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How US Citizens Can Reduce Their Crypto Tax Bill

5 min read

How US Citizens Can Reduce Their Crypto Tax Bill

Cryptocurrency has become an increasingly popular investment option for US citizens. As the IRS has classified cryptocurrency as an asset or property, gains from cryptocurrency investments are treated the same as profits from the sale of stocks, rental real estate, or other passive investments. Therefore, US citizens must pay taxes on their cryptocurrency gains.

However, there are ways to reduce your tax bill on cryptocurrency gains. This article will explore strategies US citizens can use to reduce their cryptocurrency tax bill.

 

As the IRS has classified cryptocurrency as an asset or property, gains from cryptocurrency investments are treated the same as profits from the sale of stocks, rental real estate, or other passive investments

As the IRS has classified cryptocurrency as an asset or property, gains from cryptocurrency investments are treated the same as profits from the sale of stocks, rental real estate, or other passive investments

INVESTING IN CRYPTO WITHIN A SELF-DIRECTED IRA

One of the easiest ways to reduce your tax bill on cryptocurrency gains is to invest in crypto within a self-directed IRA (Individual Retirement Account). By doing so, you can defer taxes on your gains until you take distributions.

A self-directed IRA is an IRA that allows you to invest in a wide variety of assets, including cryptocurrency. To set up a self-directed IRA, you must choose a custodian that specializes in self-directed IRAs and is willing to allow you to invest in cryptocurrency.

Once you have set up your self-directed IRA, you can use it to invest in cryptocurrency. When you sell your cryptocurrency, any gains you make are subject to capital gains taxes once you take distributions.

 

USE A CRYPTOCURRENCY-ONLY SELF-DIRECTED IRA

Another option is to use a cryptocurrency-only self-directed IRA. A cryptocurrency-only self-directed IRA is an IRA that is exclusively invested in cryptocurrency. These IRAs are becoming increasingly popular as they allow investors to take advantage of the tax benefits of an IRA while also investing in cryptocurrency.

You must find a custodian specializing in cryptocurrency-only IRAs to set up a cryptocurrency-only self-directed IRA. You will then be able to invest in a range of cryptocurrencies and benefit from tax-deferred growth.

 

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These IRAs are becoming increasingly popular as they allow investors to take advantage of the tax benefits of an IRA while also investing in cryptocurrency

These IRAs are becoming increasingly popular as they allow investors to take advantage of the tax benefits of an IRA while also investing in cryptocurrency

MOVING TO PUERTO RICO

Another strategy US citizens can use to reduce their cryptocurrency gains tax bill is moving to Puerto Rico. Puerto Rico has become a popular destination for US citizens seeking to reduce their tax bills. One of the reasons for this is that Puerto Rico has its tax laws, which means that US citizens who move there can benefit from tax incentives that are not available in the mainland US. For example, under Act 60, businesses that export services from Puerto Rico are taxed at just 4%. US citizens who move to Puerto Rico and meet the requirements of Act 60 can also benefit from tax breaks on capital gains. Under Act 60, US citizens who become residents of Puerto Rico and meet specific criteria can benefit from a 0% tax rate on capital gains.

 

CONSIDER THE DOWNSIDES OF MOVING TO PUERTO RICO

While moving to Puerto Rico can effectively reduce your tax bill on cryptocurrency gains, it is important to consider the downsides. For example, moving to Puerto Rico means leaving behind friends and family and adjusting to a new way of life.

Additionally, there are costs associated with moving to Puerto Rico, including the cost of living, the cost of purchasing a home, and the cost of setting up a new life. These costs can be high and should be considered when considering moving to Puerto Rico. However, the overall cost of living in Puerto Rico can be lower than what you are used to spending in the USA.

 

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Under Act 60, US citizens who become residents of Puerto Rico and meet certain criteria can benefit from a 0% tax rate on capital gains

Under Act 60, US citizens who become residents of Puerto Rico and meet certain criteria can benefit from a 0% tax rate on capital gains

DONATE CRYPTOCURRENCY TO CHARITY

Another strategy US citizens can use to reduce their tax bill on cryptocurrency gains is donating cryptocurrency to charity. By doing so, you can benefit from a tax deduction for the cryptocurrency's fair market value at the time of the donation. When you donate cryptocurrency to a charity, you do not have to pay capital gains taxes on any gains you have made on the cryptocurrency.

You must find a charity that accepts cryptocurrency donations to donate cryptocurrency to a charity. Many well-known charities, including the Red Cross and Save the Children, now accept cryptocurrency donations.

When you donate cryptocurrency to a charity, it is important to keep accurate records of the donation. You will need to record the date and value of the donation, as well as the name of the charity and the type of cryptocurrency you donated.

