How To Avoid Capital Gains Tax On Cryptocurrency In the USA? A question that dwells in the mind of almost every crypto investor residing in the States. When the IRS treats cryptocurrency as property, meaning every sale or trade is a taxable event, the question of how to avoid taxes on crypto becomes inevitable for every investor Depending on your income and how long you’ve held the asset, these taxes can climb as high as 37%, taking a significant portion of your hard-earned profits.
For many investors, this tax burden feels like a financial setback, reducing their gains and limiting future investment opportunities. Unfortunately, many people tend to deal with taxes only after they become due, rather than using proactive strategies to reduce their tax burden. This reactive mindset often results in paying more than what is necessary.
The good news? There are legal ways to lower or even eliminate your crypto tax liability. By planning and understanding these strategies, you can keep more of your profits in your pocket. In this blog, we’ll tell you some excellent ways to avoid taxes on crypto. So let’s begin.
How To Avoid Crypto Taxes In The USA?
Crypto taxes in the USA can feel like a hit on your crypto gains. Giving away as much as 37% of your profits in taxes can be disheartening. But, what if we say we have got you plenty of answers to how to avoid paying taxes on crypto? Here’s a list of ways to avoid crypto taxes in the USA:
1. Tax Loss Harvesting
Tax loss harvesting involves selling cryptocurrency at a loss to gain tax benefits. This strategy allows you to offset capital gains from cryptocurrency, stocks, or other investments. In addition, you can use your losses to reduce up to $3,000 of ordinary income.
If your total losses exceed this $3,000 limit, you can carry the excess losses forward to offset gains in future years. This provides a potential long-term tax advantage, helping to lower your taxable income over time.
2. HODL Crypto To Avoid Short-Term Gains
In the United States, the IRS taxes short-term gains at your regular income tax rate. This applies to assets you’ve held for less than a year. For high-income earners, this rate can be significant, making short-term crypto trades more expensive in terms of taxes. Essentially, if you’re flipping crypto frequently, you could end up losing a larger portion of your profits to taxes.
Long-term gains are taxed at a much lower rate. If you hold an asset like Bitcoin or Ethereum for over a year, you’ll qualify for long-term capital gains tax rates, which range from 0% to 20%, depending on your overall income. For many investors, this can result in substantial tax savings compared to short-term rates.
Strategically holding onto your crypto assets can reduce your tax burden. For instance, if you own two similar cryptocurrencies but have held one for over a year and the other for less than a year, selling the long-term asset will result in a lower tax bill. Additionally, if you’re just a few weeks or months away from the one-year mark, waiting to sell can make a big difference in how much tax you owe.
3. Identify Unrealised Gains and Losses
If you’re wondering how to avoid capital gains tax on cryptocurrency, leveraging unrealized losses can be a smart strategy to lower your taxable income while optimizing your portfolio.
Unrealized gains and losses occur when the value of your cryptocurrency changes but you haven’t sold, swapped, spent, or gifted the asset. These changes in value only become “realized” when you perform one of these transactions. Until that point, your profits or losses remain on paper and aren’t subject to capital gains tax.
Keeping track of unrealized gains and losses is crucial for effective tax planning. A crypto portfolio tracker like KoinX can help you monitor your investments and make informed decisions. As the year comes to a close, assess your portfolio to understand your net capital gains or losses. If your portfolio includes underperforming assets with little chance of recovery, selling them could help you realize a loss. You can use this loss to offset your capital gains, reducing your overall tax liability.
4. Maximize Your US Tax Deductions
When filing your taxes in the United States, you have two primary options: the standard deduction or itemized deductions. You can only choose one, so it’s important to determine which approach benefits you the most. The standard deduction is a straightforward option that’s processed quickly by the IRS. Many taxpayers find it convenient.
However, if you qualify for multiple tax deductions, itemizing your deductions might lower your taxable income even further. Let’s explore some common deductions that can make a big difference.
Student Loan Interest Deduction
If you’re repaying student loans, you can deduct up to $2,500 of the interest paid during the year. This deduction directly reduces your taxable income, making it a great option for recent graduates juggling loan payments.
Child Tax Credit
Parents can receive up to $3,600 per child and an additional $500 for non-child dependents. This credit significantly reduces your tax liability and supports families with dependents.
American Opportunity Tax Credit
Students pursuing higher education can claim the first $2,000 spent on tuition, books, and other school-related expenses. Additionally, you can claim 25% of the next $2,000, giving you up to $2,500 in credits.
Medical Expenses Deduction
For taxpayers with high medical costs, unreimbursed expenses exceeding 7.5% of your adjusted gross income are deductible. This includes doctor visits, prescriptions, and other necessary treatments.
Child and Dependent Care Tax Credit
If you’re paying for daycare, you can claim up to 50% of costs for children under 13, with a maximum of $8,000 in expenses per child. This credit also applies to dependent care for elderly family members.
Lifetime Learning Credit
For those advancing their education, the Lifetime Learning Credit allows you to claim 20% of the first $10,000 spent on tuition and qualifying fees. This credit can apply to part-time courses or professional certifications.
