Simple Strategies to Avoid Crypto Taxes in 2023

Famously, two things are certain: death and taxes. Crypto taxes are no exception. When it comes to taxes and crypto, there are valuable strategies you can take to reduce your tax bill and plan future crypto activity to minimize future tax liabilities.

In what follows, we offer a comprehensive list of approaches we commonly give crypto traders to help them learn how to avoid crypto taxes. 

There are numerous legal approaches to avoid crypto taxes. Here are our top five legal ways to minimize and avoid taxes on crypto for US taxpayers. International taxpayers may also benefit from these and can refer to our country guides for more information about how to minimize crypto taxes in different regions.

• Tax loss harvest

• Use accounting strategies

• Donate or gift crypto

• Aim for long-term capital gains

• Simply don’t sell

1. Crypto tax loss harvesting

Crypto tax loss harvesting involves selling assets at a loss in order to offset your capital gains and thus lower your tax liability.

It’s important that you execute these trades before the end of the tax year. If you’re a U.S. taxpayer, once January 1 rolls around, your capital gains and losses are locked in for the previous tax year. 

2. Use HIFO/TokenTax minimization accounting

HIFO (highest in, first out) accounting, a form of the specific ID accounting method, disposes of your tax lots with the highest cost bases first, thereby reducing that year’s tax liability.

3. Donate your crypto and give cryptocurrency gifts

Crypto donations and crypto gifts to IRS-recognized, non-profit or charitable organizations are not subject to capital gains taxes and are, in some cases, tax deductible.

4. Invest for long-term capital gains

The IRS gives preferential tax treatment to investments held for more than a year. Long-term crypto capital gains tax rates vary between 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%). 

5. Simply don't sell your crypto

The only way to be sure you won’t be taxed on your crypto is to simply hold it. But, if you do need to leverage your investments to pay your expenses, putting up collateral to borrow crypto is not a taxable event.

For US taxpayers, crypto taxes usually apply when trading, selling, swapping, or otherwise disposing of crypto, resulting in a capital gain or loss. Income generated from mining, staking, and most yield farming is subject to taxation as regular income. 

Purchasing crypto with fiat currency, gifting or donating crypto, and transferring crypto between wallets (without exchanging coins) generally do not trigger taxable events.

Crypto taxes done right: Our extensive, carefully researched and regularly updated crypto tax guide will help you understand the most difficult crypto tax scenarios.

Here is a fairly comprehensive list of eleven effective and legal ways to minimize your crypto tax liability. Learn how to avoid capital gains tax on cryptocurrency and how to avoid crypto taxes generally with these simple methods.

Use crypto tax software

Simplify the tax filing process by leveraging specialized cryptocurrency tax software like ours at TokenTax. With TokenTax, you can import data from every crypto exchange, blockchain, protocol, and wallet. Our tools automatically generate comprehensive tax reports and ensure accurate reporting of your crypto activities.

In TokenTax’s crypto tax software, we’ve built upon the HIFO method with our proprietary minimization accounting method, which makes adjustments based on an individual’s tax rate to minimize crypto taxes as much as possible.

Explore TokenTax: Crypto tax software that actually gets the job done!

Harvest your crypto losses

Selling cryptocurrency at a loss can offset capital gains and up to $3,000 in income, with the ability to carry forward losses to future tax years. This strategy can help reduce your overall tax liability and provide some financial relief.

Usually, tax loss harvesting is used to offset capital gains, but you may want to do it even if you don’t have any crypto gains, as capital losses can also offset income or capital gains in other assets, such as traditional stocks. 

Our Tip: TokenTax’s tax loss harvesting dashboard can be a valuable tool for this strategy, as it identifies which and how many assets you can sell off.

Hold crypto assets long term

Holding your crypto assets for more than a year can result in lower, long-term capital gains tax rates. By adopting this investment approach, you can potentially enjoy tax advantages when you decide to sell your cryptocurrency.

The crypto tax strategy is simple: holding (for at least a year) pays off, at least in regard to your tax bill. That said, this does put you at the whim of the market, and it may be more profitable to sell when your crypto has significantly appreciated rather than holding for long-term gains.

