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[1] 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[2] came out in October 2019, it clarified that specific identification costing methods could be used when calculating
