My name is Mark Robert. Crypto tax accountant and Crypto Tax Advisor. I’m going to share what I’ve learned in my 5 years as a crypto tax accountant and advisor during my 17 years helping individuals and businesses with their taxes.
The 18 crypto tax loopholes mentioned are a starting point to avoid Crypto taxes. To actually implement the various ways to cut your crypto tax you need to carefully follow IRS rules and procedures. If not, IRS could disqualify your strategy for not following the rule of law and all required steps. In that case you may ow back taxes, penalties and interest.
If you want to know how to avoid taxes on Crypto (and stay in compliance with the IRS), work with a tax professional, be sure use one that is specialized in cryptocurrency. That ensures you’ve dotted all I’s and crossed all t’s. So again, please work with a tax advisor if and when implementing these strategies.
The various ways to avoid Cryptocurrency taxes are for educational purposes and not tax advice for your specific situation and goals. A number of these strategies will not be the best strategy for you to reduce your taxes. If it’s not the right tax planning strategy for you it could actually work against you. So that’s another reason to work with a tax professional especially one specialized in cryptocurrency.
1.) Hold Your Crypto For At Least One Year
The IRS gives preferential tax treatment to investments held for more than a year.
Long-term capital gains rates vary among income brackets but range from 0-20%.
Compare this to short-term capital gains tax rates, which are the same as your income bracket’s income tax rate (10%-37%).
Therefore, if and where practical try to hold for one year to get a better tax rate on your gains and avoid Crypto taxes.
2.) Don’t Sell, Hold Onto Your Crypto Long Term
The only way to avoid all tax on your cryptocurrency is to simply hold it. If all you ever do is buy crypto with fiat, you’ll never experience a taxable event.
As long as you are holding cryptocurrency as an investment and it isn’t earning any income, you generally don’t owe taxes on crypto until you sell.
3.) Hold Onto Your Crypto Until You Die, Bequeath It In Your Estate
You might want to use it pass on your Crypto wealth to the next generation in your family. If you don’t need access to the money you’ve invested, this is a great way to avoid Crypto tax.
When you die, your assets receive what’s called a step-up basis when they are passed on to your heirs. A step up basis means your heirs will only pay capital gains based on the value on the day they received them. Not a gain based from the much lower price you paid for the crypto originally.
For example: Let’s say you bought $1,000 of bitcoin today that is worth $250,000 when you die in 20 years. If you sold the bitcoin right before you died, you’d have to pay taxes on a $249,000 gain.
Then, your heirs can sell it immediately without paying any income tax on the asset since their basis is equal to their selling price.
To make sure you arrange this sort of inheritance properly, make sure you talk to a financial professional who specializes in crypto tax planning. If not done by the book the IRS could recharacterize or revoke it.
4.) Use An Accounting Method Other Than First In, First Out (FIFO)
The IRS clarified you are allowed to specifically identify tax lots in your tax reporting. When you use (High In, First Out) HIFO for tax purposes, you are deemed to be selling the crypto in units for which you paid the highest price price. This will often result in the least amount of taxable gains which leads to a lower tax bill.
This way in how to avoid Crypto taxes on Crypto can be game changer. It can defer your capital gains and help you reduce your taxes. Using this legal technique, I’ve seen users go from owing six figure tax bills to getting refunds.
These calculations are extremely tedious to figure out by hand. The Results Tax Accountants software automates these calculations. Results Tax Accountants crypto tax software builds on the HIFO method with our proprietary minimization accounting procedures. This makes adjustments based on an individual’s tax rate to minimize crypto taxes as much as possible.
5.) Offset Capital Gains Taxes with Capital Losses (Otherwise Called Tax Loss Harvesting)
The U.S. tax code allows Crypto losses to offset your taxable gains. If you consciously use this to your advantage, it’s called tax-loss harvesting.
Since cryptocurrencies are treated as property as opposed to “stocks & securities”, they are not subject to wash sale rules. This allows you to sell your crypto positions that are in a loss situation just to harvest losses for tax purposes and quickly get back into the same position without having to wait 30 days (as in a wash sale).
If you have an overall capital loss for a year, you can claim up to $3,000 of it. Any leftover loss can be carried forward to future years rolls forward to the following year to offset future gains or lower your ordinary income by up to $3,000 per year.
No one likes to owe money at tax time. That’s why savvy crypto investors are keen on the tax consequences of their trades throughout the year and work with a tax professional to maximize crypto profits and minimize tax with this strategy.
Results Tax Accountants tax loss harvesting dashboard can be a valuable tool for this strategy, as it identifies which and how many assets you can sell off.
6.) Get Crypto Trader status
You want to avoid Crypto tax limit of $3,000 capital loss maximum per year, plus get the tax deductions of a business owner?
