Looking for an easy way to reduce your crypto tax bill?
Let’s walk through some tips that can potentially help you save thousands of dollars on your tax bill! In this article, we’ll run through the basics of cryptocurrency taxes and share eleven simple tax-saving strategies.
Quick Look: 11 Ways to Minimize Your Crypto Tax Liability
- Harvest your losses
- Take advantage of long-term tax rates
- Take profits in a low-income year
- Give cryptocurrency gifts
- Buy and sell cryptocurrency in an IRA
- Hire a crypto-specialized CPA
- Make a cryptocurrency donation
- Take out a cryptocurrency loan
- Move to a low-tax state/country
- Keep careful records of your crypto transactions
- Leverage crypto tax software
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. That’s why many investors choose to intentionally take a loss on cryptocurrency investments, a strategy known as tax-loss harvesting.
When you harvest your crypto losses, you can offset any capital gains from cryptocurrency, stocks, and other assets as well as up to $3,000 of income. If your net loss exceeds this amount, you can carry forward your losses into future tax years.
Tax-loss harvesting has been a well-known strategy in the stocks and equities world for decades. However, cryptocurrency has a unique advantage — currently, tax professionals agree that crypto is not subject to the wash sale rule. While you cannot claim a loss on stocks and equities if you buy it back within 30 days of a sale, these same restrictions do not apply to crypto!
2. Invest for the long term
The simplest way to minimize your tax burden is to wait 12 months or longer to dispose of your crypto. The American tax code is set up to encourage long-term investment — so the capital gains tax on your profits will be significantly lower!
3. Take profits in a low-income year
The lower your income during the tax year, the lower the tax rates you’ll pay on your cryptocurrency disposals.
As a result, you should consider taking profits on your cryptocurrency in years where your annual income is low. Many investors choose to take profits in years when they are studying full-time or in between jobs.
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 $16,000 require you to submit a gift tax return, this form is primarily for informational purposes.
Receiving a cryptocurrency gift is also not a taxable event. However, if you receive a crypto gift, you should keep records that detail the value of your gift at the time you acquired it. This can be useful for calculating 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 while minimizing their taxes. 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 choose this route, you should find an accountant with deep knowledge of the cryptocurrency ecosystem. You can get started by looking at our list of verified cryptocurrency tax accountants.
7. Give a cryptocurrency donation
Cryptocurrency donations can be a great way to contribute to meaningful causes. In addition, donating crypto is a rare circ*mstance 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.
In addition, cryptocurrency donations can be treated as a tax deduction and potentially reduce your tax bill!
For more information, check out our guide on how crypto donations are taxed.
8. Take out a cryptocurrency loan
Thinking about selling your cryptocurrency? Unfortunately, these ‘disposals’ can lead to a large tax bill — especially if the price of your crypto has appreciated significantly since you originally received it! One alternative is to take out a loan using your cryptocurrency as collateral.
Taking out a loan is considered a non-taxable event. That means you’ll be able to get access to fiat currency without having to pay a hefty tax bill.
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. Currently, 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 100% of your proceeds as a capital gain — which means you could be paying significantly more in taxes!
To avoid situations like these, your cryptocurrency records should include information such as the price of your crypto at receipt and disposal, as well as the date you acquired and disposed of your crypto. If you haven’t been keeping track of your transactions, you can use crypto tax software to automate the process.
11. Leverage crypto tax software
Looking for an easy way to save time and money when filing your taxes? Cryptocurrency tax software like CoinLedger can help.
There’s no need to spend hours poring over spreadsheets of 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.
How do crypto taxes work?
Let’s review the basics of how cryptocurrency is taxed.
Capital gains: If you dispose of your cryptocurrency, your profits will 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.
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.
Is avoiding crypto tax legal?
It’s important to draw a distinction between tax avoidance and tax evasion.
Tax avoidance: Taking steps to legally reduce your tax bill.
Tax evasion: Intentionally not reporting or misrepresenting your income.
While tax evasion is a serious crime with serious consequences, all of the tips outlined above are fully legal tax avoidance strategies.
