Tax Tips for Cryptocurrency – Franklin County Free Press

As cryptocurrency gains mainstream traction, 2024 marked another milestone for digital assets like Bitcoin, which reached record highs. While such achievements are thrilling for investors, they also come with a financial catch: taxes. Understanding your options for minimizing potential tax liabilities is critical to avoid a tax surprise.  And we all know there’s no such thing as a good tax surprise.

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But don’t panic yet!  To trigger taxes, you must either sell your crypto or use it to purchase things.

Here are key strategies to consider when you are ready to sell or use your crypto investments.

1. Step-Up Tax Basis with Tax-Gain Harvesting

If your income is expected to increase next year or your crypto assets continue to appreciate, consider tax-gain harvesting. This involves selling your crypto to realize gains and repurchasing it at the current market value. This strategy increases your tax basis, reducing future taxable gains.

Example: If you bought Bitcoin for $20,000 and it’s now worth $80,000, selling and repurchasing it sets your new basis at $80,000. Future gains will be calculated from this higher basis, potentially saving significant taxes.

Note: Gains on crypto held less than a year are taxed at higher ordinary income rates. For long-term holdings, the tax rate is typically lower.

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2. Harvest Your Losses

If some of your crypto investments have declined in value, consider selling those assets to realize capital losses. These losses can offset your gains and reduce taxable income by up to $3,000 annually, with any excess carried forward to future years.

Key Advantage: Unlike traditional securities, crypto is not subject to wash-sale rules, meaning you can sell and immediately repurchase the same crypto without waiting 30 days.

3. Donate Crypto to Charity

Donating appreciated cryptocurrency to a qualified charity allows you to avoid capital gains taxes while claiming a charitable deduction equal to the asset’s fair market value provided you itemize deductions. Ensure you’ve held the crypto for more than one year to maximize your deduction.

Example: You donate the Bitcoin you purchased for $20,000, which is now worth $85,000, to a charity. You can then avoid long-term capital gains taxes on the $65,000 gain and claim an $85,000 charitable contribution deduction provided the asset was held more than a year.

4. Gift Crypto to Loved Ones

You can gift up to $18,000 per recipient ($36,000 for married couples) in 2024 without triggering tax obligations. Recipients inherit your cost basis, so this strategy is ideal for passing on assets without immediate tax consequences.

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5. Establish a Self-Directed IRA for Crypto

A self-directed IRA (SDIRA) allows you to invest in crypto within a tax-advantaged account. While you can’t transfer existing crypto holdings directly, selling and funding your SDIRA with cash enables you to purchase crypto within the account.

Tip: SDIRAs can be traditional (tax-deductible contributions) or Roth (tax-free withdrawals). Consult with a custodian experienced in crypto investments.

6. Consider a Self-Directed Solo 401(k)

For self-employed individuals, a solo 401(k) offers higher contribution limits than IRAs and the ability tso invest in crypto. For 2024, the contribution limit is $69,000 ($76,500 if age 50 or older), divided between employee and employer contributions.

Final Thoughts

Proactively managing your cryptocurrency investments can significantly impact your tax liability. There are various strategies to optimize your tax outcomes. Consult with a tax professional to ensure these approaches align with your financial goals and compliance obligations.

To discuss cryptocurrency to reduce your tax impact, contact Saunders Tax & Accounting via www.SaundersTax.com or call us at 301-714-2071. Open Monday – Thursday 9 am to 5 pm. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year” and Hagerstown Hotlist 2024, we have been providing a Less Taxing Life and More Prosperous Solutions for 40 years!