.jpg)
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 eleven 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 break down the basics 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.
11 ways to minimize your crypto tax liability
Let’s break down eleven strategies that can help reduce your crypto tax burden.
1. Harvest your losses
Selling your cryptocurrency at a loss comes with major tax benefits.
When you harvest your crypto losses, you can offset any capital gains from cryptocurrency, stocks, and other assets and up to $3,000 of income. If your net loss exceeds this amount, you can carry forward your losses into future tax years indefinitely until all of your losses have been used up.
When it comes to tax-loss harvesting, cryptocurrency actually has an advantage over other asset classes. At this time, tax professionals agree that unlike stocks and equities, cryptocurrency is not subject to the wash sale rule. That means that you can sell your crypto, claim a loss, and buy it back shortly afterwards.
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.
3. Take profits in a low-income year
Remember, the tax rate you pay on cryptocurrency disposals is based on your income bracket in a given year.
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.
%20(1).jpg)
4. Give cryptocurrency gifts
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.
Receiving a cryptocurrency gift is not a taxable event. However, the recipient should keep track of the value of their crypto gift at the time of receipt to calculate gains and losses in the case of a future disposal.
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. While many well-known IRA providers do not give investors the opportunity to directly invest in cryptocurrency, you can invest in cryptocurrency through a self-directed IRA.
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 iTrustCapital, Bitcoin IRA, and 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. If you donate your crypto after less than a year of holding, you can deduct your original cost basis for acquiring your crypto.
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? Instead, consider taking out a loan using your cryptocurrency as collateral to save money on taxe
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 countries that don’t tax cryptocurrency. At this time, countries like the United Arab Emirates and Malta don’t tax capital gains for individual investors.
10. Keep careful records of your crypto transactions
It’s important to keep careful records of your cryptocurrency transactions so that you can file your taxes accurately.
In cases where you can’t find your original cost basis for acquiring your cryptocurrency, you may be required to recognize all the proceeds from a disposal as a capital gain. This may lead to a much larger tax liability.
Your records should include the price of your cryptocurrency at receipt and disposal, as well as the date you acquired and disposed of your crypto.
11. Use crypto tax software
Looking for an easy way to save time and money when it comes to filing your taxes? Cryptocurrency tax software like CoinLedger can help.
There’s no need to spend hours poring over spreadsheets with your cryptocurrency transactions. Instead, you can automatically import your transactions from exchanges like Coinbase and blockchains like Ethereum and generate a comprehensive tax report in minutes.
Once you’re sure your information is accurate, you can plug your crypto tax reports into filing software like TurboTax or TaxAct.
Start managing your crypto taxes today.
Looking for a platform that can help you save time and money this tax season? Try CoinLedger.
More than 400,000 investors from all across the world use CoinLedger to generate complete crypto tax reports and find their tax-saving opportunities in minutes.
Get started with a free account today.
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 the IRS has worked with contractors like Chainalysis to crack down on tax fraud.
Do you have to pay taxes on cryptocurrency if you spend it?
Yes. Spending cryptocurrency is considered a disposal event subject to capital gains tax.
Do you pay taxes on crypto losses?
Capital 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.
Do you pay taxes on crypto if you reinvest it?
Disposals of cryptocurrency are subject to capital gains tax, regardless of whether you reinvest your profits afterwards.
Frequently asked questions
.png)
-72ppi%20(1).png)
