The good news about investing in cryptocurrencies is that you can make a lot of money. You’re not guaranteed to make a lot of money, and there’s always a chance that you could lose a lot of money. People have done both. But if you buy the right coins and sell them at the right time, you could walk away with a handsome profit.
And that means you’ll attract the attention of the people from the government. Where there are profits, there are always taxes. Buying and selling a cryptocurrency is a taxable event.
If you buy and sell quickly—if you hold the coins for less than a year—you’ll be liable for short-term capital gains tax. Hold onto the coins for longer than a year… and you’ll pay a little less.
Either way, you’re paying the government.
Now, I’m not an accountant or a tax advisor. I have people who do that stuff for me and make sure that everything goes where it should. But it’s no surprise that crypto-entrepreneurs are already stepping in to make everything easier.
Cryptotrader.tax, for example, is a bit like TurboTax specifically for cryptocurrencies. Instead of trying to keep a record of all your trades and their values yourself, you’ll be able to download everything from your crypto exchange.
The software works with all the main exchanges, including Coinbase, Poloniex, Kraken, and Binance so unless you’re dealing digital coins in a dark alley, you’ll be able to import your trade records. The software will then prepare a report that you can use to file your own taxes or that you can send to your tax professional. It’s a valuable tool for anyone making lots of trades on different exchanges.
There may also be a way to trade cryptocurrencies while minimizing your tax exposure.
Writing in The Balance last year, financial planner Scott Spann discussed the tax benefits of a “Bitcoin IRA.”
Individual Retirement Accounts, or IRAs, have a bunch of different tax benefits. Money paid into them usually carries an annual tax deduction. Taxes on earnings can be deferred, and they can lower your adjusted gross income. In short, if you’re spending less than you’re making—and you should be—your tax advisor will probably tell you to put some of the extra in an IRA.
The people who manage the money in an IRA don’t usually include cryptocurrencies; they’re still too volatile for IRA investments. But self-directed IRAs are much more flexible. They do let you use alternative investment options, including digital coins.
A couple of IRAs that contain cryptocurrencies have already been established.
BitcoinIRA has been around since 2014 and allows self-trading.
iTrustCapital is newer and is supported by a management team with a long background in professional finance.
Self-directed IRAs tend to have higher fees than traditional IRAs so you’d need to compare the amount of tax you’re saving to the cost of trading within the IRA. And of course, before you do anything, you’ll need to talk to a professional tax advisor so that you can come up with a strategy that saves you money.
Either way, if you’re trading or investing in cryptocurrencies, you do need to know about taxes.