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Ask the Crypto Tax Lawyer: How Can I Reduce My Crypto Taxes?

Important: The information in this article applies to individual investors and LLCs that are taxed as pass-through entities. The rules are different for corporations and LLCs electing to be taxed as a corporation and are not addressed here. This article is for informational and promotional purposes only and, as always, you should consult with a professional about your specific tax situation before taking any action.

Despite its name, cryptocurrency or “crypto” is not really currency. For tax purposes, it is treated as “property,” which means it is taxed similar to stocks and bonds. As I previously wrote, buying and selling crypto is subject to capital gains tax. Paying for goods and services with crypto is likewise subject to capital gains tax. Exchanging one crypto asset for another is a taxable event as well.

“Crypto tax” has a nice ring to it, but it is nothing more than the application of ordinary capital gains tax to cryptocurrency transactions. The most important aspect of crypto investing – whether individually or as part of a business – is good record keeping. Exchange platforms like Coinbase can generate basic reports to use at tax time. But remember that you must also keep records when you pay for goods and services with crypto or receive payments in crypto. For tax purposes, when you pay someone in Bitcoin or Ethereum, the IRS considers that you have sold the cryptocurrency for cash (and realized a capital gain or loss). When you receive crypto as payment for goods and services, you acquired ordinary income in the amount equal to the market value of the crypto at the time of the transaction. In short, keep good records, you will need them.

What are some top strategies to minimize capital gains tax from cryptocurrency investing? As with any other investment, a little bit of planning can help you minimize your tax bill at the end of the year.

HODL. The capital gains tax rate is different for short-term and long-term gains. Purchasing and selling crypto within a 365 day period is considered the short term, and any gains during that period are taxed like ordinary income (i.e. wages). Short-term crypto income will be taxed between 10% and 37%, depending on your tax bracket. On the other hand, selling crypto more than a year after buying it lets you take advantage of the lower long-term capital gains rate. Depending on your income level, long-term capital gains are taxed at either 0%, 15%, or 20%, with most people falling into the middle 15% bracket. For example, if you are paying a 22% rate on ordinary income, but are in the 15% bracket for long-term gains, you will end up with significant savings on your tax bill.
Offset. Of course, not everyone buys crypto for long term investing. If you are trying to time the market and profit from crypto’s volatility, holding to gain favorable capital gains treatment may not be a feasible strategy. Tax law generally allows offsetting capital gains with losses, but the strategy does have limitations. Losses must first be used to offset gains of the same kind – for instance, short-term losses must be used to offset short-term gains, and only if you have excess short-term losses can you shift them over to reduce your long-term capital gains. If you still have remaining losses, you can take an ordinary income deduction of up to $3,000 for the tax year and retain the balance to offset next year’s gains and income.
Decrease Taxable Income. Like with other “property,” you can time your sales to your specific income situation. You may want to sell appreciated crypto when you have less income than you anticipate in the future. Or, you may accelerate 401k/IRA contributions to take advantage of the up-front tax break. Health Savings Account contributions are another taxable income reduction alternative, especially if you are anticipating significant health care expenditures in the near future. For businesses, business expenses can be used to reduce taxable income, but be sure that the expense is both “ordinary” and “necessary.” For example, renting a building and paying electricity costs for your Bitcoin farm are probably ordinary and necessary expenses. Also, be careful to properly categorize any business start-up costs, assets, and improvements, which are treated as capital expenses (and therefore are different than your ordinary business expenses).
Set up a self-directed IRA. Self-directed IRAs or SDIRAs are little-known but powerful investment tools for the sophisticated investor. They allow you to take full control of your retirement investments and direct the funds into non-traditional assets. Commonly used for holding real estate, private company stock, and precious metals, SDIRAs can certainly be used to buy and hold crypto. Most bank-managed retirement plans can be converted to the self-directed kind, but there are additional fees and special rules about what your SDIRA can and cannot do to retain the tax-favored treatment by the IRS. In essence, the SDIRA can be used to convert all or part of your retirement portfolio into an investment “checkbook” that you can then use to purchase and hold assets like crypto for the benefit of your retirement.
Move, gift, donate, or leave it to your heirs. Depending on your situation, there are other options that may be used to optimize your tax situation. If you are in a state that imposes its own income tax, you may want to consider moving to a no income tax jurisdiction. Or potentially incorporating and locating your Bitcoin mining company there. Likewise, depending on your future goals, retirement situation, and estate planning, it may be advantageous to shift some of your crypto holdings (especially those where you are looking at a significant gain) towards those objectives. For example, if you leave your crypto portfolio as part of your estate, heirs would receive a “step up” in basis and receive the crypto at the fair market value at the time of death. This significantly reduces their tax bill and something to consider if a crypto portfolio is part of your estate planning.

There are other strategies that may be available based on your particular situation. Remember to keep good records, plan ahead, and get a professional to answer all your crypto tax questions.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

Who Owns Your Invention? The Concepts and Inventions Assignment Clause, Work-For-Hire, and the Shop Right Doctrine.