Mortgage Interest Deduction
Homeowners can deduct the interest paid on their mortgage, which reduces their federal taxable income. This deduction can result in significant savings, especially for new homeowners with larger loans.
Retirement Contributions Deductions
Contributing to retirement accounts like a 401(k) or IRA offers dual benefits. You can funnel up to $19,500 into a 401(k) or make traditional IRA contributions and deduct these amounts, lowering your taxable income.
Health Savings Account (HSA) Contributions
For those with HSAs, contributions are fully tax-deductible. Withdrawals used for qualified medical expenses are also tax-free, making this an excellent tool for reducing taxable income while saving for healthcare needs.
These are only a few examples among many. If you’re self-employed or managing a small business, you may have access to even more tax deductions. Depending on your situation, it might be more beneficial to itemize your deductions rather than opting for the standard tax deduction.
5. Utilize Capital Gains Tax Breaks
Capital gains tax breaks can benefit crypto investors, especially those with lower annual incomes. By understanding the thresholds, you can avoid unnecessary tax obligations on your crypto investments. Knowing how these rules apply based on your filing status can help you strategize and even learn how to avoid paying taxes on crypto legally.
Single Taxpayers
If you’re filing as a single taxpayer and your annual income is under $44,626, you won’t owe any taxes on your capital gains. This applies to both short-term and long-term gains. It’s an excellent opportunity to maximize your crypto profits without worrying about additional tax burdens.
Married Filing Jointly
For married couples filing jointly, the income limit rises to $89,251 annually. If your combined earnings fall within this bracket, you’ll enjoy the same benefit of paying no taxes on your capital gains. This is particularly advantageous for households with moderate investment activities.
Head of Household
If you qualify as the head of household, the income threshold increases to $59,751 annually. This allows you to benefit from tax breaks while managing your financial responsibilities. By staying within this limit, you can retain more of your crypto profits without tax concerns.
6. Gift Your Cryptocurrencies
Gifting cryptocurrencies can be a thoughtful and financially smart way to share your assets with loved ones. In the United States, the IRS allows you to gift crypto up to $17,000 per person each year without any tax implications. This limit is per recipient, meaning you can spread your generosity across multiple friends or family members while staying tax-free.
Married couples or those in civil partnerships can strategically use this rule to optimize tax savings. For instance, if your spouse has a lower income, they may face a reduced tax rate on short-term capital gains when they sell the gifted crypto. This approach not only helps you make better use of personal tax allowances but also minimizes the overall tax burden within your household.
7. Make Crypto Donations
Donating cryptocurrency to registered charities is a fantastic way to support meaningful causes while enjoying tax benefits. In the United States, crypto donations to qualified organizations are tax-deductible, allowing you to reduce your taxable income. This makes it a win-win for both you and the charity receiving your support.
If your donation exceeds a certain threshold, you’ll need to report it using Form 8283. For amounts over $5,000, the IRS requires a qualified appraisal to verify the value of your donation. Additionally, make sure to obtain receipts from the charity to keep your records accurate and compliant with tax regulations.
Crypto donations simplify the process of contributing to charities, often with lower fees and faster transactions than traditional methods. By donating crypto, you can directly impact a cause you care about while optimizing your tax strategy.
8. Book Your Profits In A Low-Income Year
When your income is low during a tax year, the tax rates on your cryptocurrency profits will also be lower. This makes it an ideal time to consider taking profits from your crypto investments. By timing your profits strategically, you can reduce your overall tax liability.
Many investors find that a low-income year, such as when they are studying full-time or transitioning between jobs, offers a great opportunity to take profits. Since the tax brackets are lower, the tax you owe on your crypto gains will be significantly reduced.
If you’re looking for ways to maximize your returns while minimizing taxes, this could be the perfect strategy. Timing your crypto profits can help you keep more of what you earn, allowing your portfolio to grow without excessive tax burdens.
9. Invest In Opportunity Zone Funds
If you’re wondering how to avoid crypto taxes, investing in opportunity zone funds could be one of the options that fit your strategy, enabling you to invest smartly while managing your tax liabilities effectively.
These funds offer a unique chance to benefit your community while reducing your taxes. When you sell an asset and invest the proceeds into an opportunity zone fund, you can defer your capital gains taxes. This strategy allows you to delay the payment of taxes until 2026.
Holding your investment in the fund beyond the specified period can further reduce your tax burden. You can reduce your capital gains tax by up to 10% if you meet the holding requirements. This presents a powerful way to save money on taxes while contributing to economic growth in underdeveloped areas.
10. Try OutIndividual Retirement Accounts (IRAs)
Investing in an Individual Retirement Account (IRA) can help you reduce your tax burden while growing your wealth. You can explore Bitcoin IRAs, which let you hold your crypto assets long-term without paying taxes on the gains. Trades involving cryptocurrencies within an IRA are tax-free, making it an attractive option for long-term investors.
Self-directed IRAs provide a way to diversify your retirement portfolio by investing in alternative assets, including cryptocurrencies. Unlike traditional IRAs, these accounts give you the freedom to choose investments like real estate, precious metals, and digital assets. This allows you to gain exposure to the crypto market while benefiting from tax advantages.
