Smart Tax Strategy All Crypto Investors Must Know in 2022

You’re probably paying too much in taxes. And before you go crazy protesting that we need more tax reductions or tax strategy, let me explain. You know that feeling when you’ve worked so hard for something, and you just cherish it? This could be learning a skill, saving up to buy a car, or graduating from college. Once you have these things, you will do just about anything to keep them.

The last thing you want is to crash a car that you have just saved up for. I think the same goes for taxes. You’ve worked so hard to make money, of course, but saying I want to pay fewer taxes is almost hate speech in some circles. That might be a little dramatic, but there’s a whole lot of protesting. Taxes are good. We need more taxes. We live in a society. 

Yes, I agree that taxes have a purpose, which blew my mind. When I changed how I thought about taxes, what was the government asking us to do? 

The tax code has one line that says all income is taxable unless we say it isn’t. And then they have another line that says no expenses are deductible unless we say they are. Then we have all sorts of charts and graphs telling us how much we should pay. But that’s maybe 30 pages. The existing tax law is over 6,000. The other 5970 pages are just a series of incentives and exceptions to get you to do what the government of any country wants you to do. 

When you pay taxes, you have a partner. But, unfortunately, that partner is the government. So what does this partner want you to do? And how will they reward you for that behavior? 

I will tell you something that might shock you a little bit in today’s tax law. You’re probably doing it wrong. You can choose to pay high taxes, and the government is wonderful with that. Or you can partner with them, do what they want you to do, pay low taxes, and they’re magnificent with that, too. I would never demonize someone for going on unemployment, nor would I demonize them for trying to save a little bit on their taxes.

Sure, an argument can be made that billionaires need more taxes, but that’s not what today’s article is about. I don’t care about the few billionaires. I care about the average person who is paying too much in tax. So, today I’m going to cover methods that can land you with as little as 0% tax on six and seven-figure profits. And again, this is by working with the government and within their rules. 

There are two types of capital gains tax.

So normally, when you sell your crypto or stock for a profit, you’ll pay what’s known as a capital gains tax. There are two major types: short-term capital gains and long-term capital gains tax. 

If you held it for under a year, you’d pay a short-term capital gains tax. Short-term gains are based on your income, which can be as high as 37%. If you hold for more than one year, you will pay for the long term, which is a lower percentage. 

The Magic of Write-offs

And I have some great news right off the bat for those in lower-income brackets. You don’t have to pay any long-term capital gains tax in some situations. For example, if you held an asset for more than a year, your long-term capital gains would be zero as long as you sold it for less than $41,675 in taxable profit in 2022. This is before write-offs because we have capital losses as well. Any time you invest in something and sell it for a loss, this loss can be written off against your capital gains. 

So here’s an example: Your friend Lokendra has been a bit wild and reckless when it comes to investing. He threw $40,000 into two separate DAOs, promising a reasonable 9.99% Trillion APY. A week later, he sells both of them. One dropped 50%, resulting in a $20,000 capital loss, and the other increased 25%, resulting in a $10,000 capital gain. If he keeps good records, he can benefit from this loss. Lokendra can write off the $10,000 in gains with the $20,000 in losses at tax time.

He’ll pay $0 capital gains tax on those $10,000 of gains. And now, even better, he has the remaining $10,000 that he can use to write off either against future capital gains or $3,000 per year against ordinary income. This is a must-use Tax Strategy if you have any capital losses. Of course, consult with your accountant first, though, because this is for entertainment purposes only.

Tax Strategy # 1

But losses aren’t exciting. So we want to know how to save against massive gains. One kind of revolutionary method of tax savings is using a CRT. This is one of the few ways to save tax on capital gains after you’ve already made the gains but before you sell. 

How this works is you have a lawyer set up a Charitable Remainder Trust. You send your assets to that trust, which is actually tax deductible because it’s considered a charitable entity. Then, every year you get paid an annuity payment from that trust. This happens until you die. Once you die, the remaining funds will go to a charity you specify when you set up the trust. But what about sending an inheritance to your kids? It’s one of the biggest points of making money.

Many people will do that for their first few years’ worths of annuity payments; they will buy a life insurance policy with their children as a beneficiary. So the tax bill is reduced by doing this; you get payments for life, your kids get an inheritance once you die, and you benefit from the charity at the end. So it’s a pretty neat deal all around.

Tax Strategy # 2

Next, we have something a bit more controversial. It’s called a “deferred sales trust, or “DST.” The idea is to create a deferred sales trust, and Let’s say you bought $100,000 worth of Bitcoin, now worth $1 million. First off, Congratulations. You would sell the trust your Bitcoin for $100,000 because this technically means you have no capital gains. 

Then the trust can do various things with those assets, like sell them, reinvest in them, or pay you installments. However, many people seem skeptical of this approach because it lands in a legal gray area and can be quite expensive. So it seems like this wouldn’t be the very best option for most people. But I wanted to just highlight everything in this informative article. 

