Something that has been on my mind a lot recently is the taxes that I will owe this year from my bitcoin and other cryptocurrency. Unfortunately tax season is coming up. It is a time that many are excited for, because a large percentage of people will receive a cash refund. But for investors it can be a very expensive time of the year. Not only that, but it can be quite stressful as well.
Yes I know that taxes are something that no one wants to think about or plan for, but they are necessary and I wouldn't recommend trying to avoid them. For a person that just buys bitcoin and holds; this will be a relatively easy experience. Going from cash to bitcoin and not selling; means that you won't owe any taxes on those transactions. It is a non taxable event.
But the problems arise when you start selling your cryptocurrency; converting it from one coin to bitcoin or something else. This is a taxable event. Also you will need to pay taxes on any income earned from cryptocurrency. This means if you are earning interest at BlockFi, Celsius, or any other service; that interest earned is taxable. This past year my mind has been directly focused on increasing my passive income and it has gone very well. But now I will need to pay taxes on that extra income.
(Please remember that I am not a tax expert, or financial consultant. Please do your own research. My information is related to the USA and it may be different for where you live.)
Here are a few helpful tips that might be able to make crypto tax season just a little less stressful for you.
Is it Worth it to Earn a lot of passive income if you have to pay taxes on it?
Of course the answer to this question is a resounding yes. I am in a much better financial situation than I could have ever imagined just a few years ago. It has been completely transformed. I owe that to investing into cryptocurrency, and focusing hard on earning passive income. Even if I have to pay a percentage of what I have earned passively, at the end of the day it has ben worth it and my portfolio is stronger because of it.
Frankly I would be worried if a person would avoid earning extra money, just because eventually you would have to pay higher taxes from it. If you were offered two jobs, one with a low income, and one with a high income; 100% of the time a person would choose the higher paying job. Of course when you choose the higher paying job your expenses and taxes will come along with it. But never avoid progressing and moving up in life just because your taxes would increase.
How can you make your Bitcoin and cryptocurrency taxes less of a headache?
The easier way to simplify your taxes is simply buying with the intention to hold for the long term. This will also help you to pay an even lower percentage of capital gains tax in the future. If you buy and sell bitcoin within 1 year, you will be taxed at a much higher rate. But if you buy and hold longer than 1 year the tax rate becomes much less. Which makes the bitcoin term HODL much money beneficial. As I stated above; purchasing bitcoin with fiat is a non taxable event. You would only need to pay taxes after you sell.
So think carefully before you make a purchase. When making a purchase; always ask yourself why you are buying this, and if you're okay holding on to this for a few years. You definitely don't want to constantly make purchases, and then convert to other coins as well. This will all be taxable, and it will make filing your taxes more complicated as well.
Over the last year I have become much less of a trader and purely and holder. This means that I'm no longer trying to find the newest up and coming gem coin that will be released on Uniswap soon. Those coins can present amazing gain opportunities, but are usually much more risky. Instead I have been purchasing what I feel the most passionate about, think will be the winners in this industry, and what will still be around 10 years later. This is why I have been investing so much into bitcoin recently and also ethereum.
Keep Cash on the Side
You don't want to have an unexpected tax bill that you will need to pay for in the future. This could really put you in a grind financially and cause a lot of financial pain. Throughout the year if you do decide to convert coins, sell to fiat, or make passive income; be sure to keep an estimated total amount throughout the year. You can then set aside cash and be ready to pay your bill when tax season comes around. This is something that will save you a lot a stress.
Not only is this a good tax tip, but I feel it is just important in your regular life as well. You never want to have $0 in the bank, and then go into panic mode whenever you may have any unexpected expense. It is always a great idea to have money set aside to help account for these surprises.
Use a Cryptocurrency Tax Service
If you have very few transactions throughout the year you should definitely be able to calculate your own cryptocurrency tax, but if you have hundreds, and thousands of transactions things can become much more complicated. If you do have a large amount of transactions I would highly recommend using a cryptocurrency tax service. The last few years this has been a rapidly growing industry and is much better than it was before. Using services like Koinly have been extremely helpful for me, and well worth the price of the service. Each cryptocurrency exchange, and lending share should have their own API for your wallets there. This allows these loan clients to view all the transactions that you have done at the respective place, and then be able to document the taxes owed. Although there might be a few instances where you need to input a value that is missing. The best part about this is that this is all automatic and can be done in minutes. Although most of these services have accountants available to help you, and answer any questions you may have. Depending on which price model you choose, I have seen prices ranging from $75-200.
An amazing thing about Koinly is that they support taxes in over 100 countries. Meaning that chances are that they are available and equipped to use wherever you may be living.
I use Koinly myself, and have loved it. I highly recommend it. My taxes have gone from being a large mess, to being calculated and finished in minutes.
So how about you? How do you go about compiling your taxes for bitcoin and cryptocurrency? Do you have any helpful tips that will help people lower their crypto tax bill? Knowledge is power!
As always, thank you for reading!
