Should I sell my cryptocurrency before the year-end or after the year-end?
The US tax system works on a calendar year. This means the taxes due for your financial activity between January 1, 2020 to December 31, 2020 will be due by April 15, 2021. Taxes due for your financial activity between January 1, 2021 to December 31, 2021 will be due by April 15, 2022. Since we are at the end of the year, you can consider selling some of your crypto positions any minute after December 31, 2020 to smartly push the tax liability to the 2021 tax year.
This strategy is even more effective if your income tax bracket is going to be lower in 2021 due to a change in career, personal life (Ex:- taking a year off from work, moving to a state with no income taxes), or retirement.
I have a lot of coins purchased at different times at various prices. Does it matter which coins I sell for taxes?
Yes, the specific coin you are selling has a major impact on your tax bill. This is because you paid different prices for them and held them for different durations.
Generally speaking, selling the coins which you held for more than 12 months (long-term) will give you better tax rates compared to selling coins that you held for less than 12 months (short-term). Long-term profits will be taxed at either 0%, 15%, or 20% as opposed to ordinary income tax rates which could be as high as 37%.
Also, if you can specifically identify the coin you are deemed to be selling, you can sell the coins for which you paid the highest amount first. This is referred to as Highest in, First out Accounting (HIFO) and will generate the least amount of capital gains for most taxpayers. According to the IRS (A39), you can use this Specific ID method only if you have information about all the four criteria listed below.
1) the date and time each unit was acquired
2) your basis and the fair market value of each unit at the time it was acquired
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3) the date and time each unit was sold, exchanged, or otherwise disposed of
(4) 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 use cryptocurrency tax software, you can easily satisfy the above IRS criteria and pick HIFO accounting method with just a click of a button.
How can tax loss harvesting help me with my tax bill?
Although the crypto market has been good especially during the last quarter of 2020, you may have coins where your cost basis (how much you paid) is higher than the current market value. December is a great time to sell them to harvest tax losses. You can use these losses to offset your both cryptocurrency and stock related capital gains occurred during 2020.
Another thing to note is that the Wash sales rules are not applicable to cryptocurrency because it is treated as property (as opposed to stocks or security) by the IRS. This means that you can sell your losing positions to harvest tax losses and quickly buy back in at a lower price if you want to maintain the position. If you were to do this for your stock portfolio, you’d have to wait at least 30 days. If not, the IRS will disallow the loss.
Can I get a tax deduction for crypto donations?
Donating cryptocurrency to charities is one of the rare situations where you can get two tax benefits at once.
By donating cryptocurrency to charities:
- You get to bypass the capital gains taxes on appreciated cryptocurrency holdings and,
- You get a deduction on Schedule A which will reduce your both crypto and non-crypto related taxable income
The amount of deduction you get on cryptocurrency donations depends on how long you held the coin. If you donate cryptocurrency which you held for more than 12 months, you get a tax deduction equivalent to the market value of the coin at the time of the donation. If the holding period is less than 12 months, your deduction will be the lesser of your cost basis or the market value at the time of the donation.
Note that this tax benefit is available only if you itemize on your tax return. Make sure to donate before the end of the year to get a deduction on your 2020 tax return.
Are there any benefits to gifting cryptocurrency?
Directly gifting cryptocurrency allows you to share your wealth with others without triggering a taxable event to neither party. At any given year, you can gift up to $15,000 of property to an unlimited number of persons.
For example, say you have 1 Bitcoin (BTC) purchased at $2,000 and now it’s worth $20,000. If you were to gift this to someone, you will not have to pay capital gains taxes on $18,000 ($20,000 – $2,000) worth of gains. The donee will not have to report any income either. However, if you were to cash it out and gift the USD proceeds, you will have to pay capital gains taxes on $18,000 worth of gains.
If you’d like to gift more than $15,000, you’d have to file a Form 709 with the IRS disclosing information about your gift. There won’t be any taxes you have to pay immediately as long as it is below the lifetime gift tax exclusion of $11.58 million.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.