Everything You Need To Know About The New Crypto Tax Law

Everything You Need To Know About The New Crypto Tax Law

The continuously changing regulations of the crypto world can give taxpayers a headache. With the IRS bringing in new regulations and with the Senate releasing last-minute additions to crypto bills, the scenario has become a little complicated.

In this article, we will debunk the new crypto tax law and what effect it will have on taxpayers and the crypto industry in general. As a bonus, we’ve added a list of 7 ways you can minimize your crypto taxes.

The New Crypto Tax Law

The U.S. Senate has considered an addition to the $550 billion bipartisan infrastructure bill, according to which crypto traders have to report their transactions of digital assets. This, as a result, will force businesses to report trading of digital assets of more than $10,000. Congress claims that this change in the crypto tax law will raise $28 billion in over a decade.

According to the Internal Revenue Services (IRS), this new push will add to the security of cryptocurrencies like Bitcoin, Ripple, Ethereum, and other virtual currencies. There has also been discussion about establishing new and clearer rules as to how these digital assets will be taxed.

Consequences Of The New Crypto Tax Law

According to many crypto exchanges and other industry experts, Congress has been rushing with the rules without their consultation. This change can be a little burdensome for foundation principles of cryptocurrencies, decentralized exchanges, as well as, the taxpayers who carry out multiple cryptocurrency transactions.

But how?

Cryptocurrency is mainly governed by its main principle of being anonymous. As a matter of fact, most crypto investors were drawn to the crypto space because of this and as an alternative to the government-issued fiat currencies.

The next to face the consequences of the new crypto tax law are decentralized exchanges, which, unlike traditional exchanges, function on cryptography and complex computational mathematics. These exchanges are built with the principle that no group of executives can have access to their information. With the new tax laws in effect, these decentralized exchanges will be at risk of being non-compliant. The only way out for these decentralized exchanges is to become more centralized.

Filing traditional stocks already requires much attention. And the new regulation can only make it more difficult. But is there a way to cut down on crypto taxes? The answer is yes!

How To Minimize Hefty Crypto Taxes?

Let’s explore 7 tried-and-tested strategies to minimize hefty cryptocurrency taxes following the new crypto tax law.

  • Hold Your Crypto

As of 2021, the crypto taxes for long-term and short-term capital gains are 0-20% and 10-37% respectively. Keeping your crypto assets untouched till you convert your short-term gains to long-term gains will help you minimize your crypto taxes.

  • Sell In Low-Income Year

Apart from considering a long-term capital gain, selling off your crypto in a low-income year will help you cut down taxes. How?

This is because your taxes depend on your gains as well as your income.

  • Self Directed IRA

Leveraging Self Directed Individual Retirement Accounts (Self Directed -IRA), you can pay your crypto taxes at the time of retirement when your income is low.

  • Gift And Donate Assets

Gifting crypto assets up to $15,000 per year does not require tax reporting. However, crypto gifts that have exceeded the said amount will require you to file a tax return.

Apart from gifting, donating to a 501(3) charitable organization will help you claim a tax deduction.

  • Cut Down Taxable Income

You can bring down taxable income by looking into the tax code for credits and deductions in taxes.

  • Move To A Low Income State

Moving to a tax-friendly state implies that you’ll continue paying federal taxes but won’t have to pay extra taxes on the state level. These deductions will help you save on your crypto earnings.

  • Bequeath Your Crypto

Handing down your crypto assets has two advantages- your heirs will not have to pay taxes on your original assets, and also helps your assets from not getting lost in the vast digital space in your absence.

The Bottom Line

Having all of this said, there are also a few groups of people who might benefit from this change, such as crypto brokers and people who have little to do with the anonymity of the crypto market and care mostly about making money.

Even with the new crypto tax law in action, some tax obligations might become clearer and some might face issues. But following the methods mentioned above, you can definitely minimize paying hefty taxes to the IRS. 

FAQs

  • What is the new crypto tax law?

The U.S. Senate has considered an addition to the $550 billion bipartisan infrastructure bill, according to which crypto traders have to report their transactions of digital assets. This, as a result, will force businesses to report trading of digital assets of more than $10,000. Congress claims that this change in the crypto tax law will raise $28 billion in over a decade.

  • What will be the effect of this new crypto tax law?

According to many crypto exchanges and other industry experts, Congress has been rushing with the rules without their consultation. This change can be a little burdensome for foundation principles of cryptocurrencies, decentralized exchanges as well as the taxpayers who carry out multiple cryptocurrency transactions.

  • What issues will decentralized exchanges face?

The decentralized exchanges function on cryptography and complex computational mathematics. These exchanges are built with the principle that no group of executives can have access to their information. 

With the new tax laws in effect, these decentralized exchanges will be at risk of being non-compliant. The only way out for these decentralized exchanges is to become more centralized.

 

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