How to Avoid Crypto Taxes: A Step By Step Guide

How Crypto Tax Works

Crypto taxes typically apply to US taxpayers who trade, sell, exchange, or otherwise dispose of cryptocurrency and have a capital gain or loss. Revenues from mining, staking, and the majority of yield farming are liable to standard income taxes.

Buying cryptocurrency with fiat money, giving or receiving cryptocurrency, and moving cryptocurrency between wallets (without exchanging coins) usually don’t result in taxable events.

Detailed Look At How To Avoid Taxes On Bitcoin

According to a US news source, 20% of Americans have either traded, invested in, or utilized cryptocurrencies. This figure shows how popular digital currencies are becoming, but it also shows how difficult it is for legislators to put tax legislation into effect.
Many are keen to find out how to avoid paying taxes on Bitcoin due to the market’s rapid growth. In light of this, let’s examine each of the tactics we have prepared in further detail:

Buy Items Online

The first tactic we’ll cover in our discussion of avoiding crypto tax is probably one that many investors now employ: using their cryptocurrency holdings to purchase goods. However, in 2024, who accepts Bitcoin payments and other altcoins? More retailers than ever before are beginning to accept Bitcoin payments, making this procedure more accessible in recent years.
However, what can be purchased with Bitcoin and other cryptocurrencies, and how may this help investors pay less tax on crypto? Regarding the first, investors have access to hundreds of things on the internet, ranging from luxury watches to cars, luxury jewellery, and even charter flights. Cryptocurrency enthusiasts may even use cryptocurrencies to purchase real estate through certain online retailers.

Purchasing goods does not automatically result in a reduction in taxes when it comes to paying less tax on cryptocurrencies. Nonetheless, in the event that the investor sells their cryptocurrency assets at a loss, this strategy may assist in lowering their total tax burden. This strategy is known as “tax loss harvesting,” which is another tactic we will later consider.
An illustration would be if an investor purchased one of the top coins (like Ethereum) at a crypto price of $4,500 and sold it at a price of $2,000. In this case, there are no capital gains, and the investor can spend the $2,000 from the position to make purchases on the internet instead of reinvesting and perhaps raising their tax obligation again.

Buy and Sell Crypto Using IRA

One common method to avoid paying capital gains tax on cryptocurrency is to invest with an Individual Retirement Account (IRA), which is a tax-efficient investment. This is one kind of savings account meant to assist people in saving for retirement. Some special tax benefits are available to these accounts that are unavailable to “regular” savings accounts.

IRAs come in a variety of forms, but to use a Traditional IRA as an example, holders do not have to pay taxes on capital gains until they take money out of the account when they retire. This is so that investors won’t have to worry about paying taxes until the conclusion of the product’s lifecycle because donations are tax deductible.

A different kind of IRA is known as a “Roth IRA.” With a Roth IRA, inputs are made in after-tax income, which means that withdrawals are tax-free. Most importantly, this also implies that subject to specific restrictions, any capital gains earned inside the Roth IRA are tax-free. In the event that an investor uses a Roth IRA to buy Bitcoin and the coin triples in value, there would be no tax due on the gains.

So, how can you use any of these IRAs to avoid paying taxes on cryptocurrency? The most often used strategy is to collaborate with an IRA provider who accepts crypto investments. Although certain vendors additionally offer self-directed IRAs that permit cryptocurrency purchases, they are typically referred to as “cryptocurrency IRAs.”

Through the provider’s own arrangement, owners of these IRAs may access the finest cryptocurrencies to invest in and make purchases. This assists investors in reducing or avoiding taxes while streamlining the procedure.

Offset Gains With Appropriate Losses: Harvest Your Crypto Losses

Many choose to invest in crypto for the long term in order to profit from slow price increases, which are more common with “established” cryptocurrencies like Ethereum and Bitcoin. But it’s crucial to remember that losses on other assets can be utilized to lower the total tax burden for a given tax year when figuring out how to pay less tax on crypto.

This strategy is known as “tax-loss harvesting,” as we mentioned it briefly. This basically implies that the sale of a cryptocurrency asset at a loss is considered a “capital loss” that can be utilized to offset gains from other investments.