 

When you donate cryptocurrency to a charity, you do not have to pay capital gains taxes on any gains you have made on the cryptocurrency

When you donate cryptocurrency to a charity, you do not have to pay capital gains taxes on any gains you have made on the cryptocurrency

BE CAREFUL WITH YOUR DONATIONS

While donating cryptocurrency to charity can effectively reduce your tax bill on cryptocurrency gains, it is important to be careful with your donations. The IRS has strict rules governing charitable donations, and failing to comply with these rules can result in significant penalties.

For example, to claim a tax deduction for a cryptocurrency donation, you must provide the charity with a written acknowledgment of the donation. The acknowledgment must include the charity's name and address, the donation date, and a description of the cryptocurrency donated.

Additionally, the IRS has specific rules governing the valuation of cryptocurrency donations. To ensure that you comply with these rules, working with a tax professional who can help you accurately value your cryptocurrency donations is important.

 

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Working with a tax professional who can help you accurately value your cryptocurrency donations is important

Working with a tax professional who can help you accurately value your cryptocurrency donations is important

USE TAX-LOSS HARVESTING

Another strategy that US citizens can use to reduce their tax bill on cryptocurrency gains is tax-loss harvesting. Tax-loss harvesting involves selling investments that have declined in value to offset gains in other investments.

To use tax-loss harvesting, you must sell cryptocurrency investments that have declined in value. Doing so can offset gains in other investments and reduce your overall tax bill. For example, if you have made a $10,000 USD profit on one cryptocurrency investment but have lost $5,000 USD on another cryptocurrency investment, you can sell the losing investment to offset the gains on the profitable investment.

 

Use Tax-Loss Harvesting Carefully

While tax-loss harvesting can effectively reduce your tax bill on cryptocurrency gains, it is important to use it carefully. To benefit from tax-loss harvesting, you must sell investments at a loss, meaning you will realize losses on those investments.

Additionally, the IRS has strict rules governing tax-loss harvesting, and failing to comply with these rules can result in significant penalties. To ensure that you comply with these rules, working with a tax professional who can help you navigate the complex world of tax-loss harvesting is important.

 

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You can sell the losing investment to offset the gains on the profitable investment

You can sell the losing investment to offset the gains on the profitable investment

KEEP ACCURATE RECORDS

Finally, one of the most important things you can do to reduce your cryptocurrency gains tax bill is to keep accurate records. Accurate record-keeping can help you to maximize your deductions, minimize your tax bill, and avoid potential legal issues with the IRS.

When it comes to cryptocurrency investments, it is important to keep track of the date and price of each investment and the date and price of each sale. Additionally, you should keep track of any fees or commissions associated with each investment and sale. By keeping accurate records, you can ensure that you report your cryptocurrency gains and losses correctly and take advantage of all the tax benefits available.

 

USE A PROFESSIONAL FOR HELP

While it is possible to reduce your tax bill on cryptocurrency gains, it can be a complex and confusing process. To ensure that you are taking advantage of all the tax benefits available, it is important to work with a tax professional experienced in cryptocurrency investments.

A tax professional can help you navigate the complex world of cryptocurrency investments and ensure that you comply with all the relevant tax laws and regulations. Additionally, a tax professional can help you identify tax-saving strategies specific to your situation.

 

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CONCLUSION

Reducing your tax bill on cryptocurrency gains is an important goal for many US citizens who invest in cryptocurrencies. By using the strategies outlined in this article, including holding cryptocurrency in a retirement account, donating to charity, using tax-loss  harvesting, keeping accurate records, and seeking the advice of a tax professional, you can minimize your tax liability and maximize your returns.

Tax laws and regulations are subject to change, so it is important to stay current on the latest developments and seek professional advice whenever necessary. With careful planning and diligent record-keeping, you can reduce your tax bill on cryptocurrency gains and keep more of your hard-earned money in your pocket.

 

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Mikkel Thorup

Written by Mikkel Thorup

Mikkel Thorup is the world’s most sought-after expat consultant. He focuses on helping high-net-worth private clients to legally mitigate tax liabilities, obtain a second residency and citizenship, and assemble a portfolio of foreign investments including international real estate, timber plantations, agricultural land and other hard-money tangible assets. Mikkel is the Founder and CEO at Expat Money®, a private consulting firm started in 2017. He hosts the popular weekly podcast, the Expat Money Show, and wrote the definitive #1-Best Selling book Expat Secrets - How To Pay Zero Taxes, Live Overseas And Make Giant Piles Of Money, and his second book: Expats Guide On Moving To Mexico.

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