The year is about to end, which means it is time to review your expenses and engage to efficiently plan your tax filing. While it is obvious that nobody wants to talk about taxes during the holiday season, but this exercise is a must to ensure big savings on tax returns in April. For serious cryptocurrency investors, running numbers is a mandatory chore that is the only way to determine the line of action to take before the year ends.
Gathering Income and Expenses
This should be the first step of your tax planning. Collect all the information about your income and expenses this year, including your expected income from the remaining year. Your capital gains and your earnings from crypto mining or skating will be added to the income pile.
Make a list of all your expenses that you wish to deduct from your tax return. This should include any property taxes, student loan interest, and mortgage interest. Keep in mind that the Tax Cuts and Jobs Act 2017 removed deduction for investment interest and expenses, so that cannot be included in this pile from now on.
The above information can be compiled by a tax preparer on their software to calculate an estimated tax amount. A smart tax preparer will use tax software hosting to collaborate with their client on a real-time basis. Married people have two options to file for taxes, separately or jointly. You can test both and opt for the option that gives you more savings.
Planning
Next step is to figure out strategies to decrease the amount you owe. There are plenty of available options depending upon the situation. Let us look at a few possible alternatives.
Reduce Capital Gains
The best strategy for cryptocurrency investors is to minimize their capital gains. This can be tricky since the current tax scenario treats cryptocurrency as “property”. Every exchange and every transaction becomes taxable. Thus, shifting your investment among cryptocurrencies, or making payments through cryptocurrency, will cause additional capital gains which must be avoided at all costs.
Losses to Lesser Gains
It is no secret that the cryptocurrency market has endured a serious 70% loss in value this year. This proves that many investors have losses in their pocket. As every crypto transaction adds a capital gain, selling coins in loss will trigger a capital loss. This can then be used to offset other capital gains and potential income.
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For stocks and other investments, traders are prohibited from re-purchasing an investment that was sold for a loss in 30 days. But because crypto is considered as property, it can be sold at a loss and then repurchased without any hiccups. Just be careful with quick transactions as IRS may raise concern over this.
Maximize Deductions
Your choice between itemized deduction and standard deduction is something you make every year. The predictable choice is of the higher amount. After the Tax Cuts and Jobs Act, the standard deduction amount has increased to $12,000 for individuals and $24,000 for jointly filing married couples. This hike has ensured that most people will opt for this instead of itemized deductions.
Useful Business Expenses
Itemized deductions did take a massive hit in the newly introduced Tax Cuts and Jobs Act of 2017, but business expenses of Schedule C are still valuable. Not every crypto investor will have a Schedule C business, but those who do can profit by putting the no-longer-valid itemized deductions under Schedule C business expenses.
Stay Ahead in Planning
If your crypto investments have yielded a significant profit, there might be a need for more advanced planning for taxes.
Charitable Remainder Assets (CRTs) are strong and effective tax planning strategy that can hold your invaluable cryptocurrency as an asset and transfer it into a trust. You do not get any capital gains when the asset is sold, you receive a charitable deduction, and the trust pays the annuity for life. This is a valued tool that reduces current year taxes on top value assets and transforms it into a lifetime income.
There are many more strategies that can be applied to reduce your taxes this year. Use Lacerte tax software hosting for filing your tax returns while staying up-to-date with the latest IRS guidelines.
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