How to avoid taxes on crypto: 8 strategies

Nobody wants to pay extra in crypto taxes. While they won't wipe away big wins in the digital assets market, taxes can dampen a trader's expected returns – even during the most bullish years. 

Paying taxes is inevitable, but fortunately, crypto investors have discovered legitimate techniques to minimize their liability. It's important to distinguish tax avoidance, which is the lawful practice of minimizing tax obligations, from tax evasion, a criminal act of intentionally avoiding taxes.

In this guide, we’ll explain the basics of crypto taxation and how to legally avoid crypto taxes. We’ll also offer strategic methods to help you make wiser decisions and trim your yearly tax burden. 

Understanding crypto taxes: What is and isn’t taxable

The first step to avoiding crypto taxes is knowing what qualifies as a taxable event. Understanding what triggers a taxable disposal in the eyes of the Internal Revenue Service helps traders grasp the implications of different actions in the crypto market. 

Taxable

• Selling crypto for cash: When you sell cryptocurrency for fiat currency like USD and make a profit, it’s subject to capital gains taxes. The amount owed depends on your annual income and how long you held the position. Typically, day and swing traders pay higher taxes on short-term trades (a year or less) compared to long-term investors. 
• Converting one crypto to another: Swapping between cryptocurrencies also triggers tax obligations. If you exchange a digital asset at a higher value than its original cost (the "cost basis"), you’ll owe capital gains taxes on the transaction. Even a trade between stablecoins triggers a taxable disposal, even if the gain or loss is nominal.
• Spending crypto on goods and services: Using crypto to buy goods, like a cup of coffee, can incur additional costs. If the cost basis is lower than the current price of the crypto at the time of purchase, you’ll owe capital gains taxes on the difference. If the cost basis exceeds the current market price, you could claim a taxable loss. When spending crypto on goods or services, think of it as first converting the crypto to cash (in a taxable sale as explained above) and then using that cash to purchase the goods or services.

Not taxable

• Buying crypto with cash and holding it: You incur no taxes for simply holding crypto in an exchange account or self-custodial wallet. Additionally, if you hold your crypto for over a year before selling, you qualify for the more favorable crypto long-term capital gains tax rates. If you earn any yield, interest, rewards, or other types of returns for holding your crypto, this counts as taxable income based on the fair market value of the rewards at the time you receive them.
• Donating crypto to a qualified tax-exempt charity: You won’t owe the IRS for these transfers and may qualify for tax deductions. However, converting crypto to fiat or another digital asset before donating will still have tax implications.
• Receiving a gift: Gifting cryptocurrencies is a tax-efficient strategy for both the giver and the recipient. While the IRS requires reporting gifts over $18,000 annually and gift tax could apply to the giver, they’re exempt from capital gains taxes, making it a unique and legitimate way to transfer wealth.  

How is cryptocurrency taxed?

Although referred to as "currency," the IRS classifies cryptocurrencies as digital "property" and taxes them accordingly. Like other property-related assets, you must pay capital gains taxes when you sell or convert digital assets into different cryptocurrencies, fiat currencies, or goods and services, provided their selling price is higher than their cost basis.

The amount of tax owed depends on how long you hold your assets. Selling crypto within a year of purchase incurs short-term capital gains taxes at your marginal ordinary income tax rate. However, holding crypto for more than a year qualifies for more favorable long-term capital gains rates. On the other hand, if you sell cryptocurrency at a loss, you can claim tax deductions by first offsetting other capital gains. If your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income, such as W-2 wages or business income. Any excess losses can be carried forward indefinitely to offset future gains or income.

While buying and selling cryptocurrencies are treated as "property" transactions, there are scenarios where the IRS considers digital assets as income. For instance, people who mine cryptocurrencies on proof-of-work (PoW) blockchains or earn rewards through staking in decentralized finance (DeFi) must pay income tax on these earnings. Similarly, anyone receiving cryptocurrencies as payment for work must report them as regular income.

Ways to legally avoid paying crypto taxes

Paying taxes on cryptocurrency transactions, whether buying or selling, is unavoidable, but there are several simple strategies that could reduce your total crypto tax burden. 

Invest using an IRA

Individual retirement accounts (IRAs) have traditionally been associated with assets like stocks, ETFs, and bonds, but it's becoming increasingly feasible to also use these tax-friendly accounts for crypto investments.

For example, you can use IRAs to buy ETFs linked to cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH) on stock exchanges. Additionally, numerous self-directed IRA platforms allow you to open or rollover traditional IRAs, Roth IRAs, or 401(k)s for investing directly in digital assets.

