The Secret to Paying No Taxes Profits on Bitcoin Profits

Price Bitcoin (CRYPTO: BTC) has risen exponentially in the past year, allowing investors four times to increase their earnings without lifting a finger. If you’re thinking of selling a fraction or all of your Bitcoin investment, make sure you understand how taxes for Bitcoin work.

Bitcoin is a decentralized digital currency that offers investors more autonomy than other investment options. But investing in it doesn’t mean you’re exempt from taxes. You may have to donate a portion of the profits you earn to the IRS. However, there is a way to reduce your tax bill (or even legally pay no tax on your earnings from cryptocurrency) if you meet the rules for long-term earnings tax treatment.

Here is a breakdown of what you need to know to reduce your tax bill on Bitcoin – maybe even to nothing – when you file your return.

Image source: Getty Images.

Time is on your side

The IRS regards Bitcoin as a property in lieu of cash or currency. This means that selling your investment for profit will trigger capital gains taxes just like selling stocks.

There are two types of capital gains taxes: short-term and long-term. If you held your bitcoin investment for a year or less before selling it, you would have short-term capital gains. Your earnings will be taxed at your ordinary income tax rates, which can be anywhere from 10% to 37%.

The best deal on your tax bill comes when you hold your Bitcoin investments for over a year, because the long-term capital gains tax rules are the key to unlocking the 0% tax bracket on your Bitcoin profits.

Maximize your earnings

The secret to making your way into the lower long-term capital gains tax bracket is to pay attention to your holding period and keep tabs on your taxable income.

Long-term capital gains allow you access to the 0%, 15% and 20% tax rates. To qualify for these favorable tax rates, you must hold your Bitcoin investments over a year before selling them.

Then pay attention to your income. One filer can get taxable income up to $ 40,400 to claim the 0% tax bracket on long-term capital gains in 2021. Let’s say you’re single with taxable income of $ 25,000 in wages and $ 15,000 in long-term capital gains from Bitcoin . You would be eligible to pay zero taxes on your Bitcoin profits because your total income of $ 40,000 is less than the threshold for single filers.

Once you have crossed that income threshold, you will be bumped into the 15% long-term capital gains tax bracket. So in the example above, if you had $ 20,000 in long-term returns from Bitcoin, the first $ 15,400 would get the 0% rate, but the remaining $ 4,600 would be taxed at 15%.

Obviously, you don’t want to give up the opportunity to earn extra income just because some of it will be taxed. But if you have the option to choose when that income comes in, smart tax planning can save you some money.

Take a look at the 2021 long-term capital gains tax brackets below for your filing status and the income threshold that would qualify you for the 0% tax bracket. Married co-filers receive the largest income threshold – up to $ 80,800 of taxable income – to pay no tax on capital gains.

Single Files with Taxable Income from …

Married Files with Taxable Income from …

Married Couples File Separately With Taxable Income …

Heads of Households with Taxable Income from …

… Pay this Long Term Capital Gains Tax Rate

$ 0 to $ 40,400

$ 0 to $ 80,800

$ 0 to $ 40,400

$ 0 to $ 54,100

0%

$ 40,401 to $ 445,850

$ 80,801 to $ 501,600

$ 40,401 to $ 250,800

$ 54,101 to $ 473,750

15%

Over $ 445,850

Over $ 501,600

Over $ 250,800

Over $ 473,750

20%

Data source: IRS.

Don’t forget other deductions and investments

Tax deductions make it a little easier to land in the 0% long-term capital gains bucket. For example, the standard deduction allows 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 earnings would qualify for lower rates.

These long-term capital gains deductions and benefits also apply to profits earned in the stock market. Stocks tend to be less volatile than Bitcoin and have proven to be a great way to start as an investor. The general stock market also has a reputation that can help you better gauge your chances for long-term success.

No matter what you decide to invest in, understand that taxes are a priority, or hire a professional to help with the best strategies. That’s the secret to making the most of the incredible rewards that being an investor brings.

This article represents the views of the writer, who may disagree with the “official” recommendation of Motley Fool’s premium advisory service. We motley! Questioning an investment thesis – even one ourselves – helps us all think critically about investing and making decisions that help us become smarter, happier and richer.

Source