For instance, in the event that a crypto investor generates a profit of $20,000 from their Bitcoin holdings but forfeits $7,000 on their Tron investment, they are going to be able to decrease their taxable gains by $7,000. This means the investor will only pay taxes on $13,000 rather than on the $20,000.

This procedure is often used, particularly in the equities market. A common strategy to lower the tax burden is for investors to “cut their losses” around the time of year when yearly income taxes are due.

This strategy also has the advantage of allowing investors to use any capital losses they incur to offset other regular income if they do not realize any capital gains. Currently, $3,000 is the maximum amount that may be claimed; however, any amount that is not claimed can be rolled over to subsequent years.

Utilize Crypto Tax Software

Using efficient crypto tax software solutions is an additional tactic we’ll go over in this article on avoiding crypto taxes. This tactic is popular because it guarantees investors aren’t underreporting—or omitting to disclose—any gains they’ve achieved from cryptocurrency.

Consequently, Bitcoin tax software can assist investors in avoiding penalties related to these two activities. Furthermore, some of the greatest software programs even include built-in tax guidance functions. For instance, they may indicate when it would be advisable for a cryptocurrency investor to sell their holdings in order to take advantage of tax-loss harvesting.

Additionally, by correctly reporting profits and losses, this tax software provides investors peace of mind that they aren’t overpaying taxes. These software programs also make sure late filing fines aren’t an issue because they often produce the required tax returns for investors on time.

Hold Crypto Assets Long-term

There may be long-term capital gains tax rate reductions if you hold your cryptocurrency assets for longer than a year. When you choose to sell your cryptocurrencies, you may benefit from tax advantages if you use this investing strategy.
The tax approach for cryptocurrencies is straightforward: holding for at least a year pays well, at least in terms of your tax liability. Nevertheless, you are at the mercy of the market, so it could be wiser to sell your cryptocurrency when it has increased dramatically in value rather than holding onto it in hopes of making a profit down the road.

Take Profit During A Low-Income Year

If you want to take advantage of reduced tax rates, think about selling cryptocurrencies while your personal income is low. Realizing that your income tax bracket for a particular year determines the tax rate you pay on bitcoin disposals. By utilizing lower tax rates, this cryptocurrency tax method enables you to maximize your tax position.

Give Cryptocurrency Gifts to Family

Giving cryptocurrency as a gift to minimize taxes is a simple strategy that cryptocurrency investors may use. The act of “gifting” cryptocurrency, be it Bitcoin or another emerging coin, is often not regarded as a taxable event. Investors and the recipient of the gift will not be required to pay taxes on the amount given by doing this.

With this method, there are a few guidelines to follow. For instance, cryptocurrency investors are only able to give crypto worth $17,000 per person per year under current US legislation before being required to submit a gift tax report. In addition, the recipient of the cryptocurrency will still be liable for any financial gains realized after obtaining it.

Interestingly, US residents are immune from paying estate taxes on gifts and bequests up to $12.92 million ($25.84 million for married couples) during their lifetime. This exception allows cryptocurrency investors to avoid gift taxes that they may have otherwise incurred.

In the end, even if users get a good return on their investment, the tax will still need to be paid when the cryptocurrency is sold. However, it will assist maintaining crypto holdings in the hands of relatives, which may prove to be highly beneficial.

Move To A Crypto Tax-Free Country Or A Low-Tax State

Moving to tax-free crypto nations may lower your total tax burden. By looking into locations with lower crypto tax rates, you may maximize your tax status and possibly keep a larger portion of your cryptocurrency revenues.

Puerto Rico is the most favored location in this sense. Although Puerto Rico is technically a US territory, investors can take advantage of some of the country’s unique tax advantages. The biggest benefit is that Puerto Rico doesn’t impose any taxes at all on capital gains from investments.

Portugal is an additional option for anyone who wants to avoid paying cryptocurrency taxes. Portugal does not impose taxes on earnings from crypto trading. However, investors must be Portuguese residents in order to take advantage of these tax regulations, which can be a difficult procedure.

Hire A Crypto Tax Professional

Obtain expert advice from a knowledgeable crypto accountant who can guide you through the ways to compute BTC taxes. Consulting with a specialist can assist you in locating other tax-saving options unique to the cryptocurrency sector.