Active cryptocurrency traders can qualify for trader tax status (TTS). There’s a potential additional tax benefit with TTS: That is you can Elect Section 475 mark-to-market accounting (MTM) on securities and/or commodities or crypto.
Section 475 allows Ordinary losses to offset income of any kind including wages or any other kind of income, which makes them more useful than capital losses which are subject to the $3,000 capital loss and wash sale loss adjustments on securities.
Trader Tax Status allows you to deduct trading business expenses that might include: home office expenses, education/travel expenses, computer equipment, auto mobile and other business expenses required in your ordinary business activities. (If legitimate trading business expenses the tax savings could be big.)
A TTS trader can also write off health insurance premiums and retirement plan contributions by trading through an S-Corp with officer compensation.
Trader Status and 475 Mark To Market Status subject to a number of strict rules so you should definitely consult with a qualified Crypto accountant to ensure you actually qualify and then to comply with required rules for eligibility each year.
7.) Lower Your Taxable Income
If you want to avoid Crypto taxes, you can scour the tax code for tax deductions and credits that bring your taxable income down.
For example, you can take advantage of expensive tax deductible medical procedures, contribute to a traditional IRA or 401(k) plan, put money in a health savings account, or donate cash or property to charity, take business deductions, home mortgage interest deductions which all lower your taxable income.
There are plenty of other tax deductions and credits that you may qualify for, too. Use a tax professional to help you uncover other tax breaks you may not know about.
8.) Sell In a Low-Income Year
Whether you have short-term or long-term capital gains, the amount of income in a tax year determines the tax rate you pay. The lower your taxable income is, the lower your tax rate will be. You might save money on taxes by selling cryptocurrency (that you know will experience taxable gains) in a year or years your income is lower so you pay taxe at a lower rate.
Selling in a low-income year can help with taxes on both short-term and long-term gains. That’s because the long-term capital gains rate that applies to you – either 0%, 15% or 20% – is based on your taxable income.
9.) Gift the Assets to a Family Member
Depending on your goals and wealth, you might consider lowering your crypto tax bill by Gifting your cryptocurrency to family members. Gifting cryptocurrency can help you avoid taxation on your gains. The recipient won’t have to pay a gift tax, either.
Under current rules, you can give up to $15,000 per person per year without filing a gift tax return or paying any gift taxes.
The recipient of the cryptocurrency will need to know your basis in the cryptocurrency to determine the tax they owe when they eventually sell it. They will have to pay tax on the entire gain above your basis, but that tax will likely be less than you would pay if they are in a lower income tax bracket.
This could be an option if you help one of your children (who often have a lower income tax bracket) pay expenses like college tuition. Rather than using “after taxable crypto gain funds” , you gift the funds that will be paid at a lower tax rate by someone else and retain more of the money.
That also makes it something that you should first discuss with a tax advisor to ensure that it fits in with your overall plan.
10.) Donate Your Appreciated Cryptocurrency To Charity
Crypto donations to IRS-recognized non-profit or charitable organizations are not subject to capital gains taxes and in most cases tax deductible to you.
Under many circumstances, your donation can offset between 30 and 50% of your ordinary income.
There a number of moving parts and a lot of steps to follow to ensure you do this correctly. Something as simple as failing to complete a “contemporaneous written acknowledge” in writing within a reasonable amount of time that state no goods or services were received in your donation can result in your entire donation being revoked and disallowed later by the IRS.
11.) Buy, invest, trade crypto In A Self-Directed Individual Retirement Account
Self-directed IRAs or 401Ks are special retirement accounts that allow you to invest in unique assets, such as cryptocurrency, precious metals, and real estate. Regular IRAs or 401ks do not allow assets like cryptocurrency.
To avoid tax on Crypto gains open a self directed ira or 401k (whether a traditional or Roth) and start making contributions. However, you can also roll over an existing ira or retirement plan into a self directed traditional or roth plan.
In a Roth you contribute “after tax” paid funds. The assets can accumulate in value without any capital gains tax owed as it compounds. You do NOT have to pay any tax on a ROTH when you withdraw it in the future. So this is huge.
Since you must use after tax money to fund a Roth, if you decide to convert a current traditional 401k or IRA to a ROTH you must pay a tax on all previous tax deferred retirement funds.
However, you can minimize the tax as follows: when the crypto market is down and crypto prices are low you can sell or transfer the funds to a ROTH self directed IRA or 401k. Therefore, paying taxes on the traditional retirement fund to Roth conversion when your crypto prices are low will result in less tax because the current value of the rollover funds or assets in it are lower. Then if crypto prices take off again and returns compound, you will get tax free gains and withdrawls for life on the same funds or crypto as prices rise again.
