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In 2018, the average American paid $15,300 in income taxes.

Now with cryptocurrency and Bitcoin, so many people are having to rethink their tax planning strategy to try and minimize their tax payment even more. 

But what are the best tax planning strategies for Bitcoin? Keep reading to find out!

Understand It’s a Capital Asset

The IRS has already said that cryptocurrency, especially Bitcoin, is a capital asset, just like property would be. The short-term capital gains will have different rates of taxation based on what income bracket you’re in. 

However, the long-term capital gain is normally between 15 and 20%, but it will depend on your income level. 

If you owned Bitcoin for less than one year, the income that you made from it will be classified as a short-term capital gain. But if you’ve had it for longer, then you will have a much lower tax rate. 

Even if you exchange Bitcoin for another cryptocurrency and make money off of that, you’ll be taxed on that as well. 

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Manage Your Tax Bracket

Another thing you can do is to manage what tax bracket you fall into. 

You should identify your Bitcoin that are high-basis units. You should sell them in order to get an advantage of better tax rates on assets that you’ve had for over one year. 

You could sell just the right amount of Bitcoin to make sure you don’t get hit with capital gain taxes or get pushed into a higher bracket.

For example, if you are filing as a single person, you could sell your Bitcoin to get enough capital gains that you don’t exceed your current income. However, this strategy will take years of planning, and you may want to consult with your CPA.

Capitalize on Your Losses

Even though the market has been good lately, you still may have a few Bitcoins that you paid more for than what they’re currently valued at. 

In December, you should analyze these and harvest some of your tax losses. These losses can be used to offset how much taxes you’ll have to pay on any other capital gains that happened that year. 

However, keep in mind that Wash sales aren’t applicable to Bitcoin because Bitcoin is treated as property. This means that after you sell it for a loss, you can immediately buy the coin back at a lower price to maintain your position.

Put it In Your IRA

Another way to eliminate the tax that you’ll have to pay is to put your Bitcoin into your IRA. You could also add it into your 401(k) or some other type of retirement plan. 

If you do buy Bitcoin and put it in your traditional IRA, you’ll be able to defer the tax on the gains until you start taking out distributions. However, if you buy the Bitcoin through your ROTH, you won’t have to pay any tax on your capital gains. 

If you want to buy Bitcoin in your retirement account, you’ll then have to put your account out of the United States and into an IRA LLC. That IRA will then be able to open an offshore bank account where you can make your investments. 

Don’t worry, even though it’ll be offshore, you’ll still be in control of all of your investments, and you’ll still be able to make all the decisions when it comes down to it. 

However, because you’re the manager, you still have to follow the rules of the IRS. That means that you won’t be able to borrow any money from that account, and you can’t benefit from the investments. You’ll have to treat that IRA like a professional investor would. 

Gift or Donate Bitcoin

You could also always gift some Bitcoin to one of your relatives or older friends. You would do this in hopes of getting a Sec. 1014 step-up in case they die.

But you’ll have to give it to them as a gift and have them be alive for one year since you gave it to them. To not use up all of your lifetime gift exemption at once, you could always send them an annual gift as well. 

If you don’t have any older friends or relatives, you could also donate your Bitcoin to a good cause! This way you can write it off as an itemized deduction for your cash donation. You can write up to 100% of your adjusted gross income. 

But if you’re donating something that isn’t cash, you can only write up to 30% of that adjusted gross income. 

So if you donated Bitcoin that was worth $100,000, you could claim $30,000 on your tax deduction as a charitable return. However, you’ll need at least $100,000 of adjustable gross income to do that. 

Keep in mind that if you’re donating more than $5,000, you’ll have to get a qualified appraisal from the IRS to approve the deduction.

Learn More About Coming Up With a Bitcoin Tax Planning Strategy!

These are only a few things to keep in mind when coming up with a tax planning strategy for your Bitcoin, but there are many more strategies you can try!

We know that filing your taxes each year can be stressful and overwhelming, but we’re here to help you out. 

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