Cryptocurrency Taxation: How To Pay Less Tax On Your Crypto Investments?

Cryptocurrency Taxation: How To Pay Less Tax On Your Crypto Investments?

November 21, 2018

Wondering how to pay less tax on your crypto investments? With the substantial increase in cryptocurrency-related trading and investment activities all over the world, investors are searching for ways to pay less tax on their crypto investments.

Since the initial launch of Bitcoin in 2009, almost 4,000 different crypto coins have been introduced, and the total market capitalization has reached more than $800 billion in 2018. Therefore, tax authorities have directed all crypto investors to report their capital gains and losses in financial statements.

The majority of countries deem all crypto coin transactions taxable. These transactions include coin-to-currency trades, receipt of coin in a hard fork or split transaction, coin-to-coin trades, mining revenue, and purchases of goods or services with a coin. 

Before moving towards the ways of paying less tax on crypto investments, let’s take a brief look at the taxation system in major countries.

Countries are Relaxing Taxation System for Crypto Investors

Tax rules vary in different countries.  Some countries have imposed strict taxation rules on crypto investments while others are relaxing their rules to support the emerging industry. Japan, for instance, introduced a new tax framework to support the crypto industry. The U.S. and U.K. have also hinted they will change their taxation of crypto investments.  

The advisory committee of the U.S. Internal Revenue Service (IRS) recently asked the agency to supply additional guidelines for taxation on crypto transactions. The IRS is currently treating crypto coins as an asset instead of currency, leading crypto investors to the capital gain taxation system. The U.S. IRS advisory committee has suggested that the agency create crypto-specific taxation due to increasing public interest.

Spain numbers among those countries that have relaxed their taxes for crypto investors. The Spanish government recently announced they will offer tax Incentives to crypto, ICOs, & blockchain projects.

How to Pay Less Tax on your Crypto Investment?

Although several countries are relaxing their taxation system, crypto investors must do due diligence to pay less tax on crypto investments. It’s also important to note that you cannot completely avoid taxation on crypto investment because the IRS has recently issued a strict warning to investors who are not paying taxes on their cryptocurrency profits.

The statement says: “taxpayers could be subject to criminal prosecution […] Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000.”

Therefore, we came up with five key strategies that would help investors to pay lower taxes on crypto investments:

Long-Term Investments

Everything is a taxable event other than holding, buying, or transferring a cryptocurrency in the form of a gift. This is because holding a cryptocurrency for the long-term is the best way to minimize your taxes. Capital gains on short-term investments are generally taxed at a normal income tax rate in each respective country. Long-term gains, on the other hand, are taxed at a much lower rate.

Don’t Convert One Cryptocurrency to Another

The market experts always suggest converting the crypto investment into fiat currency whenever you sell your crypto investment. In the event that you have converted your cryptocurrency investment into another crypto coin, you are still liable to pay taxes on all the capital gains you achieved from your initial investment.

For example, if you bought Cryptocurrency A for $1 on Jan. 1, and the price of that coin jumped to $101 in the next six months, and you decide to transfer your investment in Cryptocurrency A to Cryptocurrency B, you would be taxed on the $100 gain. The IRS considers the conversion of one cryptocurrency to another as a purchase and sale activity.

Document all Your Crypto Investments and Trading Activities

You can avoid several tax-related complications once you adopt the habit of keeping all records in a spreadsheet. Indeed, several wallets and exchanges permit the user to export their record in the form of a spreadsheet.

Hire an Accountant or Tax Attorney

Tax authorities all over the world have announced they will take serious actions against investors presenting forged or inaccurate details. Hiring an attorney or accountant is especially important for those investors who owe previous taxes. Some crypto exchanges like Coinbase have also started offering tax guidance to their customers to let them know how much they owe in taxes on their crypto transactions.

 Gift or Donation in Cryptocurrency is Not a Taxable Event

The majority of countries do not consider gifts or donations through cryptocurrencies as a taxable event—up to a certain limit. For instance, the U.S. has set tax exemption on gifts up to $14,000.

The future of cryptocurrency is entirely dependent on the decisions of regulations and taxation authorities. Simple and clear processes would aid the growth of the emerging industry.

Crypto investors should also keep a keen eye on the taxation system. They must look after suggestions outlines in this article to avoid complications and additional taxes.

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