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Beginner's Guide: Tax Strategies for Cryptocurrency Holders

Beginner's Guide: Tax Strategies for Cryptocurrency Holders

There are four ways to stop paying taxes on your crypto earnings. If you're fed up with the IRS receiving half of your short-term profits and 20% of your long-term gains, here are some ways to pay zero tax on cryptocurrency earnings without having to deal with the IRS.

Please note that this article focuses on US citizens and individuals (residents and green card holders). The US IRS has stated that cryptocurrency is an asset or property, but not a currency. Therefore, profits on cryptocurrencies are treated in the same way as profits from the sale of stocks, rental of property, or any other passive investment.

If you want to avoid taxing your cryptocurrency income, plan. Here are some ways to stop paying taxes on gains and capital gains. But first, how does cryptocurrency work in the United States?

How crypto fees work in the United States

Cryptocurrencies, such as Bitcoin and Ethereum, are treated as property per US federal tax law 1. This means that the same tax principles applicable to real estate transactions also apply to trade or attributing cryptocurrencies. Real estate transactions are subject to capital gains tax as well as for cryptocurrencies and must be reported as 8949. A capital gain occurs when one of the following operations is executed:

  • Sell cryptocurrencies for fiat money, like the USD
  • Use cryptocurrencies to pay for goods and services
  • Negotiation of cryptocurrencies with other cryptocurrencies

These transactions do not involve capital gains:

  • Donate cryptocurrencies to tax-exempt organizations or charities.
  • Transfer of cryptocurrency between your wallets
  • Buy cryptocurrencies in fiat money
  • Deploy small amounts of the cryptocurrency (less than $ 15 million)
  • Lend/wager your coins
  • Cryptocurrency received from mining, forks, dropping, etc.

Receiving cryptocurrencies from mining/stocks/ loans/ etc. is considered regular income and must be indicated in the annual tax return; only the possible sale of this encryption is reported in the capital gains report. 

The United States also requires investors who have trust funds over $ 10,000 at any exchange rate (such as Bitmex, Bittrex, etc.) to report them under FBAR and FATCA.

That being said, how do you avoid certain tax on cryptocurrencies?

Buy cryptocurrencies in your life insurance policy

A way to pay zero tax on the profits of cryptocurrencies is to buy currency under an international life insurance policy. You can finance life insurance for a private placement abroad for any desired amount, and you can create the equivalent of a traditional IRA or ROTH. 

Most private placement policies abroad require a minimum investment of $ 1.5 or 2.5 million.

If you put in place a private placement policy, keep it for a few years and close it, you will receive a tax deferral similar to a traditional IRA. In other words, you will pay income tax when you close the policy.

If you keep the policy until you die and pass the cryptocurrency to the heirs, you will receive a tax exemption similar to the ROTH IRA. Due to the more extensive base, your heirs receive the coins at the cost of your death and pay no appraisal fees during their life insurance contract.

Buy cryptocurrencies in your IRA

The easiest way to defer or eliminate taxes on investments in cryptocurrencies is to purchase an IRA, 401-k, defined benefit plans, or other pension plans. If you buy cryptocurrencies under a traditional IRA, your income tax will be deferred until you start receiving distributions. If you buy from a ROTH, you don't pay any capital gains tax on your account.

Funding of an SDIRA

An SDIRA is funded by transferring money from a traditional IRA or a Roth IRA. This is called "reinvestment." The funds for a traditional IRA or Roth generally come from regularly earned income, such as wages, investment income, work income, etc.

Therefore, to trade with duty-free cryptocurrencies in a self-registered IRA, the steps are as follows:

  • Open and finance a traditional IRA or Roth with USD
  • Switch the traditional IRA or Roth USD to a self-registered IRA
  • Buy / exchange USD cryptocurrencies in self-registered IRA

SDIRA taxes

SDIRA can be very beneficial for taxes. Let's say that John exchanges cryptocurrencies on an SDIRA financed by renewable sources. This will happen in different scenarios:

With a Roth IRA account, John can withdraw the original contributions at any time without taxes or penalties (only profits are subject to the taxes and penalties indicated)

The beauty of the tax deferral is that the deferral is made worse every year. Suppose John transferred more than $ 20,000 from a traditional IRA to an SDIRA and purchased two bitcoins. John is 25 years old. Suppose the price of bitcoin increases to 10% each year. If you withdraw funds at age 71, you can defer more than $ 2 million in taxes, assuming an average tax rate of 15%.

IRAs are a somewhat complicated area of the tax code, but they provide significant tax benefits. Several platforms offer self-directed IRA accounts to cryptocurrency holders. If you are a smart investor who wants to accumulate wealth in cryptocurrencies by reducing taxes, try to trade with a reliable SDIRA holder. To maximize your benefits, be sure to postpone your retirement to 59 and a half.

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