10 Ways to Minimize Your Crypto Taxes

Written By
Julija A.
Updated
September 01,2022

Cryptocurrencies are an exciting investment and seem like the perfect opportunity to realize significant gains. However, if you don’t manage your assets wisely, you may end up paying more crypto taxes than you have to.

Thankfully, some strategies may help you rethink your investment approach and reduce your tax obligations to the state.

How Crypto Is Taxed by the IRS

The Internal Revenue Service (IRS) treats cryptocurrencies as property rather than currency, even though the asset is recognized as a virtual currency that uses cryptography and blockchain technology. So, the same rules that apply to buying and selling property also apply to crypto, which means it is taxed as a capital asset. 

Crypto Capital Gains Tax

From the IRS’s perspective, investing in cryptocurrencies works the same way as investing in stocks. Therefore, crypto is susceptible to capital gains tax if you make a profit or tax deduction because of a capital loss if you sell at a lower price than you bought the asset for.

Capital gains taxes on crypto depend directly on how much the assets were worth when they were bought. This is called the tax basis. If you sell above or below this basis, you are either eligible to pay taxes or receive a deduction.

Crypto as Taxable Income

Even though crypto isn't officially a currency in the US, it's becoming more common to receive it as payment or regular income. When you get crypto this way, the IRS considers it a gain that falls under the regular income tax category. For purposes of taxation, mining and staking rewards are considered the same.

Remember that capital gains taxes are often lower than those on sources of income like a salary. Of course, this varies from state to state.

Methods for Reducing Your Taxes on Cryptocurrencies

Here are some methods that you can try to reduce the amount of tax you pay on your cryptocurrencies.

Loss Harvesting: Using Losses to Offset Gains

When you make a profit from the sale of an asset like crypto, you have to pay tax on that profit. On the flip side, cryptocurrencies are also subject to loss harvesting. Therefore, the crypto tax strategy you can use in this situation is to sell a cryptocurrency for less than you paid to buy it.

Loss harvesting is a powerful tool that can help investors reduce their tax liability. Cryptocurrencies are especially well-suited for loss harvesting because their prices are extremely volatile, and you can easily balance out your investment by leaving less profitable positions.

By using losses to offset gains, investors can minimize their taxes.

For example, let's say you invested in Bitcoin when it was worth $30,000 per coin, and it’s now worth $20,000 per coin. You also invested in Ether when it was worth $100 per coin, now worth $2,500 per coin.

If you sold your Ether at that price, you would have to pay taxes only on crypto profits of $2,400. However, if you sold some of your Bitcoin at a loss, you would effectively mitigate the profit made on your investment with Ether, thus minimizing your liability.

Long-Term Investing: Turn Short-Term into Long-Term Gains

It's important to know the difference between short-term gains, like profits from selling or transferring assets held for less than a year, and long-term investments. Selling an asset after more than one year is subject to net capital gain tax, while short-term ones are subject to income tax.

If you don’t understand how to reduce your crypto taxes this way, here’s a simple explanation: Since capital gains tax is smaller than income tax, you save money by prolonging the period between buying and selling your crypto. In other words, long-term asset holding is the perfect answer for crypto tax reduction.

Sell Crypto in a Low-Income Year: Take Advantage of Tax-free Thresholds

Selling your cryptocurrencies in a year when your personal income is low may be a great way of paying low or no taxes on capital gains. Remember that the table below refers only to assets held for the long term.

Your Filing Status

0% tax rate

15% tax rate

20% tax rate

Single

Up to $41,675

$41,676 - $459,750

Over $459,750

Married filing jointly

Up to $83,350

$83,351 - $517,200

Over $517,200

Married filing separately

Up to $41,675

$41,676 - $258,600

Over $258,600

Head of household

Up to $55,900

$55,901 - $488,500

Over $488,500

If you decide to sell BTC, for example, and your annual income is below $41,675 in 2022, you will effectively pay 0% of Bitcoin taxes for the year.

Use Crypto as a Loan Collateral

If you take out a loan with crypto as collateral, you don’t have to pay the taxes on the loan amount. Therefore, if you need to cover some expenses, you don’t have to go through the trouble of selling your assets and paying taxes on them, especially if you plan to invest in cryptocurrencies again.

The tax code doesn’t always recognize crypto-based loans, however. If you are exchanging crypto for another crypto, it may be treated as a simple asset change that may be taxable. However, some De-Fi companies accept BTC and issue loans in USD in exchange, which wouldn’t be taxable.