If you are under 50, you can contribute up to $7,000 annually to your IRAs, including self-directed ones. Several platforms, such as iTrustCapital, Bitcoin IRA, and Coin IRA, offer specialized accounts for crypto investments, making it easier to start investing in cryptocurrencies for your retirement.
11. Choose The Best Accounting Method
The IRS allows you to choose your cost basis method, which determines how you calculate the cost of your crypto assets and the dates you bought and sold them. The method you select directly affects the taxes you owe, so it’s crucial to pick one that works best for your situation.
There are several cost-basis methods available to US taxpayers, including:
- Spec ID
- FIFO (First In, First Out)
- LIFO (Last In, First Out)
- HIFO (Highest In, First Out)
Each method has its pros and cons depending on your crypto holdings and transactions. For example, FIFO may result in higher taxes in a rising market, while HIFO could reduce your taxable gains. The key is that you must choose one method for the entire year and stick with it.
To make an informed decision, consider using crypto tax software that supports multiple cost-basis methods. Tools like KoinX help you compare methods and can save you significant time and effort when calculating your taxes.
How Can KoinX Help Save Crypto Taxes In the USA?
KoinX can make your crypto tax filing easier by automatically calculating your capital gains, losses, income, and expenses. This saves you time and reduces the risk of errors, ensuring you file your taxes accurately. By linking your crypto exchanges and wallets to KoinX, you can have all your transactions organized in one place. This tool helps you track your earnings from crypto trades, mining, staking, and other activities.
Track Unrealized Gains and Losses
With KoinX, you can monitor your unrealized gains and losses in real time. This allows you to make informed decisions about your investments. Knowing when to hold or sell becomes clearer as KoinX gives you a detailed view of your portfolio’s performance. It helps you strategize and manage your investments effectively, which can ultimately improve your tax outcomes.
Flexible Cost Basis Methods
KoinX supports multiple cost basis methods, including FIFO (First In, First Out), LIFO (Last In, First Out), and HIFO (Highest In, First Out). You can easily switch between these methods in the settings to see how they impact your tax liability. This flexibility lets you choose the best approach for your specific situation, helping to optimize your tax position.
Crypto Tax Calculator
KoinX includes a built-in Crypto Tax Calculator, allowing you to estimate your tax obligations based on your transactions. The calculator makes it easy to get an accurate understanding of how much you owe before filing your taxes, helping you avoid surprises and plan your finances accordingly.
Do you want to know how to avoid capital gains tax on cryptocurrency? KoinX’s crypto tax software can help you with your tax obligations before filing. Use it to see how different cost-basis methods impact your taxes and optimize your strategy. Start today to ensure you’re on the right track for tax season.
Conclusion
When it comes to protecting your crypto profits, knowing how to avoid capital gains tax on cryptocurrency is key to keeping more of your earnings. By leveraging strategies like holding your assets longer to benefit from lower long-term capital gains rates, offsetting gains with losses, or utilizing tax-efficient accounts, you can significantly reduce your tax burden.
Instead of waiting until tax time to figure out how to minimize taxes, take control of your tax strategy now. Remember, the crypto tax laws can be complex, but with KoinX you can effortlessly track and manage your crypto transactions thereby reducing your crypto taxes.
Frequently Asked Questions
How Is Crypto Taxed in the USA?
In the United States, cryptocurrencies are considered property for tax purposes, which means they are subject to capital gains and income tax. Short-term gains (for assets held less than a year) are taxed at rates ranging from 10% to 37%. Long-term gains (for assets held longer than a year) are taxed at 0%, 15%, or 20%. Additionally, crypto losses can offset gains, potentially lowering your overall tax liability. Crypto tax deadlines follow the same schedule as for traditional assets, with April 15 being the standard due date for most individuals.
How Much Crypto Can I Sell Without Paying Taxes?
You can sell up to a certain amount of crypto without incurring capital gains tax if your total income, including crypto gains, is below a specified threshold. For 2024, if your income is less than $47,026, long-term capital gains from crypto are tax-free. For 2025, this threshold increases to $48,350. However, short-term gains will still be taxed as ordinary income regardless of your total income.
How Does the IRS Track Crypto Gains?
The IRS tracks crypto transactions through multiple methods. These include third-party reporting, where exchanges provide user transaction data, and blockchain analysis, where the IRS collaborates with firms to monitor transactions on public ledgers. Additionally, the IRS issues “John Doe” summonses, compelling exchanges to provide data on users, ensuring compliance with tax obligations, and minimizing the potential for unreported gains.
Can You Reinvest Crypto to Avoid Capital Gains?
Reinvesting crypto does not allow you to avoid capital gains taxes. Whether you sell your crypto for cash or reinvest your profits, the IRS treats the transaction as a taxable event. This means that any gains you make when converting or reinvesting crypto are subject to tax. Essentially, reinvesting is considered the same as cashing out and using the proceeds to buy more crypto, which triggers tax obligations.
