How to Cash Out Crypto Without Paying Taxes

Not reporting your cryptocurrency taxes can lead to audits, fines, and even potential jail time. 

However, there are strategies that you can use to legally reduce taxes when you cash out cryptocurrency. In this guide, we’ll break down how cryptocurrency is taxed and share some simple tips for saving money on taxes. 

Can you cash out cryptocurrency tax-free? 

In the United States and most other countries, cryptocurrency is subject to capital gains and ordinary income tax. 

Cashing out cryptocurrency to fiat currency is considered a disposal subject to capital gains tax. 

For more information, check out our ultimate guide to how cryptocurrency is taxed in the United States. 

How much taxes do you pay when you cash out crypto? 

How much tax you pay on your cryptocurrency disposals depends on multiple factors, such as your total income for the year and how long you held your cryptocurrency. 

If you dispose of your cryptocurrency after longer than 12 months of holding, you’ll pay long-term capital gains tax ranging from 0-20%. 

If you dispose of your cryptocurrency after less than 12 months of holding, your profits will be considered ordinary income and taxed between 10-37%. 

For more information, check out our guide to crypto tax rates. 

What happens if I don’t report my crypto to the IRS? 

Not reporting your cryptocurrency transactions to the IRS is considered tax evasion — a serious crime with serious consequences. The maximum penalty for tax evasion is 5 years in prison and a fine of $100,000. 

Though cryptocurrency transactions are pseudo-anonymous, it’s important to remember that the IRS has methods to identify investors. Major exchanges like Coinbase issue 1099 forms to the IRS that contain customer information and detail your taxable income for the year. 

In addition, it’s important to remember that transactions on blockchains like Ethereum and Bitcoin are publicly visible and permanent. In the past, the IRS has worked with contractors to analyze blockchain transactions and identify ‘anonymous’ wallets. 

How to legally cash out your cryptocurrency without paying taxes

Let’s walk through a few strategies to help you legally avoid taxes on your cryptocurrency profits. 

Harvest losses 

Selling your cryptocurrency at a loss can help offset gains from cashing out crypto. 

When you harvest losses, you can offset your gains from cryptocurrency, stocks, and other assets and up to $3,000 of income. Any net losses above this amount can be carried forward into future tax years. 

Crypto IRAs 

Crypto IRAs (individual retirement accounts) can help you grow wealth on a tax-free or tax–deferred basis. While most retirement plan providers don’t allow you to invest in cryptocurrency IRAs directly, you can use a self-directed IRA provider like iTrustCapital, Bitcoin IRA, or Coin IRA. 

Take out a cryptocurrency loan 

Instead of cashing out your cryptocurrency, consider taking out a cryptocurrency loan. 

In general, loans are considered tax-free. If you need liquidity immediately, you should consider using your cryptocurrency as collateral to take a loan through a decentralized protocol. 

Move to a low-tax state or country 

While it may seem like an extreme step to take, some investors do choose to relocate to low-tax regions. 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 even choose to relocate to countries where cryptocurrency isn’t taxed. At this time, cryptocurrency is tax-free for individual investors in countries like the United Arab Emirates and Malta. 

For more tips, check out our guide on how to legally avoid cryptocurrency taxes. 

How CoinLedger Can Help

Looking for an easy way to save money on your cryptocurrency taxes? CoinLedger can help. The platform is built to minimize the amount of taxes you owe from crypto.

Today, more than 400,000 investors use CoinLedger to find their largest tax-saving opportunities and generate a complete tax report in minutes.

Get started with a free CoinLedger account.