Then of course any crypto you buy within a ROTH, you pay zero tax on the capital gains earned in the account.
If you buy cryptocurrency inside of a traditional IRA, you will defer tax on the gains until you begin to take distributions. Although you can’t completely avoid taxes on traditional IRAs or 401Ks, the biggest advantage of a SDIRA is that you get to compound crypto profits in your portfolio without having to pay taxes on them today. Not having to pay taxes on trades today means that you get to use tax money, which would have gone out to the government if you traded in a non SDIRA account, to compound profits. Moreover, if you take out the funds at retirement when you might have a lower tax rate, you get tax savings from there as well.
You should work with a tax professional in doing this because you become the investment manager of your retirement account. You must avoid IRS prohibited transactions when trying to reduce your Crypto taxes so this strategy will not backfire on you.
Some self-directed plans have pricey fees and limit your crypto and other investment choices. Others have low fees and give you freedom to do what you want. Which self directed IRA and 401k companies are the best for fees and freedom to make your own Crypto investment choices? I’m familiar with a number of highly reputable Self-Directed IRA and 401K that have low fees and allow you to choose which Cryptocurrencies you want to invest or trade.
Contact me for the current best options and how to do this correct before you leap.
12.) Move to Puerto Rico
US citizens are taxed on worldwide income. No matter where you live, US citizens must pay US tax on our capital gains, including gains from cryptocurrency. The only exception to this rule is found in the US territory of Puerto Rico.
Because the territory is excluded from Federal taxation, Puerto Rico is free to make its own tax laws for residents and offer any type of tax breaks it deems appropriate. This can help you avoid Crypto taxes.
As an American, moving to Puerto Rico allows you to pay 0% capital gains tax. This means that trading/investing profits from cryptocurrency are tax free to qualifying residents of Puerto Rico!
A resident of the territory is any US citizen who spends at least 183 days a year on the island including a few other rules.
Puerto Rico’s Act 60 promotes investment in Puerto Rico through tax incentives. These tax benefits include zero tax on passive income, including capital gains, dividends, and interest. Other tax benefits from Act 60 include:
A low 2-4% corporate tax , a 4% income tax, a 75% tax exemption on state property taxes, a 50% tax exemption on municipal taxes
This strategy is extremely complex, so you should consult a Crypto tax accountant before considering it.
Puerto Rico is America’s tax haven, but the savings you make on your crypto will be diminished by recent spikes in living costs. Puerto Rico therefore is normally best for crypto whales. If you’re not a crypto whale yet, your best tax/cost of living offset equation to taxable income is usually moving to a lower tax and/or lower cost of living combo state in the US
The key is to drive your income up and your expenses down (whether that is tax expenses or living expenses), and you can do that by choosing a tax-friendly ZIP code and/or lifestyle.
13.) Move to a State with No Income Tax
Not just the IRS, your state wants to collect taxes from your crypto gains too.
Moving to a state without income tax is a smart tax move and an attractive opportunity. Nine U.S. states have no income tax as of 2021: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Some states may have no or low income tax, but may have very high property tax rates or have other taxes that could offset benefits to “no income tax” status. Therefore, don’t just look at no zero income tax states. Consider the full tax and cost of living expense picture when researching ways to avoid Crypto taxes..
For example, for many people their second biggest expense is a house. With home-ownership comes your second or at least one of your highest tax liabilities = property tax. Property taxes have risen astronomically in many U.S. states not because of a property tax rate. States that might have a low or moderate property tax rate can have huge property tax bills because the cost of your average home is much higher. For example, California has a property tax rate of about 1%, but due to the very high cost of home prices can result in a very high property tax rate.
14.) Move Out Of the US
Many countries have no tax on cryptocurrency or very favorable treatment of crypto.
While several countries have no tax on cryptocurrency, this does not help U.S. citizens. U.S. citizens are taxed on their worldwide income, including cryptocurrency gains. This makes it more difficult for US taxpayers to find ways how to avoid Crypto taxes.
However, as we already covered, it’s about lowering your overall financial expenses that include cost of living expenses. But since tax is normally your biggest expenses burden in life and in your crypto life, that’s our focus.
Many countries offer an exceptional standard of living often 2-3 times lower cost of living than the US. You may want to look at the fact that many countries outside the US are very safe and offer an exceptional lifestyle for people willing to think outside the box and be a little adventurous. So if you’re serious about lowering taxes and other huge expenses, it’s worth taking a look.
Foreign Income Exclusion
If you are a U.S. citizen or a resident alien of the United States and you live abroad you are taxed on your worldwide income. However, you may qualify to exclude your income (while living abroad) up to an amount adjusted annually for inflation by living outside the US for a portion of each year. This amount is $112,000 at the time of this recording.
