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10 Strategies to Reduce or Avoid Cryptocurrency Taxes

Ways to Reduce or Avoid Taxes on Cryptocurrency

Cryptocurrency has been a wildly popular investment asset class over the past few years. With the rise of Bitcoin, Ethereum, and many other digital currencies, people have made substantial gains from investing in crypto.

However, with gains comes taxes. Every time you sell your crypto for a profit, you must pay taxes on those gains.

Fortunately, there are several strategies to reduce or avoid cryptocurrency taxes.

Self-Directed IRA – Buying Crypto in an IRA

One tax-advantaged way to invest in cryptocurrencies is to purchase them in a Self-directed IRA (SDIRA). An SDIRA is a type of traditional or Roth IRA that allows you to invest in alternative assets such as real estate, precious metals, and – you guessed it – cryptocurrency.

Roth vs. Traditional IRAs

A traditional IRA allows you to make pre-tax contributions to your account and defer taxes until you withdraw the funds.

A Roth IRA, on the other hand, requires you to pay taxes upfront on your contributions, but your withdrawals are tax-free.

When opening an SDIRA, you must choose between a traditional or a Roth account.

If you’re interested in reducing your tax burden in retirement, a traditional IRA may make more sense. However, if you want to avoid taxes on your investment gains entirely, a Roth IRA may be more suitable.

Moving to Puerto Rico

Another complex strategy for reducing cryptocurrency taxes is to establish residency in Puerto Rico. Puerto Rico is a United States territory that offers a 100% exemption on capital gains to its residents.

This means that if you move to Puerto Rico and hold your crypto for at least a year, you won’t have to pay any taxes on the gains when you sell your investment. The catch is that moving to Puerto Rico requires substantial planning and preparation.

You’ll need to become a legal resident of Puerto Rico, which involves spending a substantial amount of time on the island and proving that you intend to make Puerto Rico your primary home. You’ll also need to be aware of the local tax laws, which are complex.

Declaring Crypto as Income

If you use cryptocurrency as income, instead of investing, you’ll need to declare it on your tax return. To do this, you’ll need to track all crypto transactions and determine the fair market value (FMV) of the cryptocurrency received.

If you mine crypto, the FMV is the value of the coins at the time you received them.

Ordinary Income Tax Rates

The income you receive from cryptocurrency is taxed as ordinary income. This means that you’ll pay taxes on it at your ordinary income tax rates, which can be higher than the long-term capital gains tax rate.

Keep in mind that if you receive crypto as income, you’ll also have to pay self-employment taxes.

Holding onto Crypto for the Long Term

If you’re not interested in spending or using your cryptocurrency as income, holding onto your investment for the long term can help you avoid taxes. If you hold your crypto for more than a year, you’ll be eligible for long-term capital gains tax rates instead of ordinary income tax rates.

These rates are lower and can save you money on taxes.

Offsetting Crypto Gains with Losses

If you have a net gain from your cryptocurrency investment, you can offset it by selling crypto that has lost value and taking a capital loss. This strategy is called tax-loss harvesting, and it allows you to reduce your tax liability.


Several robo-advisors can help you manage your tax-loss harvesting, such as Betterment and Wealthfront. They automatically sell your losing investments to offset your gains, reducing your taxes and increasing your overall returns.

Selling Assets During a Low-Income Year

Selling your crypto during a low-income year is another strategy to reduce your taxes. If your income is lower than usual, your tax rate may be lower.

This can help you pay less in taxes on your crypto gains.

Short-Term and Long-Term Capital Gains

It’s worth noting that the tax rate for short-term capital gains is higher than that of long-term capital gains. If you’ve held your crypto for less than a year, you’ll pay a higher tax rate on any gains.

Donating to Charity

If you want to reduce taxes and donate to a good cause, consider donating some of your cryptocurrency to a qualified charity. You can get a tax deduction for the fair market value (FMV) of the cryptocurrency, and you won’t have to pay capital gains taxes.

Capital Gains Taxes

Keep in mind that if you donate appreciated cryptocurrency, you can avoid paying capital gains taxes on it. This means that you can donate more while also reducing your tax liability.

