The secret to legally reduce taxes on Bitcoin profits, maybe even to zero

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The price of Bitcoin has surged exponentially within the last year, making BTC investors richer. If you’re thinking about selling some or all of your Bitcoin investment, make sure you understand how taxes for Bitcoin work. Here’s a breakdown of what you should know to reduce your taxes on Bitcoin — maybe even to zero –when you file your return.
Bitcoin offers investors more autonomy than other investment options. But investing in it does not mean you are exempt from taxes. You have to give the IRS a piece of the profits you earn. However, there’s a way to lower your tax bill (or even legally pay no taxes on your earnings from cryptocurrency) if you meet the rules for long-term gains tax treatment.

Time is on your side

The IRS sees Bitcoin as property instead of cash or currency. This means that selling your investment for a profit will trigger capital gains taxes just like the sale of stocks would.
There are two types of capital gains taxes: short term and long term. If you hold your bitcoin investment for a year or less before selling it, you would have a short-term capital gain. Your earnings can be taxed at your ordinary-income tax rates, anywhere from 10% to 37%.
The best deal on your taxes comes when you hold your Bitcoin investments for more than a year because the long-term capital gains tax rules are the key to unlocking the 0% tax bracket on your Bitcoin profits.

Maximizing your gains

The secret to making your way into the lower long-term capital gains tax bracket is to consider your holding period and keep tabs on your taxable income.
Long-term capital gains grant you access to the 0%, 15%, and 20% tax rates. To qualify for these favorable tax rates, you need to hold your Bitcoin investments over a year before selling them.
Then, pay attention to your income. A single filer can have taxable income up to $40,400 to claim the 0% tax bracket on long-term capital gains in 2021. Let’s say you are single with a taxable income of $25,000 in wages and $15,000 in long-term capital gains from BTC. You would be eligible to pay zero taxes on your Bitcoin profits as your total income of $40,000 is less than the threshold for single filers.
When you cross that income threshold, you get bumped up into the 15% long-term capital gains tax bracket. So in this case, if you had $20,000 in long-term gains from Bitcoin, the first $15,400 would get the 0% rate, but the remaining $4,600 would get taxed at 15%.
You don’t want to give up the chance to earn extra income just because some of it will get taxed. But if you can choose when that income comes in, smart tax planning can save you some money.

Don’t forget deductions and other investments

Tax deductions make it a bit easier to land in the 0% long-term capital gains bucket. For instance, the standard deduction enables you to reduce your taxable income. In 2021, a single person can make up to $12,550 before having to share earnings with the IRS. A married couple can claim a standard deduction of $25,100. Also, contributing to a traditional IRA or 401(k) could help you reduce your taxable income so that more of your Bitcoin gains would qualify for lower rates.

These deductions and long-term capital gain benefits also apply to profits earned in the stock market. Stocks tend to be less volatile than Bitcoin and have proved to be a great way to get started as an investor. Plus, the overall stock market has a track record that can help you better measure your chance for long-term success.
No matter what you plan to invest in, make understanding taxes a priority, or hire an expert to help with the best strategies. That’s the secret to reducing your taxes on Bitcoin, even to zero.

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