The recent years have made many headlines on the wide popularity of cryptocurrency by creating several millionaires and billionaires. Cryptocurrency can be defined as a digital currency that uses cryptography for security, thus avoiding the chances to double-spend or counterfeit. Cryptocurrencies have a decentralized nature which makes them detached from the government authorities or financial institutions around the world.
At present, the IRS is trying to tax the capital gains one makes through the profits, which is the buying price reduced from the selling price or the amount you earned as profits through your trade. Your taxation will depend on the state you are in.
Important taxable situations
- Selling your cryptocurrency
People who hold cryptocurrencies for more than a year are considered as long-term capital gains. If the holding period is less than a year, it will be a short-term capital gain and the tax rate will be higher.
- Spending your cryptocurrency
When you purchase anything using cryptocurrency, this is considered as selling your cryptocurrency and will activate capital gains.
- Trading cryptocurrencies
If you trade cryptocurrencies and exchange one with another, it can also be considered a taxable event unless you do it properly.
Strategies to save taxes
If the owner of your cryptocurrency is a Private Contract Common Law Complex Trust with a contract that permits the trustee to consider the cryptocurrency like stock or security, you can escape from paying capital gains tax.
These trusts can assemble an entity of the trust and continue reinvesting that entity to develop the trust for the advantage of the beneficiaries. If the transactions are categorized as securities, the trustee can assign all the capital gains to the entity and avoid the chances of paying capital gains tax.
The important thing to remember while using this strategy is that the cryptocurrency has to be transferred to the trustee’s name without triggering any taxable events. After the trust owns the cryptocurrency, you can open new accounts in the trust’s name on the trading platforms like Binance, Kraken, Coinbase, etc.
The document of trust has to be in a particular way that allows you to have the amount of control and should match with the properly executed above plan to make sure that you are completely following the 1041 form instead of 1040 that is used by most of the CPAs.
A good financial consultant who is an expert in cryptocurrency and 1041 complex trust may be able to help you with this strategy. The IRS is actively tracking all the cryptocurrencies and sending letters to people who are ignoring the payment of taxes. They are using the KYC agreements of exchanges like Kraken, Coinbase, Binance, etc. TokenTax, Koinly, Accounting, etc are some other tools that track all your crypto activities.
The Taxation differs from country to country and state to state. But many experts believe that in the coming years, many countries will start accepting cryptocurrencies and blockchain transactions as the world is demanding more secure and fast transactions.