Giving Gifts to Family

If you want to transfer your cryptocurrency to your family members, gifting them some of your crypto may be a good idea. You can give up to $15,000 per person without incurring gift taxes.


The “basis” of the cryptocurrency you gift becomes the fair market value (FMV) at the time of the gift. When your family member sells the crypto, they will have to pay capital gains taxes on the difference between the FMV when you gifted them and the price they sold it for.

Holding Onto Crypto Until Death

If you don’t want to sell your cryptocurrency during your lifetime, you can hold onto it until you die, passing it down to your heirs. This can be a good way to ensure that your investment grows tax-free until it is inherited.



When your heirs inherit the crypto, they get a “step-up” in basis, which means that the value of the assets is set to the fair market value (FMV) at the time of your death. This means that any unrealized capital gains are wiped out, and your heirs won’t have to pay taxes on them.

In conclusion, several ways can help you reduce or avoid taxes on your cryptocurrency investment. The strategies require planning and careful consideration, but the tax savings and long-term benefits can be worth the effort.

It’s essential to track your gains, losses, and transactions accurately, and to consult a tax professional to ensure that you’re making the right decisions for your financial situation.


Cryptocurrency has become a ubiquitous form of investment, and many people are curious about the tax implications of owning and trading crypto. Here are some frequently asked questions about crypto taxes.

Do I Have to Pay Taxes on My Crypto? Yes, you must pay taxes on any gains you make from buying, selling, or trading cryptocurrency.

Crypto is considered a capital asset and is subject to capital gains tax. This means that if you purchase crypto and later sell it for a profit, you’ll need to pay capital gains tax on the gains you made.

State Taxes

It’s worth noting that some states also have their own taxes on cryptocurrency. For instance, New York state has a “BitLicense” that companies must acquire before they can operate within the state, and they also require taxes on cryptocurrency purchases.

Will My Crypto Exchange Send Me a 1099? If you sell your crypto on an exchange, the exchange may send you a 1099 tax form to report your cryptocurrency sales and capital gains taxes.

However, not all exchanges send this form, and it’s your responsibility to track your gains and losses accurately.

1099 Tax Form

If you don’t receive a 1099 form, make sure to keep accurate records of your sales and report them on your tax return. Failing to do so could result in penalties and fees.

Which Country Has No Tax on Cryptocurrency? Currently, there is no country that has no tax on cryptocurrency.

However, some countries have friendlier tax policies towards cryptocurrency than others. For example, countries such as Portugal and Malta offer favorable tax rates for cryptocurrency investors.

Worldwide Income Tax

Keep in mind that if you’re a United States citizen, you’re subject to worldwide income tax. This means that you must pay taxes on your crypto gains, even if you’re living in a country with no taxes on cryptocurrency.

Renouncing U.S. citizenship is a complex decision made for several reasons.

General Advice and Closing Thoughts

Tax planning for cryptocurrency can be complex and challenging. It’s always a good idea to consult a tax professional for guidance and advice on your specific situation.

A Certified Public Accountant (CPA) with experience in crypto taxes can help you navigate the applicable tax rules and the tax implications of different strategies.

Crypto Tax Bill

It’s important to understand that paying your crypto tax bill is your responsibility, and failure to do so could result in penalties, fees, and even legal consequences. Make sure to keep accurate records of your cryptocurrency transactions and report them accurately on your tax return.

Final Thoughts

Ultimately, reducing or avoiding cryptocurrency taxes requires careful planning, strategy, and adherence to tax rules and regulations. Keep in mind that strategies that work for some may not necessarily work for everyone.

It’s essential to seek guidance from a tax professional and stay up to date on the latest tax laws and regulations. In summary, cryptocurrency taxes can be complex and challenging, but there are several strategies you can use to reduce or avoid them.

These include buying crypto in a Self-directed IRA, moving to Puerto Rico, declaring crypto as income, holding onto crypto for the long term, offsetting gains with losses, donating to charity, giving gifts to family, and holding onto crypto until death. Additionally, it is essential to understand the applicable tax rules and regulations, keep accurate records of your transactions, and seek guidance from a tax professional.

Remember to pay your crypto tax bill, as failure to do so could result in penalties and fees. Cryptocurrency taxation is a significant topic that needs to be considered by all crypto investors.

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