If you are wondering if your interest rate for the loan is tax-deductible, the answer depends on the type of loan you’re taking out. If it’s a business loan, it will be deductible; in contrast, personal loans don’t fall under that category.

Gift Cryptocurrencies to Your Family

If you are wondering how to avoid taxes on crypto altogether, you should consider giving them out as a gift.

There are no tax obligations when you give away your virtual currency. However, if your crypto gift is larger than $16,000 in market value, you have to report the gift on your tax return, but you won’t have to pay anything.

Also, receiving a monetary or crypto gift is not a taxable event. When you receive digital assets, keep track of their price to calculate gains or losses when you eventually decide to sell them for fiat.

Donations are the way to go if you are interested in how to avoid capital gains tax on cryptocurrency, get a deductible, and help a charitable cause.

Furthermore, if you donate assets after holding them for more than a year, you are eligible to deduct taxes on their fair market value at the time you’re donating rather than the base value.

Using an IRA to Buy and Sell Crypto

A self-directed Individual Retirement Account is a specific type of IRA that allows the account owner to choose what types of investments to make from a wider pool of options than most traditional retirement accounts.

With a traditional IRA, you can invest in standard stocks and mutual funds. However, with a self-directed IRA, you can also invest in not-so-common assets such as precious metals, real estate, and cryptocurrency.

Paying taxes on crypto added to an IRA won’t happen immediately - instead, you’ll pay when the money is withdrawn.

Find Tax Advisors Specializing in Crypto

Correctly navigating their way around cryptocurrency taxation regulations is overwhelming for most investors. Thankfully, there are plenty of tax software solutions for cryptocurrencies and certified public accountants that can assist you.

Change Your Residence

Changing residences for tax purposes is something wealthy people have done for years. There are states in the US without a state income tax, such as Texas, Alaska, Florida, Nevada, South Dakota, New Hampshire, Washington, Wyoming, and Tennessee. You’ll still have to pay federal income taxes, though.

There are some methods to reduce your crypto taxes completely - like moving to Puerto Rico. Even though it’s a US territory, it has a 100% federal tax exemption on capital assets.

However, you need to be a long-term resident, and any assets you acquire while living in the US still need to be taxed before moving.

Use Crypto for Building Generational Wealth: Bequeath Your Assets

If cryptocurrency investments are just a method of diversifying your estate, and you don’t have an interest in exchanging them for fiat in your lifetime, then your heirs will receive beneficial tax treatment.

Any digital assets you bequeath to your heirs are subject to cryptocurrency taxes as if they were purchased at that moment.

For example, if you bought BTC when it was $1,000, and wanted to sell it when it cost $100,000, you would have to pay capital gains tax on $99,000. However, if it were inherited at the same price of $100,000, you wouldn't have to pay any capital gains or income taxes.

If you are considering setting up this kind of inheritance, consult financial experts who deal in estate planning.

Closing Thoughts 

Now that you are aware of multiple ways of paying lower taxes on your crypto assets, you can make an informed decision. While some methods may be more complicated than others and might not be available to everyone, there are still plenty of options that should suit most investors.

Remember, even if you don’t have to pay taxes on cryptocurrency today, keeping track of your transactions is still crucial. The IRS can audit you for up to six years after you file your taxes, or even more if there are some discrepancies, and you might be subject to interest and penalties.

For this reason, we recommend using quality crypto tax software to help you stay on top of your reporting requirements and minimize your risk of an IRS audit.

FAQ

Do I have to pay taxes on crypto?

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Yes, you have to. All cryptocurrency transactions are taxable and may be susceptible to taxes as short-term capital gains. If you hold crypto assets for longer than a year, they are treated as stocks for capital gains or losses, depending on the time of selling them for fiat.

Do you have to report crypto under $600?

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Yes, you have to. However, whether you have to pay taxes on them will depend on your tax bracket and whether the gain is considered short-term or long-term. If you are interested in learning how to minimize taxes, there are plenty of methods we discuss in our guide.

Even if you are in the first tax bracket that has to pay 0% capital gains tax, you need to include crypto in your tax report, or risk paying fines.

How can I avoid paying taxes on crypto?

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There are no legal ways of avoiding crypto taxes. However, there are methods of minimizing them, as we discuss in our guide, such as using cryptocurrency tax software or finding a certified public accountant specializing in crypto to advise you on how to make the best returns.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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