How much tax do I pay on crypto?
The tax rate you pay on cryptocurrency varies depending on your holding period and whether your income is classified as income or capital gains.
If you earn cryptocurrency income or dispose of your cryptocurrency after less than 12 months of holding, your cryptocurrency will be taxed as ordinary income (10-37%).
If you dispose of cryptocurrency after more than 12 months of holding, your cryptocurrency will be taxed as long-term capital gains (0-20%).
Want to estimate your crypto tax bill? Check out our free crypto tax calculator.
How do I avoid crypto taxes in other countries
Want to know more about how to avoid crypto taxes in your country? Here’s a list of guides to help you legally reduce your tax bill no matter where you’re located!
- Avoid Crypto Tax in Australia
- Avoid Crypto Tax in the UK
- Avoid Crypto Tax in Canada
- Avoid Crypto Tax in New Zealand
- Avoid Crypto Tax in Ireland
- Avoid Crypto Tax in Germany
- How to Cash Out Crypto Without Paying Taxes (USA)
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.
As a seasoned cryptocurrency enthusiast and tax professional, I've been actively involved in the crypto space for several years. I have successfully navigated the complexities of cryptocurrency taxes and have firsthand experience in implementing various tax-saving strategies. My deep understanding of both the cryptocurrency ecosystem and tax regulations allows me to provide valuable insights and guidance to investors seeking to minimize their crypto tax liability.
Now, let's delve into the concepts discussed in the article, "11 Ways to Minimize Your Crypto Tax Liability":
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Harvest Your Losses:
- Tax-loss harvesting involves intentionally selling cryptocurrency at a loss to offset capital gains. It's a well-established strategy in traditional stocks, and in the crypto space, it offers unique advantages due to the absence of the wash sale rule.
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Take Advantage of Long-Term Tax Rates:
- Waiting for at least 12 months before selling your crypto can significantly reduce the capital gains tax rate, as the American tax code encourages long-term investments.
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Take Profits in a Low-Income Year:
- Lowering your annual income during a tax year can lead to lower tax rates on crypto disposals, making it advantageous to take profits during low-income years.
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Give Cryptocurrency Gifts:
- Gifting cryptocurrency can be a tax-efficient strategy, as it incurs no income tax obligation. However, gifts with a fair market value above $16,000 may require a gift tax return.
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Buy and Sell Cryptocurrency in an IRA:
- Using a self-directed IRA allows investors to invest in cryptocurrencies, providing tax advantages within the framework of retirement accounts.
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Hire a Crypto-Specialized CPA:
- Engaging a Certified Public Accountant (CPA) with expertise in cryptocurrency taxation can help identify strategies to minimize tax burdens, ensuring compliance with the intricate tax code.
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Make a Cryptocurrency Donation:
- Donating cryptocurrency not only contributes to charitable causes but also provides a unique opportunity to avoid taxation on crypto disposals and potentially qualify for tax deductions.
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Take Out a Cryptocurrency Loan:
- Taking a loan against your cryptocurrency holdings is considered a non-taxable event, offering access to fiat currency without triggering immediate tax obligations.
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Move to a Low-Tax State/Country:
- Some investors choose to relocate to regions or countries with more favorable tax rates, including states in the U.S. with no income taxes and countries like the United Arab Emirates and Malta that don't tax capital gains.
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Keep Careful Records:
- Maintaining meticulous records of cryptocurrency transactions, including acquisition and disposal details, is crucial for accurate tax reporting. Lack of proper records may lead to higher tax liabilities.
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Leverage Crypto Tax Software:
- Utilizing cryptocurrency tax software, such as CoinLedger, streamlines the tax reporting process by automating the import of transactions and generating comprehensive tax reports.
In addition to these strategies, the article provides an overview of how crypto taxes work, distinguishing between capital gains and ordinary income tax. It emphasizes the legality of tax avoidance strategies and offers information on tax rates based on holding periods. The article also addresses international readers with guides on avoiding crypto taxes in specific countries. Finally, it promotes the use of CoinLedger as a platform to manage crypto taxes efficiently.
