Crypto Tax-Avoidance Strategies: Blockchain Executive and Accountant

  • Steve Beauregard used his TNABC speech to share tips on how to cut down crypto taxes.
  • Shehan Chandrasekera, a crypto accountant, also detailed his advice.
  • Borrowing against your crypto, lifetime gifting, and charity donations all reduce taxes.

This year’s North American Bitcoin Conference kicked into gear last week but with so much more than bitcoin on the roster. Many of the talks revolved around crypto startups, regulation, and even how to keep more of your digital assets.

Steve Beauregard, the CEO of Regard Ventures, a consulting firm for crypto startups, focused his talk on how to build generational wealth and avoid taxes on crypto.

He started with a couple of fun facts. First, he said 47% of millennial millionaires in June CNBC survey of 750 people said they had 25% of their wealth tied up in crypto. Second, a staggering 83% of those young millionaires said they had some type of crypto in their portfolios.

Right now, crypto holders are reckoning with a market drawdown that has pulled bitcoin 50% from its record high. But they must also figure out and file their taxes on gains from a wild trading year; the IRS started processing 2021 returns on Monday.

And while Beauregard noted he was not a financial advisor, he’s a serial crypto entrepreneur who’s had access to wealth advisors and tax accountants, and he wanted to pass his knowledge on. Shehan Chandrasekera, a certified public accountant and the head of tax strategy at the crypto-tax software company CoinTracker, also shared his tips.

Tax-saving options to consider for crypto

For starters, Beauregard suggested considering a tax-friendly jurisdiction. Depending on which state you reside in,


capital-gains

taxes can range from 2.9% to 13.3%, while some states have zero income tax.

But if a big move isn’t in your near future, consider becoming good at organizing your crypto portfolio, he added. Keeping a tab on which digital assets were purchased and at what price point allows an investor to manage their crypto as though they were managing inventory.

Specifically, Beauregard referred to the LIFO method, which means “last in and first out”.

“Think of it as a stack. So when you buy coins, and they stack up, if you need to sell some, you pop it off the top,” Beauregard said. “So the highest cost basis is what you would be selling versus the ones on the bottom that you probably bought for a couple hundred dollars.”

Selling off the last coins you purchased usually means they’ll have the least gains. This can be a tricky method because for many investors, there might not be a way of dividing your coins, especially if you’re dollar-cost averaging or buying fractions.

Chandrasekera of CoinTracker said in the real world, nobody was keeping all these records because it was virtually impossible to separate crypto in that manner.

But he added that according to the IRS, the rule was that if you could specifically identify the units, you could pick and choose which unit to sell.

Software like CoinTracker can help investors keep track of this data by connecting to the user’s Coinbase account. The information can then be filtered out when it’s time to file taxes. Unfortunately, this is not available on every exchange.

But Chandrasekera said that for 99% of taxpayers, the most beneficial method would be HIFO, which stands for “highest in, first out.” Simply put, whichever coin has the highest cost basis should be the first sold. This naturally reduces your capital gains, he said.

But if you’re looking to completely squash any taxes paid on crypto, Beauregard said you should borrow against your crypto. This method gives you access to the amount of money you need without triggering a taxable event. It also keeps you in the game if you believe your position will continue to grow.

That’s something Beauregard said he wished he had done in 2017 when he sold some of his crypto to buy an expensive house. He not only paid taxed on it but also missed out on growth.

Beauregard recommended checking out lending platforms for crypto such as Salt Lending, a firm he’s invested in.

But Chandrasekera said this approach was not without risk. If a crypto’s value dropped substantially, you could get margin-called. And if you can not cover the collateral amount, you’ll get liquidated, which will also trigger a taxable event. But there are still enough benefits to consider this option.

“It’s very easy to get a crypto loan versus applying for a mortgage these days because some people do not have enough income history or enough credit,” Chandrasekera said. “So here, you just put your crypto as collateral, you can get like a $ 200,000, $ 300,000 loan within a matter of seconds or maybe minutes.”

One way of mitigating the risk is to limit the loan amount to a small percentage of your position, Chandrasekera said. This way, regardless of how much the market drops, you’ll have a good amount of leeway.

When it comes to passing crypto wealth down to the next generation, Beauregard said it could get technical and there were numerous options, including a trust. That’s when it’s time to talk to your accountant about the best ways to do it, he added.

One simple option Beauregard recommended considering was lifetime gifting, which allows you to give up to $ 15,000 of cryptocurrency to an unlimited number of people annually. Those receiving it as a gift will not pay taxes when they get it.

Chandrasekera took this a step further and said this was an opportunity to give coins to someone in a lower tax bracket, such as a child.

Finally, if you plan on donating to a charity, try to give it in the form of crypto. This has two benefits: You do not pay capital gains, and you get a write-off on your tax return for the entire amount.

Beauregard said in this strategy, you’d want to donate your lowest-cost-base crypto.

Source

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