Glassnode has revealed some effective strategies that could enable crypto investors to minimize their tax liability, including relocation, self-directed Individual Retirement Accounts (IRAs), and tax loss harvesting, as the Biden administration gears up to address the “loophole” in wash sale rules to prevent revenue loss.
Reducing crypto tax liabilities
The cryptocurrency landscape is evolving rapidly, not only in terms of investment opportunities but also concerning tax regulations.
Accointing by Glassnode, a portfolio tracking, and tax compliance provider, has highlighted various legal ways for crypto investors to reduce their tax liability.
Recognizing the potential revenue loss resulting from the lack of a wash sale rule in the crypto market, lawmakers are exploring ways to address this “loophole.” The Biden administration’s 2024 Budget includes a provision to extend the wash sale rule to include cryptocurrencies.
Against that backdrop, Accointing by Glassnode, a platform dedicated to helping crypto market participants track and file their correct taxes, has highlighted some key measures investors could take to avoid incurring the wrath of the taxman.
Per a Twitter thread by the team, moving to a taxpayer-friendly state can have a significant impact on an investor’s tax liability. While the long-term capital gains tax rate on bitcoin (BTC) in Florida stands at 23.8%, California residents could face a staggering 37.1% rate.
States like Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming offer attractive options with no income tax, allowing investors to preserve their wealth.
Puerto Rico, a Caribbean island, has become a compelling destination for crypto investors seeking unique tax incentives. The territory offers new residents a range of benefits, including a 0% tax rate on capital gains and a 4% corporate tax rate for certain businesses.
By leveraging these incentives, investors can optimize their tax situation and potentially enjoy significant savings.
What’s more, Glassnode has stated that another effective strategy for crypto investors is to purchase cryptocurrencies through self-directed Individual Retirement Accounts (IRAs).
These IRAs offer the advantage of potentially avoiding capital gains taxes on crypto investments while enabling tax-deferred or tax-free growth.
By leveraging this approach, investors can strategically manage their tax liability and maximize their investment returns.
Crypto investors can also minimize tax liability by strategically selling their coins during years of lower income. Capital gains tax rates are determined based on an investor’s income bracket in a given year.
If the taxable income is below a certain threshold, such as $44,625 (or $89,250 for married filing jointly), the capital gains included in that amount can be taxed at 0%. By timing the sale of assets during low-income years, investors can benefit from a reduced tax rate on their gains.
That’s not all, the team has hinted that tax loss harvesting is also an incredibly effective strategy for crypto investors aiming to reduce their tax liability.
This strategy involves selling underperforming assets at the end of the year to offset realized gains from other investments throughout the year.
By utilizing this approach, investors can mitigate their tax burden while optimizing their portfolio’s performance. Notably, crypto investors have an advantage as there is no wash sale rule preventing them from buying back the same asset within 30 days, enabling tax loss harvesting at any time without legal consequences.