Tax Strategy # 3

Now let’s talk about something a bit easier to do and great, either if you expect to see a ton of capital gains in the future or if you’re a frequent trader. This is amazing. This is called a self-directed IRA.

I have explained IRA in detail over here, Do check this out: Bitcoin IRA

So a self-directed IRA is a retirement account basically in USA. Except being limited to specific investments like stocks or mutual funds, you’re able to invest in all kinds of assets. 

So, with a self-directed IRA, you can place crypto directly into a retirement account. Let’s do an example using a Roth IRA. We’re investing $6,000 in Bitcoin, the annual contribution limit, into a self-directed Roth. You’ll pay regular tax on the money going into the account, just as you would with any normal investment. But after that, you pay zero tax, even if you trade within that account every day from one crypto to another until retirement. So you deposit $6,000. 

Let’s say you traded your way up to $100,000 by the time you were 59 and a half years old. At that time, you could take your profit of $94,000 and pay no tax. If you’ve done this in a regular account, you’d be hit with a tax on every single profitable trade, lowering your amount with taxes every single time. 

People might now stay away from this because you can’t begin to pull out profits without a penalty until age 59 and a half. But there’s a loophole for this. I’m telling you, there is a loophole for literally everything. 

This is called SEPP. This will allow you to remove funds from your account without a penalty, as long as you spread them over five years’ worth of payments. Doing this allows you to have an early retirement. If you hit it big, you don’t have to wait till 59 and a half. Of course, please talk to an accountant if you want to use this kind of more loophole-type Tax Strategy.

Tax Strategy # 4

Now, remember, there’s not much you can do. After you sell Well, that was a bit of a fib. You can do some things with your profits, but it’s a bit more of an active approach. 

This is using your profits to invest in opportunity zone real estate. So remember, the government is our partner, and they’re willing to incentivize us to do what they want us to do. The government wants more investment in areas that they deem economically distressed, and you can save a ton of tax by doing what they want you to do. 

Let’s say you were sitting on $1 million in long-term capital gains on Bitcoin. You’d have to pay 23.8% tax if you were to sell it outright. So $238,000 in tax. But if you were to invest the profits into a qualified opportunity fund, or QOF, within 180 days of your Bitcoin sale, you could save a lot on tax, but this depends on how long you’re willing to keep your money within the fund.

The first is tax deferral. Investing your profits in a QOF means the taxes are deferred until either December 31, 2026, or when you sell the QOF position, whichever comes earlier. If you keep your money in the fund for at least five years, then 10% of your profit will be tax-free, meaning you’ll now only be taxed on $900,000 in profit instead of $1 million in profit. At seven years, 15% of your profit is tax-free. 

But remember, you still have to pay tax on the profits from your new opportunity zone investment because that is ideally appreciated as well. 

However, at ten years, you can completely avoid the capital gains tax on the appreciation of your opportunity zone investment on top of your 15% savings on the initial profit. And the idea is by the time ten years goes by, you’ve been able to earn far more money off of that opportunity zone investment. But, again, this is a bit of an advanced Tax Strategy, so please talk to a tax professional.

Tax Strategy # 5

Now let’s finish off with the most powerful and probably impractical way to avoid the oversight of Uncle Ben simply giving up your US citizenship. To do this, you’ll need to have citizenship from another country, and luckily for you, some countries will just sell you one. 

For example, Lokendra and Divanshu will sell you a passport for $100,000, and you’ll just need to be a resident for five days. The overall process takes about three months. 

This will allow you to travel to 150 countries visa-free, which isn’t bad at all. For ultimate travel freedom, though, you’ll probably want to go with Malta. Malta offers 182 visa-free countries, but you’ll need a fork up around €750,000 and have lived there for a year. However, even this doesn’t mean you avoid current taxes. 

If you meet any of these criteria, you’ll have to pay taxes on assets, even if you don’t sell them before leaving your citizenship. This is called a “Mark to Market Tax.” Now, there are certain exclusions and exceptions to this, but the point is that you’re not going to avoid taxes completely on your exit. 

It is not recommended to do this!

Next, I want to warn you because many people don’t know this and it could cost you a lot of money. If you trade one crypto into another, say Bitcoin into Doge, this is treated like selling Bitcoin and then using the profits from that sale to buy Doge in the eyes of the IRS. 

So if you have a lot of profits in one crypto, just make sure to consider it before you sell it or swap it into another crypto because that will be a taxable event. And after you sell, the cat is basically out of the bag. So it’s much harder to save tax at that point. 

A Conclusion on Tax Strategy 

So, as you can see, navigating taxes is often a matter of understanding what the government wants and its rules. Once you know this, there are all kinds of creative angles that you can take to pay a more reasonable amount of tax. If I missed any Tax Strategy, make sure to comment on them down below the article post. I hope you have a good day! A sweet wave by Pushkar from cryptocurrencysimple.com.