How to Avoid Taxation with Bitcoin

Despite existing for more than a decade, Bitcoin has confusion around its taxation. Satoshi Nakamoto conceived Bitcoin as an exchange medium that people could use for daily transactions. However, this virtual currency has gained a lot of traction as an investment. Traders and speculators also want to use it to make quick money off its volatility. Also, different jurisdictions treat Bitcoin differently. For instance, the IRS treats Bitcoin as property and treats it as such.

But when investing in Bitcoin, many people don’t think they should pay taxes. However, Bitcoin earned early investors a lot of wealth. But things changed after some time due to price volatility and fears of government interference. Therefore, many investors and traders want to avoid paying taxes when purchasing and selling Bitcoin. Here’s how you can avoid taxes on Bitcoin depending on your unique circumstances.

Sell Bitcoin during a Low-Income Year

The income determines the tax rates for most people, whether they have long-term or short-term capital gains. If you have low taxable income, your tax rate will also be lower. Therefore, you can save funds on taxes if you sell Bitcoin if you know they will have gains in a year when you have a low tax rate.

Perhaps, the best approach is to use Quantum Code to know the right time to sell your tokens when you have a low tax rate. Once you register with such a platform, you can get adequate information to guide you in your decision to sell or buy Bitcoins.

Note that selling Bitcoin may lead to a higher rate for your income tax. However, this may not push your entire income to a higher tax bracket.

Buy Bitcoin in an IRA

You can invest in Bitcoin in a tax-advantaged manner. That means purchasing Bitcoin in a self-directed IRA. In most cases, IRAs allow people to venture into traditional investments like mutual funds, exchange-traded funds, and stocks. A self-directed IRA is a unique IRA that enables you to invest in assets like precious metals, Bitcoin, or real estate.

However, you must identify a self-directed IRA where you can invest in Bitcoin. Also, understand how to purchase Bitcoin in a self-directed IRA before proceeding. After that, set up an account. The tax benefits you will enjoy will depend on the IRA type and tax situation.

Nevertheless, traditional IRAs can facilitate tax-deductible contributions, though you will pay income taxes for retirement withdrawals.

Declare Your Bitcoins as Income

Maybe you’ve mined your Bitcoins or received them in exchange for services and goods. In that case, taxation should work differently. Ideally, the taxman should treat Bitcoin as income upon reception. That means you should report and record a fair market price for the cryptocurrency and account for it as income on tax returns.

The government should tax the income ordinarily according to your income rates. But these tax rates could be higher than those for the capital gains. A tax term basis defines the initial value of the currency when you receive it.

When disposing of your Bitcoins, you use it as the basis for calculating capital gains and then pay any applicable taxes. And this should also apply when mining Bitcoin. However, the government considers Bitcoin mining a self-employment activity. Thus, you incur all self-employment taxes and ordinary income taxes.

If the above ways to avoid taxation with Bitcoin don’t apply to you, consider holding onto your tokens for the long-term or until death. Alternatively, use losses to offset your crypto gains. Also, you can donate your Bitcoins to charity or gift them to your family.

(Press Release)