Looking for crypto tax loopholes that can help you save money?
In this guide, we’ll outline six simple strategies that can potentially help you legally save thousands of dollars on your tax bill!
#1: Hold your cryptocurrency
For years, the cryptocurrency ecosystem has had an unofficial motto: HODL. It’s a reminder for crypto investors to hold crypto for the long run — but it’s also great advice for
! avoiding taxes
Remember, there’s no
unless you dispose of it or earn it as income. If you simply hold your existing cryptocurrency indefinitely, you won’t have any taxes to report to the IRS! tax on cryptocurrency #2: Harvest your crypto losses and other assets can be used to offset capital gains and up to $3,000 of income on your tax return. Any additional losses can be rolled forward into future tax years. Losses from cryptocurrencies
Because of this, many investors choose to intentionally sell their cryptocurrency at a loss — a strategy known as
! tax-loss harvesting
While tax-loss harvesting is not unique to cryptocurrency, crypto has some advantages over other asset classes. The
states that you can’t claim capital losses on securities — such as stocks — if you buy them back within 30 days of a sale. wash sale rule
Currently, cryptocurrency is not considered a security by the IRS. As a result, most tax professionals agree that
the wash sale rule does not currently apply to crypto. That means that you can sell your cryptocurrency for a loss, buy your crypto back shortly after, and claim a loss on your tax return! #3: Contribute to retirement accounts (IRAs) allow you to invest in cryptocurrency on a tax-free or tax-deferred basis! You can choose to save money on your taxes through a traditional IRA or a Roth IRA. Crypto Individual retirement accounts
Traditional IRAs allow you to invest using pre-tax income. You’ll only be taxed when you withdraw your money in the future.
With a Roth IRA, you're taxed on any income that you contribute to the account. However, you won’t be taxed in the future when you withdraw money from your IRA!
While most IRA providers don’t allow you to directly invest in cryptocurrency, self-directed IRA providers allow you to invest in assets like Bitcoin and Ethereum.
#4: Dispose of crypto after more than 12 months
The American tax code is set up to encourage long-term investment. That means that if you hold cryptocurrency and other assets for longer than 12 months, the tax that you’ll pay on profits is significantly reduced!
#5: Donate crypto to charity is one of the rare occasions when the IRS allows you to ‘double dip’ on tax benefits. Donating cryptocurrency
Donating your cryptocurrency to charity is
not considered a taxable disposal — meaning you won’t be required to pay capital gains tax even if the value of your crypto increased significantly since you originally received it!
In addition, donating crypto can be treated as a deduction on your tax return and potentially reduce your tax bill!
#6: Cryptocurrency gifts is not subject to tax in most circumstances. Gifting cryptocurrency
If you give less than $16,000 worth of cryptocurrency gifts to a single individual during the tax year, you don’t need to report your gifts to the IRS.
While you are required to fill out a gift tax return if you give more than $16,000 in cryptocurrency gifts to a single person during the tax year, this does not necessarily mean that you have a tax liability. Filling out a gift tax return is for informational purposes only in most cases.
You’ll only pay tax on giving gifts if you exceed the lifetime gift exemption threshold — currently at $12.06 million.
Are crypto tax loopholes the source of the budget deficit?
In recent years, the
has singled out ‘crypto tax loopholes’ as a major source of the budget deficit. Biden Administration
In 2023, the White House put out a Budget Plan that would introduce the wash sale rule to cryptocurrency. The White House claimed that closing this loophole would bring in $24 billion in tax revenue over 10 years.
It’s not clear how the White House put together this estimate. According to cryptocurrency experts, it’s unlikely that closing the wash sale rule will generate billions of dollars in revenue.
How does crypto tax work?
Cryptocurrency, like other assets, is subject to tax. In the United States and most other countries, you’ll most likely pay
capital gains tax and income tax on your cryptocurrency profits. Capital gains tax: When you dispose of crypto, you’ll incur a capital gain or loss. Cryptocurrency disposals include selling your crypto, trading it for another crypto, or using crypto to make a purchase! Income tax: When you earn cryptocurrency, you’ll recognize ordinary income tax. Examples of income include cryptocurrency mining and staking! What tax loopholes can I use for NFTs?
Many of the strategies listed in this article can be used ro reduce
. For more NFT-specific strategies, check out our guide to NFT taxes . NFT tax loopholes