Cryptocurrencies have changed the global economy for the better. This decentralized money has also changed the way people perceive investing, saving money and finally – earning. By erasing the need for third parties and institutions that would be in charge of transactions and everything that has to do with one’s money, crypto has opened a new door for many categories of people. Not only have investors experienced tremendous benefits from decentralized money and blockchain technology, but it seems like every person that decided to indulge in this world, is aware of all the possibilities this field offers to its users.
The only authority in the crypto marketplace is the cryptocurrency itself as well as people who are making transactions that are being stored in a blockchain and shared with everyone involved. When it comes to the oldest cryptocurrency of them all, Bitcoin, it can be said that people who are mining BTC or in other words – who own computers that are able to solve mathematical problems and generate coins are also some kind of authority. However, they are being authoritative only for themselves. This is the biggest difference between the traditional systems and this innovative one. Everyone is in charge of their own money. They are responsible for passwords, if they have a hot wallet or an online account for trading; or they’re responsible for their private keys: if they have an offline or a cold wallet. That said, if they make a mistake when doing a transaction, it’s irreversible, since there’s no one above them to verify or double check it.
One thing is sure, cryptocurrencies gave us significantly more freedom compared to what we were used to when it comes to financial institutions, tools, investing and money in general. Some even say that this is a revolution in the global economy and finance. Freedom is one of the reasons why such a high percentage of people decided to ride the wave of modern technologies, or in other words: to take advantage of them. Not having to rely on banks or any other governmental organisations is liberating for many people, especially investors or people who don’t have access to banking services.
But what about taxes? Do crypto holders and investors need to pay taxes or not? Does every cryptocurrency fall under the tax laws? Keep in mind that there are almost 2000 different types of cryptocurrencies on the market right now. Is each and every crypto whether it’s Bitcoin, Cardano, Solana, Ethereum (the list could go on and on) free of taxes? Let’s dive into it:
First of all, if you thought that having decentralized money means avoiding your obligations, you were wrong. According to the IRS, no matter what you do with your coins and no matter what type of coins you have, you need to report everything to this institution.
What do we mean by everything? The answer is simple. Whether you’re buying or selling cryptocurrencies, or you’re making a payment, every of these steps has something to do with tax, especially when reporting your annual income. This is not very different from reporting your annual income whether you’ve worked with crypto or not. That simply means that your bitcoins or ethereum or any other type of cryptocurrency is taxable, and it’s being treated the same way as gold for example. If you are an investor and you hold stocks, you need to know that you need to report your property to the IRS. The same goes for BTC.
However, it’s not taxable in all situations. If you’re paying for a coffee or you’re buying a house with crypto, you are actually making a transaction that you need to pay your taxes for. If you just bought some coins and they are located in your hot or cold wallet, you won’t have to pay any taxes. As soon as you sell it, you have earned something. It will be treated as capital gains or if you’ve lost money, that will be your loss. This is important to mention because gains are treated differently compared to the income you made – in terms of tax.
Still, having to deal with taxes in the first place (when you just thought that you’re using decentralized money that has nothing to do with the government or third parties) is extremely frustrating for the majority of people. This is why crypto owners are trying to develop strategies that would help them to either avoid taxes or pay as little as they can. If you are a newbie in this field, or you simply want to find out how to reduce the amount of taxes on your crypto, here are some tips and tricks on how to do that:
1. Be strategically patient
What does being strategically patient when it comes to crypto taxes mean? According to washingtonindependent.com, it means that if you want to minimise the amount of taxes you need to pay for your crypto, you better wait for your gains to convert. Research shows that the longer you hold your coins, the lower the amount of taxes you will pay. Since the crypto market is a very dynamic market, that’s at the same time – very volatile, this is not an easy task or a simple thing to do; however, if you manage to stay patient and let your short-term gains become long term, you will get great benefits from it: you’ll most likely pay less money.
2. Deduct where you can
If you’ve had an expensive procedure, or you ‘ve experienced certain problems when it comes to your virtual currency, such as crypto losses, this will help you reduce the amount of money you need to pay for taxes. That being said, it is important to report your losses when filing your taxes, and you get a certain deduction for your capital losses. The same goes for simply not gaining any money. You don’t have to lose gains, it’s enough to simply not gain anything and you can ask for a deduction as well. You can also take advantage of donating your money to charities.
3. Sell then buy again
This technique is very popular among the most experienced crypto traders. It includes selling your assets when needed and then purchasing them again, only this time you will pay less money. What’s the point of this? The goal of this process is to harvest any losses, and then simply repurchase assets you had, while paying less taxes. The good thing about this is the fact that you don’t have to wait for a month to do it, you can do it as soon as you want to. As a result, you will be able to offset your gains and you basically lose nothing – quite the contrary!