which includes 100% exemption on capital gains. Behind this reason, moving to Puerto Rico can save on crypto or you can avoid capital gains which is a good option.
- Proclaim your crypto as Income : If you receive the cryptocurrency in exchange of goods and services, taxes work in a different way. In these cases, when you report the income, the tax at ordinary income tax rates. These are higher than the capital gains tax rates. Tax is basically used to define the currency’s initial value when you receive it. And for the cryptocurrency you receive is the amount you report as income. When you dispose of the cryptocurrency, use basis to calculate any capital gain which you may have and pay the valid capital gains taxes.
- Donate to charity : Donate to the qualified charity that may be tax-deductible if you itemize your deductions. Cryptocurrency as a donating property, may result in favorable tax treatment. You have to deduct the fair market value of your cryptocurrency. In this process you don’t need to pay capital gains taxes when doing so.
Investing money in crypto assets results in significant gains if you purchased the assets before they drastically increased in value. You have to follow the tax rules while helping you minimize the tax you may owe.