In the modern employment context, there are plenty of on-boarding documents, including a handbook, that the employee may be asked to sign as part of getting hired. Lurking in these pages of seemingly innocuous workplace policies may be critical obligations and restrictions that significantly restrict the employee’s rights. For example, non-compete and non-solicitation clauses are becoming more and more common in all industries. Also, there may be another Trojan Horse to watch for, especially in high-tech industries – the so-called “concepts and inventions assignment clause.” This clause essentially assigns all of the employee’s inventions, innovations, and discoveries that they make or create while working for the employer to the employer. And even in the absence of such a clause, the employer may claim rights as work-for-hire, or have limited rights under the “shop right doctrine.”

A “concepts and inventions clause” is a contractual obligation that is becoming increasingly standard in employment documents. It can be stand-alone, part of an employment contract, or even hidden in an employee handbook or manual. The clause gives the employer automatic and exclusive rights to inventions, conceptualizations, and other ideas created during the employer-employee relationship. The idea is that since the employer is paying the employee to dedicate 100% of his or her time to the business, and the employer is also providing the tools, space, and other means for the employee to work, the employer owns all of the fruits of the employee’s labor. The scope and breadth of the contract is up to the parties. However, some states (most notably California), limit the scope of such agreements by law. In those states, the agreement may not cover independent inventions – meaning inventions that are created on the employee’s own time without using any of the employer’s resources. For example, if an employee is a software designer, but goes home and creates a new type of mechanical circular saw in her garage during evening hours. Even if there is a general assignment clause, it likely would not be enforceable. Michigan does not have a law limiting the scope of the assignment clause/contract, which means that a Michigan employer could potentially claim rights to the new saw design, even if the invention has nothing to do with the employer.

In a high-tech context, a “concepts and inventions clause” may also list express exclusions. If Company A is hiring an inventor, the inventor would list all of the prior inventions that Company A has no rights to and the inventor retains. At the same time, the list benefits Company A because the inventor cannot later claim rights to an invention that is not on the list. Additionally, the clause (whether it is stand-alone or part of a broader employment agreement) often contains an integration clause, which prevents parties from claiming they had a side-deal or different understanding. And, there are “teeth” to provide that in case of a litigated dispute, the losing party would pay the prevailing party’s attorney fees, thereby discouraging lawsuits over ownership of an invention.

A similar situation occurs when an employer hires an employee for a specific purpose – that is to create a work-for-hire. Even without a contractual assignment clause, the employer will own the rights to any resulting invention where it is the outcome of the specific employment relationship. For example, Company A hires an engineer to invent a new chassis platform to use across Company A’s pickup truck line. The work results in a patentable invention and Company A owns 100% of the rights to the chassis. Even if the inventor did some of the work on his or her own time or otherwise made out-of-work contributions to the project, it would be considered a “work-for-hire” where the employer – or the “hirer” – owns all rights to the resulting innovation. The owner Company A is then free to license, sell, or otherwise assign the patent rights, and keep all of the profit, without providing the inventor with any additional compensation.

What about the situation where there is no “concepts and inventions clause” and there is no specific “work-for-hire” arrangement? Does the inventor always own 100% of the rights to his or her invention, even if created on company time? No, because of something called the “shop right doctrine.” The doctrine is a common-law concept (meaning it is a principle created by the courts, as opposed to the legislature). In general, the doctrine allows the employer to continue using the invention, but precludes the assignment or licensing of the invention to third-parties. In other words, the employer gets a royalty-free limited license to use the invention, but cannot sell it. The doctrine also requires that the invention be created using an employer’s resources, such as a laboratory, computer, or analytical equipment. The shop right doctrine is a defense to patent infringement that the employer can rely on if sued by the inventor – it is not an affirmative or assignable right.

What does this mean for employers and employees? If you are hiring or being hired, and anticipate the relationship may produce a valuable invention, concept, or other innovation, you should consult with an attorney to ensure your rights are protected. After-the-fact litigation is not only costly, but incredibly uncertain in outcome, and should be avoided as much as possible. As an employer, you want to make sure to have solid and well-defined assignment clauses for your employees to sign. And, because at least 9 states have statutory limitations on the scope of the assignment agreement, it is best practice to draft any assignment to be enforceable across the entire United States. As an employee, you need to make sure you are not inadvertently signing away more rights than you intend to, and are fully aware of your respective rights and obligations.

On a final note, these concepts (as well as other intellectual property concerns) also apply in the university context. Professors and graduate students are constantly innovating and creating, but whether they or the university own the final outcome may be something that they have not considered. In a famous example, Larry Page (one of the founders of Google), is listed as an inventor on one of the key patents that served as the foundation for Google. However, Stanford University owns the patent because Larry Page was a Ph. D. student there at the time of the invention. Consequently, Google had to license the patent from Stanford University for a hefty nine-figure sum. So while a university may not claim rights to inventions made by students as a matter of policy, they will likely claim rights to inventions made by employees. A graduate student or a post-doc is like a professor, in the sense that they are often employees of the university. Your specific institution likely has a tech transfer department, as well as its own policies and regulations. Again, an experienced attorney can help you protect yourself and stay informed of your rights and obligations.

Questions or concerns about your situation? Contact Artaev at Law PLLC to set up your initial consultation or call or text Dan today.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.