3 end of the year tips if you racked up an insane tax bill in 2021

2021 was huge for the crypto ecosystem, and there’s a good chance many of you reading this probably saw big gains during the year.

If this is you, then congratulations! However, if you were actively buying and selling and not passively holding, there’s a good chance that you probably have an insane tax bill to pay when April rolls around.

Anyway, here are some tips for how you can (legally) reduce your tax liability and avoid trouble with the IRS.

I do want to note that I’m not a tax professional and all of this is based on my own research and conversations with my accountant. Please do your own research before you listen to some random dude on Reddit!

Harvest your losses

Are you down on any one of your positions this year? Even though it sucks to see yourself in the red, it’s good to look at the silver lining: capital losses can offset your capital gains for the year and up to $3000 of income.

I know what some of you are probably thinking: ‘What if I don’t want to sell my tokens? I still think they can go up!’

I got good news for you — unlike with stock trading, cryptocurrency has no wash sale rule. That means you don’t need to wait 30 days to buy back the crypto you sold if you want to claim a loss on your tax return. You can sell your crypto at a loss, claim a capital loss, and buy back shortly after!

This might be ending soon. The Build Back Better Act would have introduced the wash sale rule to crypto. Even though the bill doesn’t look like it’s going to pass, it’s clear that the government is looking to end wash sales on crypto in the very near future. That means it’s probably a good idea to take advantage of the tax benefits of wash sales while the opportunity is still there.

And remember, harvesting your losses does come with some risks (just like any other financial decision). If you plan on selling your cryptocurrency sometime in the future, there’s a chance you might be paying more in taxes later down the road since you’re bringing down your cost basis. This can turn out to be a problem (especially if you think you’ll be in a higher income bracket in the future). Tax-loss harvesting also restarts your holding period, which means you’ll have to pay higher taxes if you sell in the next 12 months.

Send some crypto donations!

Remember, donating crypto to an organization with 501(c)(3) status is tax-deductible!

Crypto donations come with two tax benefits.

1. Donating crypto is not considered a taxable event. Normally, disposing of your cryptocurrency requires you to incur capital gains or losses, but in this case, you don’t have to worry about any tax liability.
2. Donating crypto can be treated as an itemized deduction on your tax return which can potentially reduce your tax bill.

One thing to note here - itemized deductions (like donations) will only reduce your tax bill if the total amount of your itemized deductions exceeds the standard deduction. That’s $12,550 for single individuals and $25,110 for married couples filing jointly. Remember, mortgage interest and state/local taxes can also be considered itemized deductions.

One charity I like is Give Crypto. They give cryptocurrency directly to people around the world who are living in poverty. By donating, you’re not only helping people in need, but you’re also helping accelerate the worldwide adoption of cryptocurrency!

Consider putting some money aside

Some investors have a large percentage of their net worth in crypto. If you’re in this situation and you made a lot of taxable trades this year, it’s probably a good idea to set aside some money you can use to pay your tax bill when April rolls around.

There’s a reason for this — I’ve heard a few horror stories about people who got insane gains during the 2017 tax year, only to lose it all a few months later. Then, they didn’t have the money to pay their taxes.

To avoid these types of situations, you can get started with a crypto tax platform that can help you calculate your tax bill. Most of them aren’t that expensive. Personally, I like CryptoTrader.Tax because of their customer support, but there are other options as well.

Anyway, once you’ve calculated your taxes, you’ll know exactly how much money you’ll need to get the IRS off your back.

TL;DR: Harvest your losses, make some donations, and put some money aside that you can use to pay your taxes!