However, there are some limitations to consider. IRA contributions are capped at $7,000 per year for individuals under 50, and there may be additional management or custodial fees. Moreover, while IRAs offer price exposure to cryptocurrencies, they usually don’t provide direct access to digital funds in a self-custodial wallet. Be aware that early withdrawals made before age 59½ generally come with a 10% penalty in addition to standard income tax. Also, required minimum distributions (RMDs) begin at age 72, meaning it’s important to maintain a long-term investment strategy to fully leverage the tax benefits. Despite these drawbacks, using IRAs for crypto investments is a legitimate way to shield potential profits from taxes.

Have a long-term investment horizon

Holding – or "hodling" in crypto slang – has been a favored strategy for investors who want to simplify their approach to the market. This straightforward "buy-and-hold" method is also a smart move for those looking to minimize capital gains taxes.

By holding crypto assets for at least one year, investors qualify for the more favorable long-term capital gains tax rates. Additionally, "hodlers" benefit from fewer transactions, leading to savings on annual commissions and gas fees on their preferred crypto exchanges.

Gift crypto to family and friends

Cryptocurrency gifts exchanged between friends or family throughout the year come with no capital gain tax obligations. There’s no need to report these gifts as long as the value stays below the current $18,000 limit. Even if the value of the gift exceeds the $18,000 annual limit, it won't trigger capital gains taxes for the donor or recipient. Instead, the donor must file a gift tax return. However, gifts are only subject to gift tax if the total value surpasses the lifetime gift tax exemption.

Relocate to a different country or state

With no universal standards for crypto taxation, each country determines its own approach to taxing digital assets. In some cases, nations actively encourage innovation in the cryptocurrency sector by offering attractive tax breaks.

Although crypto tax laws are ever-changing, countries like the United Arab Emirates and Portugal are known for their lenient policies, sometimes even exempting traders from capital gains taxes. El Salvador also stands out with its pro-crypto stance, where Bitcoin has been legal tender since 2021.

While relocating to a new country might not be practical for everyone, it’s an option some traders may consider if they’re seeking a more crypto-friendly environment. That said, it's important to remember U.S. citizens who relocate abroad are still subject to U.S. taxes, as the U.S. taxes citizens on their worldwide income. However, certain statutory exceptions exist, such as Puerto Rico income for bona fide residents.

While moving to another country may offer some tax benefits, even relocating within the U.S. can significantly impact your tax burden. For instance, moving from high-tax states like California (up to 13.3%) or New York (up to 10.9%, plus New York City tax of 3.08% to 3.88%) to no-income-tax states like Florida, Nevada, or Texas can help reduce your overall tax liability.

Donate crypto to charity

As more charitable organizations accept crypto donations, investors are contributing millions to causes they care about. Beyond their philanthropic intentions, crypto donors benefit from the fact that qualifying transfers are free from capital gains taxes. In some cases, they may even qualify for deductions on their annual taxes.

Offset gains with appropriate capital losses

If you hold underperforming assets, you might consider strategically selling at a loss to offset realized gains – a technique known as tax-loss harvesting. This method helps reduce the total capital gains taxes by using losses as deductions. If losses exceed total gains, you can also lower your annual taxable income by up to $3,000 and carry over additional losses into future years. This can be done even between different asset classes; for example, if you have large gains from trading stocks, tax-loss harvesting with crypto will offset those stock capital gains (and vice versa).

Sell crypto during low-income periods

Timing the crypto market isn’t just about buying low and selling high; it also involves considering your annual income to gauge potential capital gains taxes.

Ideally, traders sell their profitable positions in years when their income is lower, which places them in a lower tax bracket. This strategy is particularly effective during transitions like changing jobs, returning to school, or taking a sabbatical.

Use crypto tax software 

Keeping tabs on crypto transactions can get complicated, but crypto tax software like CoinTracker simplifies the process. No matter which exchanges or wallets you use, linking your accounts with API keys or CSV files is safe and easy. In addition to features like a portfolio tracker and trade calculator, CoinTracker also integrates with popular DeFi activities like staking, yield farming, and liquidity pools, ensuring all transactions are captured accurately. 

Avoid paying extra in crypto taxes with CoinTracker 

Confused about reporting crypto taxes? Afraid you're overpaying on your gains? CoinTracker can help. 

With over 500 integrations on exchanges and wallets – plus 23,000+ smart contracts in DeFi – CoinTracker offers the most comprehensive crypto tax software suite. Whenever you make a crypto transaction, CoinTracker instantly logs it into your dashboard for real-time portfolio updates. And when tax season arrives, CoinTracker ensures smooth reporting by generating compliant tax forms and seamlessly connecting with popular tax platforms like H&R Block and TurboTax, making year-end filing hassle-free. 

See why millions of crypto traders trust CoinTracker with a free account. 

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.