Looking for an easy way to reduce your crypto tax bill?
Unfortunately, there is no way to completely avoid crypto taxes. Remember, there are severe consequences for tax fraud and tax evasion.
However, there are strategies that can help investors legally minimize their tax burden. In this article, we’ll run through the basics of cryptocurrency taxes and share ten simple strategies that can help you save money on your tax bill.
How do crypto taxes work?
Before we get into tax reduction strategies, let’s go through the fundamentals of how cryptocurrency is taxed.
Cryptocurrency is considered a form of property by the IRS, similar to equities and real estate. That means it’s subject to both capital gains and income tax.
Capital gains: If you dispose of your cryptocurrency, you’ll be subject to capital gains tax. Disposal events include selling your cryptocurrency for fiat, trading your cryptocurrency for other cryptocurrencies, and buying goods and services with crypto. You’ll need to pay capital gains based on how your tokens have appreciated since you originally received them. Ordinary income tax: If you earn income in the form of cryptocurrency, you’ll need to pay ordinary income tax. Income events include earning staking or mining rewards, earning referral bonuses from crypto apps, or receiving compensation for your work in crypto.
For more information, check out our
. complete guide to cryptocurrency taxes 10 ways to minimize your crypto tax liability
Let’s break down ten strategies that can help reduce your crypto tax burden.
VIDEO 1. Harvest your losses
If some of your cryptocurrency holdings have decreased in value, then
can be a great way to decrease your overall tax bill. tax-loss harvesting
Tax-loss harvesting is the practice of intentionally selling your cryptocurrency at a loss to claim tax savings. Here’s how it works:
When it comes to tax-loss harvesting, cryptocurrency actually has an advantage over other asset classes. Stocks are subject to the ‘
wash sale rule ’, which states that capital losses cannot be claimed if investors buy the same stock 30 days before or after the sale.
However, the ‘wash sale rule’ currently does not apply to cryptocurrency. At this time, investors can sell cryptocurrencies like Bitcoin, claim the capital loss, then buy back their tokens.
2. Invest for the long term
The simplest way to minimize your tax burden is to wait to dispose of your assets until they are long-term property. Remember, you’ll pay less in capital gains tax if you’ve held your crypto for more than 12 months.
Of course, it’s important to remember that cryptocurrencies tend to be volatile. If you’re expecting a price drop in the next few months, it may be better to sell now than to wait. Still, you should keep the preferred long-term capital gains rate in mind when making trading decisions.
3. Take profits in a low-income year
you pay on cryptocurrency disposals is based on your income bracket in a given year. tax rate
As a result, some investors choose to take profits on cryptocurrency gains in years where their personal income is low.
In some circumstances, this can make a big difference in terms of your tax bill. Remember, the tax rate for cryptocurrency sold after a year is 0% for taxpayers who earn less than $40,000.
4. Give cryptocurrency gifts
Cryptocurrency gifts come with their own tax benefits. If you give cryptocurrency away as a gift, you have
no income tax obligation. While gifts with a fair market value above $15,000 require you to submit a gift tax return, this form is primarily for informational purposes.
This might seem like a drastic step to take. However, if you want to share your wealth with family and friends, giving a crypto gift could be a great way to accomplish this goal.
Recipients receive tax benefits as well. Receiving a crypto gift is
not considered a taxable event.
However, it’s important for the gift recipient to keep track of the price of the cryptocurrency at the time they received it. These amounts are used to calculate any gain or loss for the recipient to report when the crypto is sold.
For more information, check out our blog on
. how cryptocurrency gifts are taxed 5. Buy and Sell Cryptocurrency Via Your IRA or 401-K
Retirement accounts are designed to help investors build wealth tax-free. However, it’s important to remember that you won’t be able to access your savings until you are of a certain age.
Traditional retirement accounts are funded with tax-free income, but all gains and eventual withdrawals are taxed. Meanwhile, Roth retirement accounts are funded with taxed income, but all gains and eventual withdrawals are tax-free.
For example, if you decide to sell your capital assets in a Roth IRA, you will not be required to pay capital gains tax until you withdraw your earnings.
