With crypto markets down around 50% in the past month and over 70% from their highs in late 2021, many crypto investors are searching for answers after their profits from the last few years have evaporated into the ether.
Following the incredible bull market, crypto investors enjoyed over 2020 and 2021; you may now find yourself nursing losses rather than gains ahead of the upcoming tax season. Crypto tax platform Koinly shares 5 little-known tax hacks you need to know after the crypto crash.
1. Pay less tax by holding
Want to avoid paying tax on crypto? While you can’t dodge your tax obligations entirely – there are quite a few ways you can optimize your tax position. But here’s the catch, you’ll need to do it before the end of the financial year to pay less tax overall.
You’ve probably heard it before, but the easiest way to pay less crypto tax is to simply HODL. In many jurisdictions, holding your crypto investment (or other assets like shares) for longer than one year qualifies any gains as long-term capital gains. Depending on where you live, any crypto sold 12 months after purchasing is:
- Tax-free in Germany
- Discounts capital gains tax by 50% in Australia
- Taxed at lower tax rates of 0%, 15% or 20% in the US, depending on individual income over the year
2. Tax-free gains
Tax-free thresholds on your capital gains can help you automatically owe less tax. In the UK, individuals have a CGT allowance of up to £12,300 before paying tax. Germany has a relatively low threshold of €600, while Australians have no such allowance. If you’re in the US, the IRS states any individual’s income under $40,400 pays no Capital Gains Tax.
Knowing the tax-free maximum for capital assets in your country is a great way to help determine your crypto disposal strategy, so make sure you understand how crypto is taxed wherever you are.
- Offset your gains with losses via tax-loss harvesting
Tax-loss harvesting allows you to claim capital losses by recognising and selling your assets at a capital loss. These capital losses may be carried forward against future capital gains and even over multiple financial years.
For example, if you made $10,000 after buying and selling Bitcoin but lost $10,000 after selling your Ether, you won’t owe any tax since you broke even. This also works if you’ve had a good year in share trading, you can offset those gains with crypto losses.
However, if you have an unrealized loss and do not crystallize it by selling before the end of the current financial year, you won’t be able to take advantage of this capital loss until next year’s tax return.
Be careful of wash sales rules which prohibit selling assets at a loss to create an artificial loss this financial year, then immediately repurchasing them. To avoid this, you can swap one crypto for another cryptocurrency or sell and buy a different cryptocurrency (sell ETH for USDC and then buy BTC).
- Track your crypto to spot opportunities
Tax offices, including the IRS, HMRC and ATO, demand investors keep detailed records over at least 3-5 years. With shares, this may be easy, but in crypto, with dozens of different wallets, hundreds of blockchains, multiple exchanges, DeFi protocols and NFT platforms, it can be a headache come tax time.
Using crypto tax software like Koinly not only helps you file your crypto taxes in half the time, but it can also help you track your unrealised gains and losses for each asset throughout the financial year.
5. Pick the best cost basis method
When calculating your crypto taxes – the cost basis method you use matters. It dictates which of your assets you’ve sold and how much your subsequent capital gain or loss is.
First in, first-out (FIFO) tends to produce the highest gains but may lower your tax bill if a long-term CGT discount applies in your country. Alternatively, last in, last out (LIFO) usually produces the lowest gains but may increase the tax rate you pay due to paying short-term CGT.
Koinly supports both of the above cost basis methods (and more) – so check out your settings to see which accounting method could produce the lowest tax liability. Talking to an accountant about your crypto taxes can be helpful for you to navigate any confusion and ensure you’re doing the right thing while still optimizing your taxes.
About Koinly: Koinly calculates your crypto taxes for you, catering to investors and traders at all levels. Whether it’s Crypto, DeFi or NFTs, the platform helps you save valuable time by reconciling your holdings to generate a compliant tax report in under 20 minutes. Sign up today and see how much you owe!