To avoid Crypto taxes on earned income, you must be a U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. For example your foreign income while living outside the US could be: a professional trader/investor or other business activity like freelancing, e-commerce, working as an employee, etc.
Change Your Country of Citizenship, Get A Second Passport and Renounce Your US Citizenship
Would you give up your citizenship simply to avoid Crypto taxation and all other types of tax? The most dramatic way to stop paying the IRS for your cryptocurrency gains is to give up your US citizenship. Once you expatriate, the IRS no longer has any right to your earnings.
Again, US citizens pay US tax on their capital gains and cryptocurrency gains no matter where they live. If you move to Panama, but keep your US passport, you still pay US tax on your trading profits. The only way to get rid of the IRS forever is to turn in your passport. Without a second passport, there’s no way to expatriate from the United States.
Here are 13 Countries that do Not tax cryptocurrency or have extremely favorable taxation on crypto:
British Virgin Islands.
You have many choices when it comes to getting a second passport. You can buy one from countries like Malta ($1.2 million), Dominica ($120,000) or St. Lucia ($500,000 investment), or you can earn one over time by becoming a resident of a foreign country.
Additionally, there are other countries that are extremely crypto-friendly. You might want to keep your eye on these options in deciding how to avoid Crypto taxes.
On country may tax cryptocurrency and/or have other types of taxes that offset the benefits of no tax on Crypto. Therefore, it’s important to discuss this with a tax advisor. Tax laws also change constantly, so you need to stay up to date on any changes.
15.) Buy Cryptocurrency In Your Life Insurance Policy
Another way to pay zero tax on cryptocurrency gains is to buy coins within an international life insurance policy. You can fund an Offshore Private Placement Life Insurance with any amount of money you wish and create the equivalent of a ROTH or Traditional IRA. There are no contribution limits or distribution requirements.
Most offshore private placement policies require a minimum investment of $1.5 or $2.5 million.
If you set up a private placement policy, hold it for a few years, and then close it down, you get tax deferral similar to a traditional IRA. That is, you’ll pay tax on the gains when you close out the policy.
If you hold the policy until your death and pass the cryptocurrency to your heirs, you get tax free similar to a ROTH IRA. Because of the step up in basis, your heirs receive the coins at their price on the date of your passing and pay zero tax on the appreciation while they were held in your life insurance policy.
16.) Take Advantage of 0% Long-term Capital Gain Tax Rate
The US tax code has a relatively less known 0% tax rate for long-term capital gains. This is one of simplest ways how to avoid Cryptocurrency capital gains tax.
The eligibility for this 0% tax rate depends on your filing status, annual income you make, and how long you kept the cryptocurrency before selling it. Essentially, if you are married and filing jointly, you could make up to the $83,350 (married filing jointly) (at time of this recording) in crypto profits without being subject to any taxes.
17.) Roll Over Crypto Profits Into Opportunity Zones (OZs)
This strategy to avoid tax on Crypto gains is well suited for sophisticated high-net worth taxpayers who have a large amount of unrealized cryptocurrency gains. The federal government has created a set of tax incentives for investing into economically distressed areas. Tax savings come in three forms: tax deferral, tax reduction, and tax elimination.
Basically, you would roll over your long-term crypto profits into a Qualified Opportunity Fund (QOF). The QOF fund would invest that money in economically distressed areas designated by the government. If you were to hold your investment in the QOF for at least 5 years, 10% of your initial crypto tax gain will be tax free. If you were to hold your investment in the QOF for at least 7 years, an additional 5% of your initial crypto tax gain will be tax free.
Finally, if you were to hold your investment in the QOF for 10 years, you can completely avoid capital gains taxes on the appreciation of QOF stocks in addition to the tax savings triggered at year 5 and 7. This ability to completely eliminate taxes on the appreciation of QOF stock is one of the biggest tax saving opportunities in the tax code.
18.) Consult a Crypto Specialized Tax Accountant
Most of the ways discussed to cut your crypto tax are very effective. However, each strategy has numerous strict rules and procedures that must be adhered to so the IRS or state tax authority does NOT disqualify the way you’re applying the tax reduction strategy.
To be sure you’re in compliance when applying the IRS tax code to your situation, work with a Crypto tax professional. Sometimes the dollar you spend to set these strategies up “the-correct-way” can save you 5, 10, 15 dollars in taxes. You get the confidence and peace of mind to sleep well at night knowing all your tax reduction is air tight and will stand up to an IRS examination or audit.
I help clients complete and file their crypto tax returns, crypto accounting, do tax planning and provide ongoing monthly/quarterly tax compliance and tax reduction coaching. If there’s anything I can help you with please set up an appointment to see if I’m a good fit to help yo
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