Take profit during a low-income year

Consider selling cryptocurrency when your personal income is low to benefit from lower tax rates. Understanding that the tax rate you pay on cryptocurrency disposals is based on your income tax bracket in a given year. This crypto tax strategy allows you to optimize your tax situation by taking advantage of reduced tax brackets.

Give cryptocurrency gifts and donate crypto

Gifting cryptocurrency does not incur income tax, although gift tax returns may be required for high-value gifts. By giving crypto to friends and family, you can share your assets while potentially minimizing your tax burden.

When it comes to donating crypto, keep in mind: If you purchased $20,000 of BTC and sold it more than a year later for $60,000, under normal circumstances you would have to pay long-term capital gains taxes on your $40,000 of profit. However, if you donate the asset, no capital gains taxes are owed—as long as the following criteria are met: 

• You have held the donated cryptocurrency for more than a year 

• You verify the intended receiver of the funds is considered a tax-exempt organization by the IRS 

• You give the crypto directly to the organization without cashing it out or converting it to a different coin. Both of these actions are

  crypto taxable events. 

Under many circumstances, your donation can also offset between 30 and 50% of your ordinary income, depending on the type of organization to which it was given and whether or not you are itemizing deductions.

Buy and sell crypto via your IRA or 401-K

Self-directed IRAs can help you invest in cryptocurrencies within your retirement accounts. By using retirement accounts, you may be able to enjoy tax advantages and grow your crypto investments tax-free.

However, be aware that you may owe taxes on certain actions some protocols take with your collateral. For example, Alchemix’s self-repaying loans can result in taxable debt cancellation income.

You will owe taxes if you experience forced liquidation. For more info on crypto tax basics, visit our crypto tax guide, and see our choices for the 10 best crypto loans in 2023.

Take out a crypto loan

Instead of selling your crypto, consider taking out a crypto loan using your cryptocurrency as collateral to potentially save on taxes.

This strategy allows you to access funds without triggering taxable events and can be beneficial. Be sure to know the risks involved and choose the best crypto lending platform for your situation.

Move to a crypto tax free country

Relocating to a crypto tax free country can help reduce your overall tax burden. By considering jurisdictions with lower crypto tax rates, you can optimize your tax situation and potentially keep more of your crypto profits.

This is not a small undertaking for US taxpayers, however, as the US taxes citizens regardless of where they reside.

Keep complete records of your crypto transactions

Maintaining accurate records of cryptocurrency transactions is crucial for proper tax reporting and to determine the cost basis of your crypto acquisitions. By keeping organized and complete records, you can ensure compliance with tax regulations and avoid potential penalties.

Leverage these methods to develop an effective tax strategy, avoid crypto taxes, and optimize your overall tax situation.

Hire a crypto tax professional

Seek professional assistance from an expert crypto accountant who can help you navigate the complexities of the tax code. Working with an expert can help you identify additional tax-saving strategies specific to the crypto industry.

When in doubt, our team at TokenTax can help. TokenTax VIP is our full-service crypto tax accountant to help you avoid crypto taxes legally and navigate you through all crypto tax challenges. We offer a dedicated team and tailored crypto tax solutions for businesses and select investors.

Here are answers to frequently asked questions about how to avoid capital gains tax on cryptocurrency and how to avoid crypto taxes.

What happens if you don't report crypto on taxes?

Failure to report cryptocurrency on your taxes can result in significant repercussions, including penalties, interest, and potential criminal charges, depending on the jurisdiction. 

If you’ve failed to report cryptocurrency on your taxes for the current or prior tax years, don’t panic. You may still have the opportunity to rectify the situation by amending your returns.

Do I really need to pay taxes on crypto?

The IRS treats cryptocurrency as property. When you buy, sell, or exchange one crypto for another or for goods or services, this is treated as a taxable event, usually resulting in a capital gain or loss. The IRS also taxes earned income from crypto activities such as mining or staking as ordinary income.

International taxpayers can refer to our helpful country guides, and there are some crypto tax free countries where it may be possible to entirely avoid crypto taxes.

Do you have to pay taxes on cryptocurrency if you spend it?

Yes, when you spend crypto for goods or services, the IRS considers this a disposal, and the usual capital gains tax implications apply. If the crypto you use for a purchase has appreciated since you first acquired it, you’ll need to pay capital gains. If it has depreciated, this is a capital loss.