How To Avoid Taxes On Your Bitcoin
What a shame that you can’t just enjoy your Bitcoin gains thanks to tax. Of course the state doesn’t want to miss this opportunity to dig deep into the pockets of its citizens.
However, there are a few ways to get around tax payments on Bitcoin.
First of all, let’s just briefly mention that US Americans can basically escape taxation if they leave the country and also give up their citizenship, i.e. give up their US passport.
For citizens of other countries, emigration is usually sufficient, citizenship usually doesn’t have to be given up in order to avoid the tax liability to a country.
Since emigration, or even the abandonment of US citizenship, would be the last choice for most people, we want to look at the more realistic ways, or possibilities, that should be feasible for more people:
Bitcoin Tax Avoidance Through IRA
In the USA, one of the ways to avoid paying taxes on Bitcoin is to buy or trade Bitcoin within an Individual Retirement Account (IRA).
IRAs are a way of providing for old age. Traditional IRAs allow investments in equities, bonds and investment funds with tax benefits for the saver. Such annuity savings account are managed and held in custody by certain financial service providers.
However, there are special forms of IRAs, such as self-directed IRAs where alternative investments are also permitted, e.g. private stocks, real estate, hard money loans, precious metals, tax liens and others.
Since the IRS regards cryptocurrencies as property, Bitcoin and other cryptocurrencies today are among the investment forms used in self-directed IRAs.
The crux of this opportunity to save taxes on Bitcoin gains in the long run is that it is only worthwhile if you withdraw the money when you retire, not earlier.
The tax benefits only apply to the full extent if the IRA is used as intended.
Only taxable compensation may be contributed to an IRA. Other income sources such as capital gains, annuity income, pension, rental income etc. are not allowed to be invested in an IRA.
For self-directed IRAs, it is worth considering whether to choose a normal self-directed IRA or a self-directed ROTH IRA for your cryptocurrency investments.
ROTH IRAs have some important differences to traditional IRAs.
We’ve gathered the most striking ones here:
Income Limits
Traditional IRA: No income limits
ROTH IRA: maximum gross income 137,000 for singles (different for couples), if you earn more, you’re not allowed to contribute to your IRA account.
Deposit limits:
Traditional IRA: $6,000 per year per person (for couples it’s 12,000, even if only one has an income)
ROTH IRA: $6,000 per year per person
Age Limits
There is no minimum age to start investing in an IRA.
Traditional IRA: Contributions can only be made till the age of 70 1/2
ROTH IRA: No age limits for contributions
Taxation:
Traditional IRA: Deposits are made without tax deduction, disbursements (later) are taxed. The advantage for crypto traders is that all trades made in the meantime will in the end be taxed in one sum. So you don’t have to pay tax on each trade individually.
ROTH IRA: Deposits are subject to a tax, but later payments are completely tax-free. So you don’t have to worry about changing future tax rates for pensioners.
Withdrawals from the IRA:
Withdrawals are possible at any time in both cases, but they can then be subject to taxation or penalty.
Traditional IRA: Age 70 ½ limit for contributions; Premature withdrawals must be taxed with the gross income, in addition a 10% penalty payment is added.
ROTH IRA: Deposits may be withdrawn at any time, without taxation or penalty. But not the profits that have been generated over time on this share capital. Profit payments would be taxable.
Required Minimum Distributions:
Traditional IRA:
money is forced out after age 70 ½
early distribution before 59 ½ are subject to tax and a penalty
ROTH IRA:
No required minimum distributions, not at any time.
Early distribution of the contribution (not the capital gains etc) can be done any time without a reason, tax and penalty-free
The most important thing with IRAs is correct IRS-compliant administration. Only if the rules of such accounts are strictly adhered to you can profit from this form of investment in the long term.
If somebody doesn’t adhere to these rules, as for example by early withdrawals or by contributing money from non-allowed sources, an IRA makes no sense regarding Bitcoin investments and Trading, because then it means likewise enormous levies.
Offshore IRA (self-directed)
Some investors prefer to bring their IRA offshore. This is even relatively easy. You simply set up an offshore IRA LLC which you use to settle your Bitcoin trades. Still, in this case the same rules apply as for IRAs in the country.
The offshore version has above all the advantage of privacy and security, because such an offshore account is generally outside of US official access.
Within an offshore IRA, cryptocurrencies can be traded tax-free. But since the same rules apply as for domestic IRAs – premature withdrawals would be expensive, so the financial advantage of an IRA for crypto trading would no longer apply.
Thanks to our Internet age, self-directed IRAs are of course easily available online.
Here you will find a list of Bitcoin IRAs and Bitcoin ROTH IRAs:
https://bitcoinira.com/
https://www.bitira.com/ (ROTH)
https://www.fdira.com/
https://www.broadfinancial.com/
Bitcoin Tax Avoidance through Bitcoin Loan
At Bitcoin loan can prevent you from being forced to sell your precious BTC when you need cash:
A completely different way to save taxes on Bitcoin profits is through Bitcoin loans.
More specifically, this is a way to cash out without having to pay taxes on the cash.
Bitcoin loan companies offer loans against Bitcoin. This means that you deposit Bitcoin as security (which you get back later) and get a certain amount of cash paid out for it.
Due to the volatility of Bitcoin, you only get a maximum of half of the current market value in cash. This means that the Bitcoin exchange rate could collapse almost up to half without there being a problem.
At half of the market value, however, the loan company would have to sell your deposited BTC in order to get their money back safely.
Before such a liquidation would happen, however, the borrower would receive a margin call. This means that the borrower gets notified of the price drop in good time and asked either to deposit more Bitcoin or to repay the loan immediately.
Bitcoin credits offer an advantage especially when you need money but don’t want to sell your BTC.
While a real BTC sale would have to be taxed, a loan is tax-free. The only costs are interest charges, which is of course always the case with loans. And you have to be able to repay the loan at the end of the term if you want your Bitcoin back, but that goes without saying.
So if you deposit 1 BTC at a BTC rate of $10,000 to get $5,000 as credit, you don’t have to pay taxes on this $5,000. It should be noted that Bitcoin loans, just like other kinds of loan, are subject to relatively high interest rates. The shorter the term, the lower the annual interest.
All details about Bitcoin loans can be found here.