The growing popularity of cryptocurrencies has resulted in massive profits for crypto investors. But more profit naturally means more tax.
However, while tax cannot be legally avoided altogether, there are simple measures that can help you reduce your tax bill.
If you want to know more about how to avoid paying crypto tax, this article offers a comprehensive guide on how to do so legally and simply.
At a glance: The top strategies to reduce your crypto tax bill
Before we provide detailed information on ways to invest in cryptocurrency and avoid paying taxes, let’s take a quick look at the top strategies to reduce your crypto tax bill:
- Harvest your losses: Investors can legally offset any capital gains from cryptocurrency, stocks, and other assets with their crypto losses. Losses can also be carried forward into future tax years.
- Take out a crypto loan: Selling your crypto holdings attracts taxes, but if you take out a loan using your crypto holdings, it won’t attract taxes. It also ensures your crypto holdings stay with you.
- Take profits in a low-income year: Investors using this strategy need to sell their crypto holdings at a profit in the year in which they expect to have a lower overall annual income. This strategy allows investors to optimize taxes by taking advantage of reduced tax brackets.
- Give cryptocurrency gifts: Giving or receiving cryptocurrency gifts is not a taxable event. Thus, by giving your crypto holdings as a gift to friends and family, you can lower your taxable income.
- Buy and sell crypto through an IRA: Using retirement accounts such as self-directed IRAs is a great way to grow your crypto holdings and enjoy tax benefits.
- Offset gains with losses: If you are planning to sell your profitable crypto investment, then to reduce the tax liability, you can offset that gain from losses you incurred by selling any other crypto holdings.
- Crypto donations: Donating crypto to a registered non-profit and charitable organization is tax-free. Such donations are treated as a tax deduction and help reduce tax liability.
- Take advantage of long-term tax rates: Waiting 12 months or longer to dispose of your crypto holdings reduces your tax burden. Investments held for 12 months or more are subject to a comparatively lower long-term capital gains tax rate.
- Track your losses and gains: Keeping careful records of your cryptocurrency transactions helps you to file your taxes accurately. Several crypto tax calculators and portfolio trackers are available to help you easily track your crypto gains and losses.
- Use specialist crypto tax software or calculators: Many crypto tax software or calculators are available online that can help you to reduce your taxes.
How we chose the best methods to avoid crypto taxes
To choose the best methods to avoid crypto taxes, we consulted several crypto and tax experts on what advice they give to their clients to reduce their crypto tax liability. We also considered the opinion of many expert crypto investors on how much tax they pay on their crypto earnings and what tricks they use to minimize their tax liability.
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A closer look at how to avoid paying taxes on cryptocurrency
Now that you know the best ways to avoid crypto tax, let’s discuss each in detail to understand what makes them effective and how to execute them.
1. Harvest your losses
Tax-loss harvesting is a well-known tax saving strategy in the stock market, and now crypto investors are using it. Harvesting losses means offsetting crypto losses, to offset any capital gains tax from cryptocurrency.
For this reason, many crypto investors intentionally take a loss on cryptocurrency investments to reduce their tax liability. If you plan to harvest your losses, you must execute the trades before the end of the year to ensure they are counted for that tax year.
More importantly, you can also carry forward your crypto losses to into future tax years if your net losses exceed the threshold amount fixed by tax authorities.
2. Take out a crypto loan
If you are in need of quick money, you might be tempted to sell your crypto holdings. Selling your holdings, however, will attract taxes, especially if the value of your cryptocurrencies has gained significantly since you bought them.
In such a scenario, taking out a crypto loan could prove a smarter decision as it is a non-taxable event. So, all you need to do is put your crypto up as collateral to get the needed cash, and repay the loan over time.
There are plenty of crypto lending platforms that provide high quality services to both lenders and borrowers.
However, it is important that the interest you pay on the loan is less than the taxes you have paid on selling your crypto holdings.
3. Take profits in a low-income year
A low-income year is a year where your annual income is comparatively lower than usual. Thus, to reduce your tax liability, it is recommended that you sell your crypto holdings in a year where you expect comparatively less annual income.
Many investors, for instance, prefer taking profits in years when they are studying or in between jobs. However, it is important that investors have accurate information on the applicable tax rate based on their income in a given year.
4. Give cryptocurrency gifts
Giving or receiving cryptocurrency as a gift doesn’t attract income tax obligation. You may be required to fill out a gift tax return if the fair market value of the gift is above $17,000, but this return is mainly for informational purposes.
So, by gifting crypto to friends and family, you can easily minimize your tax liability while keeping your crypto holdings closer to you.
5. Buy and sell crypto through an IRA
Retirement accounts help investors to grow their wealth while minimizing taxes. Self-directed IRAs, for instance, allow investors to put their retirement savings in other avenues, including real estate, precious metals, and cryptocurrencies.
Smartly using your retirement accounts could help you not only grow your crypto investments tax-free but also provide you with tax benefits. It must be noted that those below 50 years are allowed to contribute $7,000 annually to their IRAs.
Note: IRAs are not available in the United Kingdom. Check out our full guide on how to buy crypto in the UK.