Unfortunately, many well-known IRA providers do not give investors the opportunity to directly invest in cryptocurrency. Luckily, there are alternatives.
Self-directed IRAs allow investors to store their retirement savings in alternative investments such as real estate, precious metals, and cryptocurrencies. If you are under the age of 50, you are allowed to contribute $6,000 a year in total to all of your IRAs, including self-directed IRAs.
There are several options available for self-directed IRAs that allow investors to invest in cryptocurrencies. Popular choices include
, iTrust Shares , and Bitcoin IRA . Coin IRA 6. Hire a Crypto specialized CPA (Certified Public Accountant)
Navigating the tax code on your own can feel overwhelming. That’s why you may want to consider enlisting the help of a professional.
Though it may be an expensive step to take, many investors find that a quality accountant is well worth the money. An accountant well-versed in cryptocurrency can cover their own costs by identifying strategies to minimize your tax burden.
If you’re looking for an accountant, you may want to check out our verified list of
. cryptocurrency tax experts 7. Give a cryptocurrency donation
Cryptocurrency donations can be a great way to contribute to meaningful causes. In addition, donating crypto is a rare circumstance where the IRS allows crypto investors to ‘double dip’ on tax benefits.
Donating cryptocurrency is one of the few occasions when disposing of cryptocurrency is not taxed.
Additionally, cryptocurrency donated after a year of holding can be deducted based on its fair market value at the time of the donation.
For more information, check out our guide on
. how crypto donations are taxed 8. Take out a cryptocurrency loan
Looking to cash out some of your cryptocurrency profits? Consider taking out a loan using your cryptocurrency as collateral instead.
Unlike selling your cryptocurrency, taking out a loan is considered a non-taxable event (though the IRS has yet to issue explicit guidance on DeFi loans). Depending on the interest rate and your personal income bracket, a loan may be able to help you save money.
For more information, check out our blog post on
. how cryptocurrency loans are taxed 9. Move to a low-tax state/country
While it may seem like an extreme step to take, some investors do choose to relocate to different regions with more favorable tax rates.
Currently, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income taxes (though New Hampshire taxes interest and dividends).
Some investors go as far as to relocate to different countries. At this time, Portugal does not tax income received from cryptocurrency disposals. Meanwhile, El Salvador
that all profits from Bitcoin will be tax-free. has announced 10. Leverage crypto tax software
Because you need to identify what the US dollar value was for every trade that you made throughout the year, crunching your gains and losses manually can quickly turn into a difficult task.
That means it’s harder to identify opportunities for tax-loss harvesting and harder to report your taxes at the end of the year. Luckily, there is a solution.
like CoinLedger can make filing your tax return stress-free. There’s no need to spend hours trying to calculate your capital gains. Instead, you can automatically Cryptocurrency tax software your transactions from exchanges like Coinbase, Kraken, and Gemini in minutes. integrate
Once you’re sure your information is accurate, you can plug your crypto tax reports into filing software like
or TurboTax . TaxAct Frequently asked questions
Let’s cap things off by answering a few frequently asked questions about minimizing crypto taxes.
How can I avoid cryptocurrency taxes?
While there is no legal way to avoid cryptocurrency taxes, strategies like tax-loss harvesting can help investors reduce their tax liability.
Can the IRS track Bitcoin? Yes. Transactions on the Bitcoin blockchain are publicly available, and that the IRS uses AI and data analytics to detect potential tax fraud. it’s been reported Do you have to pay taxes on cryptocurrency if you spend it? Yes. Spending cryptocurrency is considered a disposal event and may require you to pay capital gains tax, depending on how your tokens have fluctuated in price since you originally received them. Do you pay taxes on crypto losses? can offset capital gains and up to $3,000 of personal income. Any losses above this amount can be carried forward into future tax years. Capital losses Do you pay taxes on crypto if you reinvest it?
Any disposal of cryptocurrency is considered taxable, even if you do reinvest the profits of your disposal after the fact.
Start managing your crypto taxes today.
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