Keep Complete Records Of Your Crypto Transactions

It is essential to keep precise records of your Bitcoin transactions in order to calculate the cost basis of your purchases and to file taxes correctly. You may guarantee compliance with tax laws and avert fines by maintaining comprehensive and well-organized records.

Use these techniques to maximize your entire tax status, create a successful tax plan, and avoid cryptocurrency taxes.

How Do I Calculate Tax On Bitcoin & Other Cryptocurrencies?

It might be difficult to understand how to use cryptocurrency without paying taxes, especially when regulations change frequently and differ between nations. But as we’ve seen so far, investors have a few options for figuring out their taxes and making sure they pay the least amount of taxes feasible.

To ascertain the amount of tax they will be required to pay, investors need to conduct a few actions. In general, these include:

• Determine Whether Short-Term Or Long-Term Taxes Are Owed

As said, the length of time a crypto asset is kept affects the capital gains tax. Anything more than a year is referred to as “long-term,” and anything shorter is referred to as “short-term.” In the end, the government takes these actions to deter speculative transactions and encourage long-term asset holding by investors.

Because of this, cryptocurrency investors need to find out the precise day they bought their holdings. Significantly, crypto assets held for 365 days, or exactly one year, are still regarded as long-term holdings.

• Calculate Gains Or Losses For Each Transaction

Calculating the profits (or losses) from each cryptocurrency transaction is the next stage. Investors can determine their “total” tax burden in this way, provided they have realized a profit.

Subtracting the purchase price from the selling price (less any relevant selling fees) is the simplest method for determining profits or losses from a cryptocurrency transaction. For instance, the capital gain would be $100,000 if an investor put $50,000 into one of the most popular cryptocurrency ventures and sold it for $150,000 just a few months later.

• Check For Transactions That Are Considered Taxable Income

The last step is to confirm that there are no further transactions that might be considered “taxable crypto income.” Cryptocurrency obtained from mining, airdrops, yield farming, staking, and other related activities is typically used in these transactions. As was already noted, cryptocurrency acquired in exchange for products or services qualifies as “income.”

The value of the crypto asset on the day it is received is considered the taxable amount from a tax perspective. Thus, if someone sold something online and was paid 0.1 BTC, or $2,500 at the time, for it, that sum would be added to their yearly income.

After completing all of these procedures, investors will have a thorough understanding of their capital gains and whether or not they will continue to earn profits from cryptocurrency that will add to their annual income. Following that, investors can file their taxes with the assistance of a tax expert or a Bitcoin tax software program.

Are You Legally Allowed To Avoid Tax On Crypto?

As already said, cryptocurrencies are very different from FIAT currencies like the US dollar. The main distinction is that cryptocurrencies aren’t governed by a single institution like these other currencies. Given this disparity, is it permissible to avoid paying cryptocurrency taxes?

In short, the answer is yes. Given the implications of “avoiding” taxes, many readers might find this surprising. But tax avoidance, at least in the US, refers to using legal strategies to reduce a person’s or company’s tax liability. Thus, this “tax avoidance” category encompasses all the tactics covered in this guide.

With this knowledge in hand, investors should make sure their tax filings are correct and genuine. Recent technological developments have made it possible for the IRS to simply monitor cryptocurrency transactions because exchanges and brokers are required to register all activity on their networks. The IRS has the legal right to request customer data from a broker or exchange, even if they choose not to give it out.

The sure way the tax collector is unable to access a citizen’s crypto holdings is if they are kept on an external hardware wallet. Therefore, to avoid breaking the law, cryptocurrency investors must still make sure their tax reporting is correct.

Conclusion

To summarize, both individuals and businesses must be aware of the tax obligations while making cryptocurrency investments. As the regulatory environment is always evolving, it is critical to be informed of recent tax rules in order to reduce liability.

Buying goods from internet marketplaces is one method investors might reduce their obligations. Through these platforms, investors may acquire premium goods and partially offset the liabilities they have accumulated. Furthermore, you can gift crypto, relocate to a tax-free region, take profits during low-income years, hire tax professionals, and several others to avoid huge taxes.