The year is coming to an end, and a lot of people have started thinking about minimizing their tax burden. If you’re a bitcoin investor, things get even more complex. The IRS recently sent out 10,000 letters[1] to cryptocurrency investors, and this is an indication of how serious they are when it comes to cryptocurrency tax compliance. This means that bitcoin investors need to make doubly sure that they’re filing their returns as accurately as possible. At the same time, they also need to find legitimate ways of minimizing their bitcoin taxes.
Let’s look at some things you can do to save your precious gains in April.
Tax-Loss Harvesting: Turn Your Losses Into Tax Profits
This is one of the best loopholes in current crypto regulation that you can leverage to reduce your tax burden. Let’s say you’ve made significant profits from crypto trades through the year. However, the current value of the bitcoin you hold is extremely low. You can simply sell your current bitcoin holdings at this low price. This will trigger capital losses that you can then set off against your profits. In fact, you can even use these losses to offset future gains and ordinary income (up to $3,000[2]).
But what if you want to keep holding onto your bitcoin in the hope of future appreciation? Well, if you are based in the U.S. then you can simply buy it back afterward.
Note that some countries use Wash-Sale rules that prevent re-buying sold assets right away. For example, in Canada, a special Superficial Loss Rule kicks in whenever you sell at a loss — essentially preventing you from reducing your crypto taxes[3] if you buy the assets back within 30 days. There is a similar