6. Offset gains with losses
Similar to harvesting your losses, you can offset your crypto gains with crypto losses. For instance, if you realized a gain of $5,000 by selling Bitcoin and a loss of $5,000 from selling Ethereum, you can offset the gain from Ethereum losses to minimize Bitcoin taxes.
To execute this strategy, it is important that before cashing in large crypto investments, you thoroughly scan your crypto portfolio to check if you have any loss-making investments to offset your crypto gains.
7. Crypto donations
Similar to crypto gifting, crypto donations can also provide you with tax benefits. In fact, donating crypto is among the few scenarios in which disposing of cryptocurrency is not taxed.
Any crypto donations to a registered non-profit or charitable organization are not subject to capital gains taxes. When you donate crypto, you are eligible for a deduction worth the full value of your crypto, including capital gains.
8. Take advantage of long-term tax rates
One of simplest ways to minimize your crypto tax liability is to ‘hodl’ (hold) your crypto investment for more than a year. Tax codes are usually designed to encourage long-term investment, and thus, investments held for more than a year get preferential tax treatment.
Long-term capital gains tax rates are comparatively lower than short-term capital gains tax rates, which are levied on investments held for less than a year. The short-term capital gains tax rate is usually the same as the normal income tax rate.
9. Track your losses and gains
Keeping track of your crypto holdings, including the price you originally bought and the date you acquired and disposed of your crypto, is critical. If you don’t accurately know the money you made from your crypto investments in a year, you may be in for a surprise when you get your tax bill.
Additionally, keeping track of your crypto losses and gains helps you to verify your tax bill. You can use crypto tax software to help you keep track of your crypto tax.
10. Use specialist crypto tax software or calculators
Using some of the best crypto tax software and calculators can also help you to reduce your crypto tax liability. Additionally, the use of such software or calculators helps you to save time and makes your life easier.
Cryptocurrency tax software are capable of importing your transactions from some of the best crypto exchanges like Coinbase, and blockchains like Ethereum, to generate your comprehensive tax report within minutes.
Additionally, crypto tax software or calculators can help optimize your taxes. For instance, crypto tax software can track your unrealized gains and losses to help you understand when to sell or hold to minimize taxes.
The best crypto tax software compared
| Platform | Exchanges Supported | BlockchainsSupported | Free plan | Customer service |
| CoinLedger | 100+ | 9 | Yes | Web chat, email, help center |
| CoinPanda | 500+ | 125+ | Yes | Web chat, email |
| Koinly | 400+ | 170+ | Yes | Live chat, email, help center |
| TokenTax | 100+ | 50+ | No | Web chat, email, expert tax advisors |
| ZenLedger | 400+ | 100+ | Yes | Web chat, email, help center |
| CryptoTaxCalculator | 3500+ | 42+ | No | Web chat, email, help center |
| CryptoTax | 100+ | 20+ | No | Web chat, email, guides |
| TaxBit | 1500+ | 50+ | Yes | Web chat, email, CPA a |
Pros and cons of avoiding crypto taxes
Avoiding or minimizing crypto taxes is beneficial for investors, but there are a few downsides, too. Here are a few of the most significant pros and cons to be conscious of.
Pros
- Reduces money outflow and increases profits
- You can use taxes saved to make more investments
- You develop a habit of tracking and keeping a record of your crypto transactions
- Encourages you to make donations
Cons:
- Potential extra spending on crypto tax software
- You may be forced to sell your crypto holdingsto minimize taxes
How do crypto taxes work?
Crypto taxes apply when you sell or dispose of your crypto holdings, resulting in a capital gain or loss. The profit from selling or disposing of the crypto holding is subject to capital gains tax.
On the other hand, if you earn any income from cryptocurrency, you will be subject to ordinary income tax. Income from cryptocurrency could come from staking, mining rewards, receiving compensation for crypto work and earning referral bonuses.
Additionally, gifting, donating, or transferring crypto between wallets are usually non-taxable events.
Is avoiding crypto tax legal?
Yes, it is completely legal to avoid crypto tax using legal measures such as those that we discussed above. On the other hand, tax evasion, not reporting crypto income or misrepresenting crypto income, is fraud.
It must be noted that evading taxes is a serious offense, but if you are using legal means to reduce or avoid crypto tax, such as harvesting your losses or donating or gifting crypto, it is completely legal.
Methodology: How we chose the best methods to avoid crypto taxes
We considered the following factors to come up with our list of how to avoid crypto taxes:
- Legality: We only considered methods that are legal. Any method to save or avoid tax with a slight chance of being unlawful didn’t find a place on our list.
- Cost: The cost of implementing a particular measure is also a crucial factor. If the cost is more than the tax it saves, then it’s not sensible to adopt it.
- Ease of implementation: We also considered how easy or difficult it is to implement a particular measure. If a measure takes time or is hard to implement, then it may not be viable.
- Expert recommendation: A measure scored high on our list if more experts, including tax experts and expert investors recommend it.
Our verdict on how to avoid crypto taxes
You can use one or a combination of the above-suggested measures to reduce or avoid crypto taxes. How much you can save depends primarily on your understanding of crypto taxes and how efficiently you execute the above measures.
You can also use the services of a tax expert, who can guide you on crypto taxes to help you stay on track of your financial goals.
