The turn of the year is always a good time to start thinking about your tax strategy, especially when investing in crypto assets. Because the crypto markets have fluctuated so much this year that even the most famous roller coasters would be jealous. Below are a few tips on how to minimize your tax burden at the turn of the year.
Crypto loss harvesting with tax loss harvesting
One option that many investors consider is what is known as tax loss harvesting. The strategy has been used by investors in traditional markets for decades and has recently gained popularity in cryptocurrencies as well. The goal is to claim tax losses on capital sales realized within the year in order to reduce the tax burden.
The idea behind this strategy is to tax losses on investments made during the year to reduce the tax burden.
An example: Suppose an investor bought a cryptocurrency at a price of 1,000 euros in January, and in December it is only 500 euros. In this case, the investor can claim the loss of 500 euros for tax purposes by selling the assets to realize the loss. This reduces the tax burden accordingly. It is important that this happens within the one-year period. Therefore, the time at the end of the year is particularly suitable for checking this, all the calendar year’s transactions can then be easily examined.
For crypto investors, the use of tax loss harvesting is particularly important, as volatility in the crypto market is often high and losses can occur quickly. By using this strategy, investors can reduce their tax burden and give them more money for future investments.
It is also important to take screenshots of all crypto exchanges before the end of the year. This makes it easier to get the information you need when you file your tax return. The screenshots must contain all shares – so you have all the relevant information to calculate and pay your tax. Store the screenshots in a safe place for easy recovery in case of loss or damage. And if you are logged in to the exchange, you should take the opportunity to download and save the transaction data at the same time.
Furthermore, the log-in should be checked for all crypto exchanges used and the data stored there should be backed up. If you can download your trading activity and transactions, you should definitely do that too. So you have all the documents you need for your tax return. Some exchanges may go out of business or change their services in the future, so it is important to take the opportunity now to back up the data and be prepared for IRS estimates.
Crypto charges: The early bird catches the worm
It also makes sense to start with the crypto tax report in December. If you check your transactions and trading activities, you may be able to realize losses (tax loss harvesting) and thus come under the exemption limit of 600 euros. Plus, starting early gives you enough time to gather and review all relevant information to ensure your tax report is accurate and complete. You should also check whether you have already used the exemption limit of EUR 600 in the current tax year; if not, this is a great way to realize a profit up to this amount completely tax-free.
Finally, it is important to build a reserve for tax payments by setting aside fiat money in a bank account, especially after large gains from crypto trading. Here it is really advisable to keep the reserves in fiat and not in stablecoins. This is especially important if your crypto transactions experience sharp price changes or so-called “stablecoin crashes”. If a stablecoin goes down, its value can suddenly drop sharply, causing you to suffer big losses and potentially stop paying your taxes. Therefore, it is important that you have enough fiat money in a bank account in reserve to be able to pay your taxes, even if you have suffered a loss on your crypto investments. In this way, you can avoid financial bottlenecks and always meet your tax obligations.
As previously emphasized, it is very important to start the crypto tax report as early as December. As the saying goes, “Better early than never – especially when it comes to taxes!”
Werner Hoffmann is an expert in crypto-taxes. He has been dealing with this subject full-time for years and gained his tax expertise first-hand when he set up Tax IT as a civil servant. With his company Pekuna, founded in 2018, he has helped dozens of clients with tax preparation of their crypto transactions.
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