After many countries around the world such as the United States, the United Kingdom, France, and Portugal published their own cryptocurrency tax guidelines this year, it is only reasonable they will expect to see an increase in crypto tax filing. They may even follow suit with the U.S. Internal Revenue Service and begin their own crypto tax compliance campaign.
As the price of Bitcoin (BTC) jumped this year, so too did the tax liability for every profitable sale, trade or exchange for Bitcoin traders. The recent drop in Bitcoin price presents traders with a great opportunity to reduce tax liabilities accumulated since January 2019.
Many people don’t know it, but cryptocurrency tax liability can be significantly reduced by a recently developed practice called crypto tax planning.
Just like you can plan your taxes in stocks trading, countries that consider cryptocurrency to be an asset subject to capital gain tax also enable crypto traders to report capital losses, which means two things:
- If you have made profits from crypto trading since the beginning of this year, and have some losses now that the price has fallen, you can offset this loss and reduce your tax liability.
- Some countries, like the U.S., enable you to choose which particular Bitcoin token to sell. Therefore, you can choose to sell the same Bitcoin you purchased when the price was high now at a lower price. This can assist you in optimizing your tax liability. This tax planning method calls for the use of specific identification, a common way to calculate and plan taxes in many countries.
Furthermore, you may benefit from tax planning based on the specific identification method even if you did not accumulate crypto activity profits this year and instead incurred capital losses. You can offset losses against any other capital gain you made this year or keep them to offset in the next year that you gain profits. A capital loss will occur as long as the price you paid when you purchased the Bitcoin is higher than the amount you get when selling the same Bitcoin.
As the tax season of many countries begins in two months, there is one month left to plan your crypto tax liability for this current year. It is essential to remember that tax rules vary by country. Therefore, it is advisable to consult a local crypto tax professional. For maximum accuracy on your tax planning, you can use a crypto tax platform that will check all of your crypto addresses and recommend which one to use.