W2s and 1099s have been sent out and tax season is officially in full swing here in the United States. For those operating in the world of bitcoin or altcoin investing, this time of year can have added stress as reporting gains and losses for your crypto trades can be a cumbersome task. While the reporting can be difficult at times, there are many things you can do to help minimize your bitcoin and other cryptocurrency gains and, in turn, your tax liability. This article discusses a few of these tips and tricks.
Open a Crypto 401(k) or IRA Retirement Account
Retirement accounts like IRAs and 401(k)s are popular vehicles used in the world of investing. These types of investment accounts come with tax incentives and can help shield profits from the tax man. By using a retirement account like a self-directed IRA to purchase cryptocurrencies, you can defer paying tax (sometimes you can even pay none at all).
This is contrary to using a traditional cryptocurrency exchange where the income generated from selling or trading crypto is taxed during that same year. Cryptocurrency IRAs can be an effective tax reduction tool — especially if you believe in the long-term value of cryptocurrencies.
Keep in mind that there is a deadline to open and contribute to your self-directed cryptocurrency IRA. The period in which you can make a contribution for a given tax year is from January 1 of that year until you file your tax return. Contributions cannot be made after your filing deadline (i.e., April 15 of the following year).
Look into Using a Specific Identification Costing Method
After the new IRS cryptocurrency tax guidance came out in October 2019, it clarified that specific identification costing methods could be used when calculating your gains and losses for your cryptocurrency transactions provided that you had records to specifically identify your crypto.
This sounds a lot more complex than it is. Essentially, pre-2019, most bitcoin and crypto investors were using the common First In, First Out (FIFO) calculation method to calculate their gains and losses from their trades (the cryptocurrencies that you bought first are sold first) because the IRS had not yet specified whether specific ID was allowed. Now that the new guidance makes this clear, specific identification is a great way to reduce your gains.
In using this strategy, you want to specifically identify and “sell” the cryptocurrencies that you bought at the highest price first. For active traders, this slight change can lead to huge tax savings.
Cryptocurrency tax calculators are especially good at applying these tax minimization algorithms like Highest In, First Out (HIFO) and Last In, First Out (LIFO).
However, before you can use a specific identification method, you have to be able to specifically identify a unit of cryptocurrency as the IRS outlines:
To specifically identify a unit of cryptocurrency, you must have records of the following information:
- The date and time each unit was acquired;
- Your basis and the fair market value of each unit at the time it was acquired;
- The date and time each unit was sold, exchanged or otherwise disposed of; and
- The fair market value of each unit when sold, exchanged or disposed of, and the amount of money or the value of property received for each unit.
If you have this data for your transactions, you are able to use specific identification methods like LIFO or HIFO which can drastically lower your cryptocurrency capital gains taxes.
Hold for Longer Than One Year
Similarly to the world of investing in stocks, holding onto a cryptocurrency investment for longer than one year pushes you out to the long-term capital gains tax rates. These are typically much lower than the short-term capital gains tax rates which apply when you have sold or traded out of your investment after holding onto it for less than one year.
Additionally, if you are able to identify your cryptocurrencies specifically, you can take advantage of this strategy further. You can specify that the coins you “sell” are the coins that you have held for longer than one year’s time. This will qualify you for the long-term capital gains rate and will help reduce your overall tax liability!
Invest Your Crypto Capital Gains into a Qualified Opportunity Zone Fund
Opportunity Zone Funds became part of the tax code with the Tax Cuts and Jobs Act of 2017. The IRS defines an Opportunity Zone as an “economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” Put simply, the communities on the receiving end of these funds benefit from revitalization while investors gain tax benefits from investing.
When an investor sells an asset that produces capital gains, he or she can roll any amount of the gain into an Opportunity Zone Fund within 180 days of the sale. The investor can then defer capital gains taxes on that amount until December 31, 2026, or until the Opportunity Zone Fund investment is sold or exchanged (whichever comes first).
For bitcoin investors who have large amounts of capital gains, rolling these gains into an opportunity fund investment can be a powerful strategy for reducing your tax bill.
Use Cryptocurrency Tax Software
Finally, one of the best ways to fully maximize your tax savings on your crypto investments is to plug all of your trade history into a cryptocurrency tax software. Bitcoin and crypto tax software platforms have built-in tools to analyze and optimize your gains and losses reporting for tax minimization. Importing your trade history is as easy as connecting your cryptocurrency exchange accounts. Once your historical trades are in, these programs will then generate your tax reports with the click of a button.
This is a guest post by David Kemmerer, co-founder of CryptoTrader.Tax. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc. This article is for informational purposes only and should not be considered tax or accounting advice. Always seek guidance from a tax accounting professional when assessing your individual tax situation.
The post 5 Tips For Minimizing Your Bitcoin and Crypto Taxes appeared first on Bitcoin Magazine.
JP Morgan: Bitcoin Needs to Reclaim $40K Soon or Momentum Will Fade
Bitcoin has to endure and overcome the $40,000 boundary in order to avoid a consequent major price correction. JPMorgan strategists say that otherwise, the major cryptocurrency might suffer investment outflow.
The $40K Is the Key to Future Prospects for BTC
According to a JPMorgan Chase & Co report, cited by Bloomberg, this level is an omen to more eventual losses.
The major financial institution strategists led by Nikolaos Panigirtzoglou said that the cryptocurrency is at risk of further losses and an outflow of trend-following investors unless it can “break out” over the $40K frontier. The team added that the pattern of demand for BTC futures and the $22.9 billion Grayscale Bitcoin Trust might help determine the perspective.
