Understanding capital gain tax

Capital gain taxes are tax cuts on profits from trading a capital asset. Capital assets include anything from real estate, stocks, precious metals, bonds, and investment properties to futures contracts, vehicles, and stamp collections. To effectively minimize capital gains taxes, it’s important to understand that capital gain tax is cut from realized gains, which are profits made when the asset is sold. Capital gain taxes are not charged on unrealized profits.

For instance, if an asset purchase for $1,000 is sold for $1,200, the capital gain of $200 made is taxable under the tax laws.

Note the difference between income taxes which are tax cuts on your regular wages and capital tax gains. Capital gain taxes apply to crypto assets as well, including fungible tokens and NFTs.

How capital gain tax on cryptocurrency works

Capital gains tax on cryptocurrency works similarly to other sectors. When you sell the asset, tax authorities deduct a percentage from your crypto gains. Tax rates vary across geographic regions. For US taxpayers, these rates can be as high as 37% on crypto investment profits. To calculate your applicable tax, keep detailed records of the purchase and sale prices for each crypto investment. Several finance journals offer guidelines on reporting crypto for US taxes. To determine your tax amount, verify the tax percentage that applies to you based on factors like marital status and investment duration (long-term or short-term). After that, multiply your net gains by the tax percentage. Like taxation in other sectors, the IRS (Internal Revenue Service) manages crypto capital gains taxes.

How to avoid or minimize capital tax gains on cryptocurrency

A 37% cut on your crypto gains is a significant reduction in spendable income. As a cryptocurrency investor in the US or any other region with an active tax law on cryptocurrency profits, strategizing your operations to reduce or avoid these taxes could impact your finances positively, here are a few ideas on how to avoid or reduce the portion of your crypto profits paid in taxes;

Relocate to a lower or no income tax nation or state

For US taxpayers, tax rates could vary across the different states in the country. For instance, the base tax rate in Texas is as low as 0.0% depending on factors considered, but as high as 13.3% in California. Outside the United States, several countries have yet to enact an active law on digital assets like crypto tokens and NFTs. Several African nations have zero capital gain taxes on cryptocurrencies. One way to minimize capital gains taxes is to move to states with a lower tax percentage or leave the United States and relocate to a lower tax rate state. However, it is important to consider other factors that apply to relocations and taxation in these states and countries.

Take advantage of your low-income year

Tax rates may differ depending on your net annual income. Tax rates are notably lower for low-income earners. As a means to lower the amount paid on your cryptocurrency gains, you can consider selling your profitable crypto assets in a low-income year. Calculate your earnings for the year and verify the tax percentage that applies, then compute your crypto gains and evaluate the tax benefits that you could earn by selling the assets in that year. Note that crypto sales could boost your income and consequently, your tax rate. Ensure to apply these factors during your estimations. Selling your crypto investments in a low-income year could you a significant amount in taxes.

Give cryptocurrency gifts and donations

Cryptocurrency and cash gifts up to $17,000 are not taxed. You can give cryptocurrency gifts as a good way to reduce the amount you pay in taxes. While you must record tangible gifts in a separate documentation plan, they do not attract taxation like regular income or capital gains. You can apply this advantage in several ways to reduce or avoid taxes on crypto gains.Donations are also another way to contribute to noble causes without paying taxes. Crypto donations can also earn you tax deductions and reduce your capital gain taxes on crypto significantly.

Hold on to your investments for long-term

In the US, the capital gain tax percentage applicable to short-term investment is at least 10% and to 37%. However, the maximum percentage tax on long-term investment is 20% and can go as low as 0%. Investments over 12 months are considered long-term. To reduce the capital gain tax on your crypto investment, consider holding on to your investments for over a year. Carefully document the time of purchase and sale of your capital asset after at least 12 months. Also, adjust this strategy for price variations within the waiting periods.

Where possible, offset capital gains with capital losses

Like capital gains, capital losses are losses incurred due to a fall in the value of a capital asset you purchased. Say you purchased a crypto asset at the price of $100 a piece and the value declined to $80, your capital loss is $20. Compute your capital losses and capital gains and evaluate the tax reductions that could apply when you sell both losing and profitable assets in the same period.  You can save a significant amount in taxes by selling your losing investments together with your profitable investments.

Invest in crypto using your retirement plans.

Crypto investments made using US retirement plans like 401(k) and 403(b) are subject to a different taxation plan. First, investments made using these plans are not taxed immediately and might be devoid of capital gain taxes. Retirement accounts like IRA (Individual Retirement Accounts) allow US investors to save up for their retirement and invest in capital assets, withdrawals from the IRA are subject to zero taxes once the individual is above 59_1/2  years. However, note that using retirement plans for your crypto investment might limit you from selling the assets prior to your retirement year.

Take loans on your cryptocurrency holdings

Instead of selling your crypto investment, you can take out a loan on your crypto holdings. Unlike selling your capital assets, loans are tax-free. If your crypto asset has appreciated significantly, you can take out a loan using the asset as collateral. This keeps you from selling the asset immediately, saves you tax payments, and allows you to access funds immediately.

Hire a CPA (Certified Public Accountant) experienced in crypto

Tax laws are expansive. Understanding and applying these codes can overwhelm anyone, regardless of their personal knowledge. Depending on your level of involvement in the crypto space and the amount you manage, hiring a CPA with expertise in crypto tax laws may be your best option. A good accountant can manage the documentation of your crypto profits and implement strategies to minimize the taxes you pay on your earnings.

For educational materials on cryptocurrency and crypto investments visit Coin Hint.

Conclusion

We recommend sincere compliance with national and regional tax laws for every citizen. However, employing strategic practices that reduce the tax percentage can help increase your net income after taxation. In this article, we discussed a few strategies to minimize capital gains taxes on your cryptocurrency investments. As an investor, it is crucial to understand and apply each of these strategies. Please note that this article does not support tax evasion in any way.

FAQs

Can one completely avoid paying taxes on crypto gains?

For the most part, you cannot avoid capital gain taxes on crypto; however, you can significantly reduce or defer them to a more beneficial period using certain strategies, some of which this article discusses. Note that a law-abiding citizen is responsible for paying taxes as specified in the national and regional laws.

What is the percentage capital gain tax in the US in 2024?

The basal capital gains tax percentage in the US varies based on the amount gained and the duration of the investment. Factors such as marital status also influence the capital gains tax percentage an individual pays. For short-term investments in the US, the tax can be as high as 37% in 2024. In contrast, a maximum tax rate of 20% applies to long-term investments.

Are crypto futures gains taxable?

You have to pay taxes on profits from crypto derivative trades because the IRS considers them capital gains, but whether the contract qualifies as an asset can affect this.