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How To Maximize Bitcoin Returns With Tax-Free Crypto Investing

Bitcoin taxes

Bitcoin and other cryptocurrencies are treated as property by the IRS, just like stocks or real estate. Every sale triggers a taxable event – with a few unique exceptions. If you hold your crypto in a Roth IRA, you can avoid several headaches that investors outside of a Roth can’t escape. Meanwhile, even those who aren’t eligible for a Roth can still reap certain benefits when it comes to capital gains taxes.


Short-Term Capital Gains Tax

Some people are set-it-and-forget-it investors, whereas others like to buy and sell assets in their accounts more frequently.

The difference, however, is that short-term capital gains tax is often higher than long-term capital gains tax. Long-term capital gains tax is capped at 20%, while short-term can be far higher. This means that depending on your tax bracket your short-term capital gains tax could all the way up to 37% for single filers earning more than $518,400 per year.

For short-term traders, both Roth and traditional cryptocurrency IRAs can offer benefits. While those with a Roth may likely escape cryptocurrency tax altogether, short-term trades made in a traditional IRA are still considered unrealized. If you’re a trader who expects to be in a lower tax bracket when you retire, you can put off paying the tax on your short-term gains until you withdraw from your IRA, paying regular income tax on each distribution.


Long-Term Capital Gains Tax

Long-term capital gains taxes generally affect investments held over a year. It can be as low as 0% for those earning less than $40,400 in the year (or $80,800 if filing as a couple). Long-term capital gains taxes, however, can be as high as 20% for yearly incomes over that mark. Regardless of regular income, if those holding crypto for the long-haul realize the gains many expect, this could mean a significant chunk of profits would be deducted.

Capital gains are where a Roth IRA shines. Money that goes into a Roth is deposited after taxes have already been paid on it, and provided certain rules are followed, any earnings made on that money afterward should be tax-free. Not owing taxes on capital gains could easily mean an extra 15 or 20% in your pocket for you to use as you see fit at retirement, as opposed to other investment strategies that don’t offer such protection.


Bookkeeping and Reporting

Keeping track of transactions and gains for crypto trades is no easy feat. While long-term holders won’t have as much to deal with, investors making short-term trades will have a laundry list of tasks to track down the transaction information needed to satisfy the IRS’ crypto reporting requirements. Since the IRS considers cryptocurrencies property, every sale, whether at a profit or a loss, triggers a taxable event that must be reported. A traditional stockbroker would provide a neat little form at the end of each tax year that would provide all the information the IRS needs – but crypto traders must collect and calculate all that information themselves.

This includes information like cost basis, fair market value, and realized gain or loss for every single trade. Some services have popped up to help ease the burden for crypto traders, but reporting remains a tricky task – while the federal government appears to be taking a piecemeal approach to regulation and haphazardly changing requirements as they try to keep up. If you trade crypto in a retirement account, like a traditional IRA, Roth IRA, crypto 401k, or Roth 401k, all of your trades are likely exempt from dealing with any of these reporting requirements. Plus, you won’t get the hassle and confusion that often comes along with it.


We Handle Tax Reporting For You

Like traditional banks and brokerage firms like Fidelity and Wells Fargo, all of your statements are supplied to you at the end of each year. If a taxable event occurs, our custodian will send you and the IRS the appropriate tax form. You don’t need to worry about tracking your capital gains taxes or losses for your self-trades because they sit within your retirement account.

Taxes are frustrating for most people, and confusing to even more, especially when it comes to cryptocurrency-related taxes. IRAs relieve the headache of capital gains tax and bookkeeping, unlike other types of accounts. And for Roth IRAs, your growth is likely tax-free. While investors are investing in Bitcoin, and other cryptocurrencies, some forget about cryptocurrency capital gains taxes. If you’re expecting big gains, then you should know that it only takes a few minutes to open an account with us, we can help you keep more of your cryptocurrency gains.



Recommended article: 2021 IRA And 401(K) Contribution Limits



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