“The flow into the Grayscale Bitcoin Trust would likely need to sustain its $100 million per day pace over the coming days and weeks for such a breakout to occur,” the strategists commented on Friday.
After a record-breaking hit near $42K in the first week of January, Bitcoin suffered a significant price correction with almost $12K in just a short time, leaving investors pondering the reasons. JPM strategists said that the primary cryptocurrency has been in a similar situation last November when it passed the $20,000 test.
Furthermore, a significant flow of institutional money entering the Grayscale trust has encouraged the BTC rally claimed, JPM specialists. They’ve also noted that trend-following traders “could propagate the past week’s correction” and “momentum signals will naturally decay from here up till the end of March” if BTC price doesn’t break the $40,000 milestone.
Breaking the $40K Limit and Replacing Gold?
Amidst both volatile behavior and opinions on BTC, recently, JPMorgan shared another possible Bitcoin scenario. As CryptoPotato reported, analysts from the financial institution have claimed that the cryptocurrency has taken portions of gold’s market share which could lead to price losses for the bullion.
Back then, strategists said that institutional investors had shown significant transfers from gold ETFs to bitcoin, thus suggesting adverse price developments for the noble metal.
Both bitcoin and gold have one thing in common – their rather limited supply – which had encouraged investors to think that the digital asset might replace the precious metal to an extent in the future.
Analysts said that since October, “money has poured into Bitcoin funds and out of gold, a trend that’s only going to continue in the long run as more institutional investors take a position in cryptocurrencies.” Still, the bold suggestions remain more of a speculation, while BTC remains quite volatile.
Bitcoin Exchange Owner Sues Australian Banks For $290K For Accounts Closure
The legal battle comes as the Aussie man allegedly suffered significant losses in his crypto business after the banks, Westpac and ANZ, shut down his accounts, local media reported Monday.
According to the proceedings filed at the ACT Civil and Administrative Tribunal, Allan Flynn alleged that the banks’ action was illegal as they closed his accounts without any prior warning or reason.
20 Accounts Closed In Three Years
Flynn owns an AUSTRAC-registered crypto exchange with about 450 customers. Using the platform, he helps his clients to purchase crypto assets like Bitcoin.
The Australian Financial Review revealed that the complainant has had about 20 of his accounts shut down in the last three years by more than five Australian banks, including CBA, NAB, ING, and Bendigo Bank, to mention a few.
Following the continued account closures, Flynn said he opened new accounts with Westpac and ANZ while informing the banks that the account was for crypto transactions. But both accounts were closed after almost a year of running them. He said he received a message from Westpac saying his account would be closed in five days. His effort to open another account with Westpac was not successful.
He requested to know why his account was closed and why he couldn’t open a new one, and the bank told him that he was “under investigation for cryptocurrency fraud.”
Flynn said Westpac offered him a compensation of AUD$250 for not providing “reasonable notice” before closing the account. However, he hasn’t “seen a cent of it either.”
Not The Only One
For one thing, cryptocurrencies and exchanges are legal in Australia, and there’s no law prohibiting banks from rendering services to crypto traders. However, Flynn noted that he is not the only victim of this unlawful discrimination.
“I am by no means alone or the first. I know of at least one other trader who has had accounts closed more than 60 times,” he said, adding that “how am I supposed to run a lawful business if I can’t get a bank account?”
According to the report, Flynn demands a total settlement of AUD$375,000 from the banks, with the hearing expected to take place in late March.
He is seeking AUD$250,000 for stress and inconvenience and AUD$125,000 for emotional distress and reputational damage. Aside from closing his accounts, Flynn alleged that an ANZ employee informed other banks and his clients that he was fraudulent.
Cardano Price Analysis: 18 January
Cardano’s price has surged by a massive 133% in the last 15 days and the rally shows signs of more upward movement. Trading at $0.378 ADA is ranked the sixth-largest cryptocurrency in the world in terms of market cap. The cryptocurrency has witnessed a reduced volatility phase leading to fairly stagnant price movement.
Due to the formation of a bullish pattern, ADA’s outlook is overall bullish and suggests a price surge upwards of 10 -30% in the mid-to-long term.
Cardano 4-hour chart
As seen in the chart, ADA’s price has formed a bullish pennant with the price already breaking out of the pattern on January 16. Since the breakout, ADA has surged approximately 20% to where it currently stands. Although the general outlook is bullish, there might be a retest of the supports at $0.3579 and $0.3455, pushing the price higher.
With the price already surging 20% from the pennant, we can expect another 40% surge on the table. Hence, a long position would better serve the profits that are yet to come.
Supporting this is the constant inflow of volume despite the stagnant movement in price as seen in the OBV indicator. Following this, there is the RSI indicator that shows a retreat from the overbought zone due to the recent breakout from the pennant.
Lastly, the MACD indicator showed a dip in both the MACD line and the signal indicating a decrease in buying momentum. It also shows that these lines might undergo a bearish crossover soon.
With bitcoin trending sideways, this is the time for altcoins to surge higher. Rightfully so, altcoins are surging without a stop in sight, hitting new all-time highs – especially the DeFi coins. With ADA’s bullish pattern, there is a high chance for it to surge to $0.5333 or 67%. On the other hand, a drop below 0.240 would indicate failure of the uptrend and a continuation of the downtrend.
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