Tax day has come and gone, but April 15th doesn’t have to be a source of dread, especially if you’ve decided to make the move to invest in Crypto. While it may be too late to take advantage of this year, there are some savvy new market solutions that cater to crypto.
You can even kill three birds with one stone: simplify the tax process, donate to charity, and keep more of your money rather than paying more taxes.
What to Know About Crypto and Taxes
Uncle Sam says that in the U.S., crypto counts as property, so as a capital asset, it’s eligible for taxation. To know when and what crypto activity you’ll need to report on your tax return, you’ll need to familiarize yourself with what counts as a taxable event.
Taxable events include:
Selling your crypto in exchange for standard fiat currency.Exchanging one crypto for another.Investing in Initial Coin Offerings (ICOs).Receiving crypto in exchange for your goods or services.Since the IRS categorizes it as property, crypto sales are subject to capital gains tax. The amount owed is based on the capital gain or loss of converting a digital asset into another digital asset or fiat.
And capital gains tax is no joke. Depending on the income taxed, an individual can be on the hook for a long-term capital gain rate of 15% for digital assets held for more than a year.
How to Minimize Your Crypto Tax Burden
Short of renouncing your citizenship and fleeing the country, there are a few ways to lessen your crypto tax burden legally.
First, you can use a Roth IRA to put funds into Bitcoin and Crypto ETFs or exchange-traded funds. Thus, you’re avoiding capital gains taxes by investing funds you’ve already paid taxes on.
Let’s say your assets aren’t in the best shape. Another way to reduce your crypto tax burden is to sell your crypto, realize the losses, and repurchase the assets. As a result, you’ll lower yourself to a lower cost basis which allows you to defer taxes in the future once you’re making profits.
Donating to a charitable organization in crypto is another decision you can make to benefit your portfolio and your choice’s cause(s).
Benefits of Donating in Crypto
By using crypto for charitable donations, you can support your favorite causes and save money on two kinds of taxes: capital gains taxes and federal income tax deductions. How does it work?
First, crypto donations aren’t subject to capital gains taxes. So if the value of your crypto assets has increased over time, donating spares you from paying the taxes on that increase.
This is a better option than selling your crypto and donating the cash because then you would have to pay a capital gains tax on the appreciation.
B Charitable is one organization that makes it easier for people to “be charitable” with their crypto funds.
Like a “charitable savings account,” B Charitable gives users a way to set up a donor-advised fund (DAF) and give in crypto or typical methods to any of the over 1 million public charities recognized by the IRS. B Charitable’s platform allows users to give to many charities over time while realizing the tax benefits immediately and without the hassle of tracking down multiple receipts.
Founder and President, tax attorney Jonathan Shugart spoke with Wealth of Geeks about the organization’s mission and the salience of crypto donations.
“The goal of B Charitable is to create the strongest, most simple, secure, and social charitable giving platform around. We have taken a charitable giving tool that has been around for decades, the donor-advised fund (“DAF”), and built it on a modern fintech platform and made it available to everybody,” Shugart explained.
Another organization working on expanding crypto donations is FreeWill, a start-up at the estate planning and philanthropy intersection.
FreeWill offers a Crypto for Charity site, which gives donors the ability to give crypto to over 55,000 U.S. nonprofits. FreeWill’s mission is to address the need for over 90% of nonprofits today that don’t have a crypto solution and thus are missing out on potential donations.
Charities have caught on to this benefit for donors and accepting crypto benefits charities because they can potentially receive larger donations and donations from different demographics.
In light of this, nonprofits have built up their in-house crypto capacity, hiring crypto officers and building partnerships with crypto projects. For example, Save the Children Rwanda launched a crypto charity platform with Cardano in July 2021. GiveWell, UNICEF, and others have done the same.
Crypto Tax Software Solutions
There’s also a plethora of options to help file your taxes. Of course, it’s always a good idea to do your own research, and you can, of course, hire a crypto tax attorney who can advise you on your unique portfolio.
Nowadays, standard tax software like TurboTax is expanding its crypto features. For example, with its Premier or Self-Employment package, you can import information about your trades into your return.
There is also a wide variety of crypto tax software that specializes in features related to DeFi, secure backup, coin tracking, exchange support, tax-loss harvesting, and more. Examples of software providers include Koinly, ZenLedger, Crypto Trader.Tax, CoinTracker, Token Tax, and more.
Overall, the do’s and don’ts to follow when it comes to crypto and taxes are generally don’t try to cheat the IRS. The risks are too high. But don’t miss out on the opportunity to make the most of your charitable donations by giving in crypto. And do study up on crypto taxation and the companies mentioned to stay updated on the latest ways to streamline your tax process.
For further reading, the IRS also offers a series of FAQs from 2014 and 2019 to guide holders on crypto activities and taxation.