Can you pay zero taxes with crypto? Yes, some operations in the US and other countries are crypto-tax-free, leading to no income or capital gains taxes.
When trading crypto, can you avoid crypto taxes? Not so fast. However, there are legal ways to reduce your crypto taxes, from crypto tax loss harvesting to moving to crypto-tax-free countries.
Let’s discover all the crypto-tax-free events you can enjoy and how to reduce the taxes on your crypto.
The top 4 ways to not pay taxes with crypto:
1. Buy crypto and don’t sell
In the US, if you buy crypto and don’t sell any portion of it during the tax year, you won’t have to report it nor pay taxes on it.
You’ll even be able to answer “No” to the crypto question on Form 1040 (US Individual Income tax Return).
If you’re a long-term investor, one of the best ways to optimize your crypto taxes is to hold them for over 12 months or in retirement accounts. When you cash out your gains, you’ll pay fewer taxes.
If you are using a Dollar Cost Average (DCA) strategy, where you buy crypto every month for a fixed amount (e.g., $500), you’ll keep increasing your portfolio while not having to pay taxes during the accumulation phase.
2. Hold crypto
Holding crypto is not a taxable event in the US or other countries. If you buy crypto and simply hold it, you won’t have to report it or pay taxes from it.
Imagine that you bought bitcoin and a few years later sold some of it. But, for the majority of your portfolio, you decide to just hold it.
The year after the sale, you’ll pay taxes on the gain, but for the other years, you won’t have to pay any more taxes until you end up selling.
3. Transfer crypto between personal wallets
Transferring crypto between personal wallets is a crypto-tax-free event in the US and most countries.
If you move your holdings from one personal wallet to another, you won’t have to report those transfers nor pay taxes on them.
You may have to spend some crypto to transfer it, and those fees are not tax deductible, but you won’t have to pay taxes.
Remember, if you sell any portion of your crypto, you’ll have to report it on your tax report and pay taxes on it.
4. Gift cryptocurrencies
Gifting cryptocurrencies is not a taxable event in the US. You can gift crypto to a friend or family without extra reporting if you don’t cross the limit of $15,000 for each recipient.
If you gift more than $15,000 worth of crypto in a tax year, you’ll have to report it on Form 709.
A few FAQs on paying zero taxes for crypto or how to get around paying taxes on cryptocurrency:
Is converting crypto a taxable event?
Yes, in the US, converting crypto to FIAT (e.g., USD) or another crypto is a taxable event, subject to capital gains taxes.
You’ll have to report the gain on the trade and pay the appropriate tax rate according to the holding period of your original crypto.
The difference between your total sales proceeds in the trades and the initial cost basis to acquire the crypto will determine the gain/loss on the trade.
You will be subject to a short-term capital gains tax rate (between 10% and 37%) if you held your crypto for 12 months or less before selling or a long-term capital gains tax rate (between 0% and 20%) if you held it for over 12 months.
Do you have to pay taxes on crypto if you reinvest?
If you reinvest the profits of your crypto trades into another purchase, you’ll only have to pay taxes on the gain from the first trade.
If you bought crypto and sold it for a $500 profit, you’ll have to pay capital gains taxes on that profit. If you reinvest the $500 in another cryptocurrency, you’ll only pay taxes on it when you sell it.
How to get around paying taxes on cryptocurrency?
You can get around paying crypto taxes in a few ways in the US, including:
Hold crypto for more than 12 months and get a long-term capital gains tax rate (between 0% and 20%)
Donate crypto to a charitable organization and get an itemized tax deduction
Wash sale rule
Invest in crypto through an IRA
Move to a crypto-tax-free state
Move to a crypto-friendly or crypto-tax-free country
Crypto tax-free countries in 2022
There are a few crypto-friendly countries (lower taxes, a few exceptions where you don’t pay taxes on some crypto activities) and countries with no crypto taxes, including:
United Arab Emirates
If you’re a US citizen, you’re still taxed on your worldwide income if you remain a US citizen when moving to a crypto-tax-free country.
You’ll need to renounce your US citizenship and probably pay an exit tax to then fully enjoy the benefits of crypto-tax-free countries. Please consult your crypto tax advisor on your particular situation.
What happens if you don’t report cryptocurrency on taxes?
If you don’t report your cryptocurrency as per the tax code, the IRS will sooner or later send a letter with the amount of taxes due. You can have potential fines and a higher tax bill that is necessary due to misreporting or not reporting taxes.
Learn how to reduce your crypto taxes with this CoinTracking feature:
The best crypto tax software: CoinTracking
The best crypto tax software in the market is CoinTracking.
You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.
CoinTracking is your full crypto tax solution for:
DeFi and NFT support with our ETH+DEX importer.
Importing your Binance Chain, Binance Smart Chain, and MATIC transactions.
25+ advanced reports, including which coins offer you a tax-free rate.
Automatic capital Gains, according to 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB), accepted worldwide.
Generating complete Tax Reports in your country.
Moreover, CoinTracking can easily classify all your earnings from yield farming, liquidity pools, crypto staking, and much more.
Crypto taxes with no errors: CoinTracking Full Service in the US.
CoinTracking also offers a Full Service for US traders. A crypto reconciliation tax expert from Polygon Advisory Group, a leading US crypto tax firm, will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
Do you have any crypto tax questions? Check the best guides:
How are rebase token protocols taxed?
Do you pay taxes on fan tokens?
Do you pay taxes when trading stablecoins?
How is Yield Farming Taxed?
DeFi Taxes: The Complete Guide.
How to save taxes with a Bitcoin IRA.
Do you pay taxes for receiving Bitcoin tips?
Uniswap Taxes Guide
How to calculate taxes with Bitcoin dollar-cost averaging?
FIFO for crypto taxes? Implications of accounting methods.
NFT Taxes: The Complete Guide.
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 35+ AMA crypto tax reports for free.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.