9 Ways to Legally Avoid Cryptocurrency Taxes

Cryptocurrency investors often overlook the possibility of taxation. Crypto and taxes are explained here.

Cryptocurrency has made early investors rich. Wealth creation will likely be taxed.

Crypto investors may decrease digital currency taxes thanks to the U.S. tax legislation. Here are 8 ways to avoid crypto taxes, depending on your position.

Cryptocurrency taxation mechanics

International income is taxed by Americans. Investments dominate cryptocurrency. The IRS considers cryptocurrency and blockchain-based resources like NFTs capital assets. Capital gains tax. (Cryptocurrency revenue follows.)

Capital gains taxes differ. How long you hold bitcoin—in this case—determines your financial rewards.

After a year, selling cryptos for more than customers paid makes short-term profits. Taxable like wage income.

Long-term financial advantages come from holding bitcoin for over a year and selling it for more. Long-term capital gains are tax-free.

Cryptocurrencies are new, thus the IRS or Congress may change its crypto tax regulations. Bitcoin is now taxed, however there are ways to reduce or eliminate your tax bill.

1. Cryptocurrency IRA Investment

In a self-directed IRA, you may buy cryptocurrencies tax-free. Most IRAs accept equities, mutual funds, and exchange-traded funds (ETFs). Self-directed IRAs enable physical gold, housing, and crypto trading.

Find an identity IRA that permits bitcoin investments. Before buying cryptocurrencies in your self-directed IRA, be certain that you know how. Your tax advantages will depend on the sort of IRA you create and contribute to.

Traditional IRAs enable tax-deductible donations, but retirement withdrawals are taxed as regular income. Roth IRAs provide tax-free withdrawals in retirement if you contribute post-tax money. Check out our Roth vs. regular IRA guide.

2. Relocate to Puerto Rico

If you have several digital assets, Puerto Rico may assist you escape federal taxes. Puerto Rico exempts 100% of capital gains. If you want to avoid payroll taxes on stock or crypto investments, moving to Puerto Rico may help.

It’s not beneficial. Puerto Rico requires residency to submit taxes. Your pre-Puerto Rico bitcoin profits are still taxed in the US. Consult a tax specialist before using this advanced procedure.

3. Cryptocurrency gains as income

Crypto wallet users that receive digital money for products and services or mine or stake bitcoin are taxed differently. When you get cryptocurrencies, it is revenue. The actual value of the bitcoin you received must be reported as income for tax purposes.

This money is taxed like ordinary income. These exceed capital gains taxes. The bitcoin you get is reported as income based on its original value, known as its basis. You compute any capital gain and pay capital gains taxes when you sell the bitcoin.

Mining cryptocurrency is similar. Cryptocurrency mining is mostly self-employed. Self-employment taxes are in addition to income taxes.

4. Long-term crypto holdings

Unless you sell bitcoin, you don’t pay taxes on it until you sell. Selling none in a tax year avoids taxes.

However, you may sell your cryptocurrency. Sell bitcoin you’ve owned for over a year to reduce your taxes. If so, your bitcoin sale may qualify for reduced long-term capital gains taxes. This might lower your tax bill significantly.

5. Swap cryptocurrency wins and losses

Investment sales provide profits or losses. It uses asset cost and selling price. Capital gains and losses offset in the U.S. Tax-loss harvesting exploits this.

Same-type gains and losses cancel first. Short-term profits offset tax losses. Then, offset any net loss with a net gain.

$1,000 narrow loss, $2,000 short-term gain, $3,000 long-term gain, $5,000 long-term loss. You would profit $1,000 short-term and lose $2,000 long-term. Long-term loss is $1,000.

Recoup up to $3,000. Carryover losses. The best robo-advisors automatically collect investor tax losses.

6. When income drops, sell assets

Income impacts your tax rate for short-term or long-term capital gains. Lower taxable income lowers tax rate. Selling bitcoin you know will rise in years with lower tax rates may save you money on taxes.

Selling bitcoin may raise certain income taxes, but it does not raise all income taxes.

7. Give to charity

If you itemize, qualifying charitable donations are tax-deductible. Before contributing, you must have owned the asset for a year.

Donating bitcoin may reduce taxes. You may reduce the fair value of your bitcoin without capital gains taxes.

Verify with your tax expert to see whether donating might improve your taxes.

8. Gift your loved ones

Gifting cryptocurrency may help you avoid winnings taxes. No gift tax either. Current regulations allow you to donate $15,000 per year without gift taxes. If you exceed $15,000, gift taxes won’t apply until you’ve spent your $11.7 million estate exemption.

Your bitcoin basis determines the receiver’s sales tax. However, they must pay tax on the whole gain above your basis.

A college graduate with their first job pays less in taxes than a successful 40-year-old. Gifting bitcoin to a younger relative may lower its tax requirement.

To sum up

If you buy crypto assets before they rise in value, you may profit. If this happens to you, tax preparation may lower your crypto tax burden. The accompanying suggestions may aid your tax professional conversation.

Cryptocurrency taxes are quite complicated and may evolve in the future. Thus, a tax lawyer or CPA should be consulted (CPA). They can assist you to obey tax laws and decrease your tax bill.