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How To Save Money On Your Crypto Taxes – #taxbreakdown

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Prepare for the crypto tax season

Crypto traders are often wondering why they should file their crypto tax reports, given that most of their investments were lost in 2018. However, filing a tax report is required by law and those that do not file a report risk being audited by the IRS.
It is not yet tax season in the US, but it is always good to be prepared in advance. If you had some losses in 2019, you could utilize a few of the strategies we will present to minimize your overall tax liability. This will also potentially increase your tax refund.

Capital losses are deductible


Any losses from crypto trading can be deducted from your taxes. They can be used as a counter to any capital gains you made during that year, whether they come from crypto, stocks, or even real estate investments. If these capital losses outweigh the capital gains, then you can offset some other income sources, such as wages. However, this is allowed only up to $3000. However, one thing that people may not know is that the remaining losses past $3000 can be carried over to subsequent years. If you make gains in 2020, your 2019 losses can be used to offset those.

Accounting methods


In order to calculate your gains and losses, you will need to select an accounting method. The accounting method dictates which coins you are “selling” or “trading” if a lot of the same coins are accumulated over a period of time. These methods can be First-In-First-Out (FIFO), Last-In-First-Out (LIFO), Average Cost, and Specific Identification. FIFO would be the most conservative option to choose in most cases.

The chosen accounting method can have a tremendous impact on your overall tax liability. The best choice of the accounting method depends greatly on your transaction history. During a bull market, you may think that the LIFO method would give you the least amount of capital gains as you are trading only your most recently acquired coins. However, if FIFO is used, some of those coins could be categorized as long-term (held for >1 year), which would bring a lower tax rate when they are inspected. We highly recommend using tax software to calculate and compare your total gains and losses for each of the different accounting methods.

An example we will show will clarify how different methods have different outcomes. Imagine you bought 3 ASDF coins:

One coin in July 2018 for $2,000;
One coin in April 2019 for $7,000;
One coin in November 2019 for $5,000.

You sell 1 ASDF coin in December 2019 for $4k. We can use different accounting methods to determine tax liabilities.

FIFO: $4,000 – $2,000 (July 2018 cost basis) = $2,000 gain;
LIFO: $4k – $5k (November 2019 cost basis) = $1,000 loss;
Specific Identification: $4,000 – $7,000 (April 2019 cost basis) = $3,000 loss.

This simple example shows how different methods greatly affect the amount of tax you have to pay.

Tax-loss harvesting


What happens if you held your coins all throughout 2019 and lost some money? In that case, you have not realized any of your losses. This means that they can’t be used to deduct income or gains from other sources. However, you can use your newfound knowledge to come prepared for next year’s tax season. Specifically, utilizing a strategy called tax-loss harvesting may be a good option.

Tax-loss harvesting involves realizing losses by determining which coins to sell as well as the amount that should be sold. The easiest way to do this is certainly using crypto accounting software. This method could maximize your realized capital gains for 2020 and make a huge difference on the tax sheet come next year!

Conclusion

Taxes are certainly no fun, especially for crypto traders during long bear markets. However, they are a necessity. By using various strategies and tools, you can make your life way easier.

A picture of the example would be good to add.

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