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I bought one Ethereum last year for around $350 and ended up selling it early this year for around $1350.

From what I'm reading, capital gains will be close to 40% on the $1000 I made.

Is there a way to reduce the amount of taxes that I'm paying on cryptocurrency trading or is there a certain amount you need to make before the trades become subject to taxes?

I understand that holding the coins for longer than a year would change the tax from short-term to long-term gains, but is there anything else I could do?

EDIT: I'm an Indiana resident, but I bought and sold the Ethereum while at school in Kentucky.

  • 1
    As you mention that you are at school, is this your only income? Not familiar with the US, but I suppose there may be a treshold before you need to pay tax. Also education cost may be deductible? – Dennis Jaheruddin May 31 '18 at 18:52
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    @DennisJaheruddin I also work an internship, where I make decent money. I will look into education costs being deductible as I'm not certain about that. – Jake Steele May 31 '18 at 19:36
  • Unless your internship pay is huge your Federal marginal rate shouldn't exceed 24%, and the Internet says Indiana is 3.23% and Kentucky (if you actuallly changed your residence) 6%, so where do you get 40%? – dave_thompson_085 Jun 1 '18 at 22:05
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(Assuming US based on profile)

Welcome to the world of income taxation. Your $1,000 in short-term gains will be treated as "normal income" and subject to your marginal tax rate. So there is fundamentally no difference in this and "I just got a $1,000 bonus - how can I reduce the tax on that income". The answers would be the same:

  • Do something to increase deductions: e.g. donate to charity
  • Use it to fund an IRA
  • Sell other investments at a loss to offset the gains
  • Enjoy the $600 or so you get to keep and chalk it up to experience (e.g. consider taxes when investing and/or hold for more than 1 year)

I don't know state tax laws in your areas but I'm assuming you're more concerned about federal taxes.

  • 1
    With the standard deduction for single now $12k, if you don't own a home (or otherwise pay property tax) it'll take a lot of donations to benefit from itemizing, although I suppose you could consider elective medical treatment. You can use investment income for an IRA only if you also have taxable compensation (mostly wages or selfemployment, also pre-2019 alimony), and often can't deduct trad IRA contributions if you are (employed and) covered by an employer plan; for a student the first is likely an issue but not the second. – dave_thompson_085 May 31 '18 at 18:20
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    "Do something to increase deductions: e.g. donate to charity"... I never understood this. Is this the kind of thing people do just to spite the government? Because it makes zero sense from a financial or mathematical standpoint. – Mehrdad Jun 1 '18 at 7:40
  • @Mehrdad Maybe you would be donating, but feel like you don't have enough money. In that case you might still be OK with donating if you actually get money back somewhere else. It's definitely not to make money with it, it's about spending money where you'd rather spend it. – R. Schmitz Jun 1 '18 at 9:18
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    @R.Schmitz: What you're saying is that it'd make sense to increase your deductions because you want to donate to charity, which is very valid. Here it's the other way around -- the idea is to donate to charity because it increases your deductions, which sounds kind of nuts. – Mehrdad Jun 1 '18 at 9:23
  • @Mehrdad I did not mean to suggest to donate just to give a tax deduction, and was using donation simply as an example, as technically it would lower your tax burden. You are right that financially it does not make sense to donate just for a tax break, but financially it does not make sense to donate in the first place. The returns on a donation are not financial. – D Stanley Jun 1 '18 at 15:06

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