According to the majority of the cryptocurrency investors, the tax system takes away a larger portion from their earnings which leaves them with very little to grow their investment portfolio.
To some extent, this is quite true and it is a common complaint that can be heard from many crypto investors. However, the main point here is that if investors understand the taxation rules properly, they will change their perspective on the tax system. In fact, they will be able to enjoy deductions on their taxes which are done legally and also prepare themselves for an audit.
The tax code has been written in more than 60,000 pages. Well, there is a reason so much has been covered about the tax code. If it only told you how you can pay your taxes, it would probably be written in under 50 pages.
The tax law on digital currencies has not been designed to increase your burden of paying taxes. If you understand the rules clearly, it can actually help you reduce your taxes.
The taxation part that is associated with crypto investing also consumes time. When you are accumulating wealth for yourself, it doesn’t involve how much you earn. How much you manage to keep after taking care of the expenses is what you actually use to build your wealth.
You cannot build your wealth if you don’t have a proper tax strategy in place. For this, you must know what the government wants from you. So why not take a look at some of the strategies that you can use to minimize your taxes. These ideas can help you build your investment portfolio and wealth, while paying your taxes legally.
Calculate your portfolio
If you can calculate your portfolio accurately, your assets will be protected from interest. Basically, you will not be charged by the IRS. Working with a chartered accountant who has experience with cryptocurrency taxes can help you analyse and calculate your portfolio accurately.
Reduce capital gains
Extra capital gains can hinder your ability to build wealth. Every time you invest on cryptocurrencies, you must know that it is a taxable event. This is the reason you should be very careful when making investments. You must choose your trades carefully and avoid making unnecessary transactions.
Understand your holding period
Once you have analysed your portfolio, you must also analyse the holding period for your assets. The capital gain rates that apply on a short term basis is far less favourable than that which applies over the long term. So if you hold your digital currency for over a year, you will have to pay taxes using the long term gain rates.
We have seen that investors who rush to liquidate their holdings end up paying much more than they should have if they waited a little longer.
Donating or giving away cryptocurrencies does not attract taxes. In fact, gifting digital currencies to family members and friends is a great strategy that many investors use to avoid paying taxes.