The cryptocurrency space comprises of benefits and losses equally. Be it making 50% plus profits on your assets in a day or losing 25% of its value in hours, this space is filled with multiple profit-making opportunities and risks of loss. With all the bright sides and dull comes the latter one – taxes.
Let’s keep in mind that individuals are liable to pay ‘Capital Gains Tax’ on the profits of cryptocurrencies when they are sold for cash (fiat), exchanged for another crypto (C2C transactions), spent on goods and services (on merchants that accept crypto) and when given away to someone (who is not a spouse).
Doing cryptocurrency taxes is complicated (as if doing general taxes weren’t). But you can always learn as a crypto investor what are your options to reduce your crypto taxes and not give HMRC the chance to chase you.
1. Hodl it.
For the capital appreciation on digital assets investors are liable to pay Capital Gains Tax when they sell their assets for a profit. To reduce your taxes hodl your crypto until it goes to the moon. This is the best way to reduce your taxes while capitalizing on your crypto gains.
Until you sell it there are no taxes implied, which is why you might as well hodl your crypto and its profits until you really need to sell it off.
2. Lend it or Gift it.
Rather than selling your cryptocurrencies when you gain a significant profit, lend it. You can even lend it to your relatives or friends (while keeping in mind the legality of lending; upto). Or gift it off to your spouse (taxes not applicable on gifts received).
This is the easiest way to reduce your crypto taxes after hodling.
3. Tax loss harvesting
The volatility of the crypto market is vulnerable to losses with almost zero security. Tax loss harvesting helps investors to offset their capital gains with capital losses. This indicates that you can sell your diminished-in-value digital assets to “realize a loss” which decreases your taxes overall.
Basically, if you’ve had gains on one digital asset and loss on the other, your losses can help you pay less taxes on your gains.
4. Claim for negligible value
If the coin/token you trusted at the start of the year has dumped way below the value you purchased it or are almost worthless then, its loss can be crystalized. A ‘negligible value’ claim needs to be made to HMRC at the same time as reporting annual losses. Considering the digital asset is pooled (distributed amongst multiple investors) the negligible value claim will be held in respect to the entire pool and not on individual tokens.
Additionally, if you’ve lost your crypto keys and there is evidence on it being non-recoverable, then a negligible value claim can be made and, dependent on HMRC accepting the claim, losses can be crystallised.
5. Using tax free allowance
Tax-free allowances reduce the amount of tax you pay on the income you receive. This includes allowances that you can earn upto a certain amount prior to doing your taxes and tax relief which is the amount you claim to reduce your aggregated tax bill.
Most residents in the UK are allowed to receive an amount of income before having to pay their income taxes, known as the basic personal allowance. You can club this with other tax-free allowances such as marriage, personal savings, dividends and more to purchase your tax-free crypto assets.
6. Do your crypto taxes regularly
It is important to do your crypto taxes time-to-time. Either get consulting from certified CPA (specializing in cryptocurrency taxes) or use crypto tax softwares. There are plenty of options available on the internet to automate your manual tax reporting processes. This helps in identifying how much money you owe in taxes to the government and what you can do about it.
7. Avoid penalties
HMRC is after crypto traders who made a couple of bucks in the past booms and haven’t done their taxes yet. As per the rules of HMRC, crypto traders who fail to disclose their gains on digital assets will be charged with a 20% capital gains tax. In addition to this, any interest and penalties of up to 200% will be applicable on any tax due.
Not just this, those found to have evaded the tax could also face criminal charges and jail terms. The best way to pay low on your taxes is also to pay them on time.
The cryptocurrency space is growing, more people are coming in now than ever. This is the time when banks are adopting blockchains, mainstream VCs are funding cryptocurrency projects and tax departments are looking out for taxpayers.
Doing taxes are important and necessary just as paying bills are! Educate yourself with the regulations in your country and do your taxes accordingly.