How to Avoid Crypto Taxes in the US in 2023
Alright, we admit it. The title is a little clickbaity. There IS no way to completely avoid crypto taxes in the US, at least not in theory (more on this later). However, thanks to a few tax breaks and loopholes, there are ways you can effectively reduce your tax bill by 50-90% or no tax at all.
The following are 6 methods you can use to save more taxes on your capital gains and income:
Tax Loss Harvesting (Wash Sale Rule)
Tax loss harvesting is the most straightforward way to avoid crypto taxes in the US to the extent you can. If you don’t know what it is, we have an in-depth guide you can check out.
But to quickly summarize, it’s when you deliberately sell your crypto assets that are performing negatively to realize losses and use them to offset your gains and reduce your tax bill. In fact, you can use your capital losses to offset gains from stocks, bonds or other instruments as well.
In case you don’t have any gains to offset, you can deduct your reported losses from your total taxable income (up to $3000) to pay fewer income taxes.
Bitcoin.Tax can identify tax-loss harvesting opportunities by highlighting assets in your portfolio that are sitting at a loss. It helps you scale the process and harvest losses more effectively.
This alone can save you a lot of taxes, but let’s go one step further and introduce another layer of complexity into this equation.
The Wash Sale Rule
In the US, you can’t use your losses to offset gains if you repurchase the same units of assets (that you realized losses on) within 30 days of selling it. The same goes when you previously bought the same units of assets 30 days before selling them.
This is the rule that we refer to as the wash sale rule. It prevents taxpayers from exploiting the tax loophole and practically harvesting unlimited losses.
However, the wash sale rule only applies to stocks and securities, and since crypto is treated as property by the IRS, crypto investors can utilize this tax loophole to reduce their tax bill.
But for how long? Read our complete guide on the wash sale rule to learn about it in depth.
Donate Crypto
As you may already know, donations are tax-deductible, meaning whatever amount you donate to qualified charities can be used to offset your gains or reduce your taxable income.
Pro tip: Donate crypto sitting on long-term gains (more than 12 months) instead of crypto with short-term gains.
Why?
Because you can only deduct the cost basis on assets with short-term gains.
Crypto IRA
An IRA, or Individual Retirement Account, is a long-term savings plan for retirement that comes with many tax benefits. The best part about IRAs is that you can put any form of investment in it, including cryptocurrency.
The tax benefits you receive will differ based on the type of IRA you opt for.
In traditional IRAs, the benefits are immediate. You can deduct your yearly investment in an IRA from your taxable income, but when withdrawing your funds after retirement, you’ll pay income taxes.
In Roth self-directed IRAs, the tax benefits are delayed. You can’t deduct your yearly investments, but all your funds will be tax-free at the time of withdrawal.
Even though you can’t avoid crypto taxes in the US with IRAs, you can gain many tax benefits, while at the same time, save for retirement.
This was a simplified version of how crypto IRAs work. There is more to it. Check out our in-depth guide on Crypto IRAs to know more.
Crypto Charitable Remainder Trust
Crypto charitable remainder trust can get real confusing, real fast. If you’re not afraid of all the complexities and nuances, check out our in-depth guide. But for others who want a brief summary of what it’s all about, here you go –
Crypto CRT allows you to donate your crypto (or any other property) to an irrevocable trust and receive multiple tax benefits and an additional income stream for the rest of the term before leaving with 50-95% of what you donated all this while.
The first tax benefit is you can deduct up to 30% (if you have a good tax advocate) of your first year’s donations from your taxable income or carry it forward to five consecutive tax years.
Secondly, the amount you receive at the end of the term is practically tax-free.
The tax benefits alone may not look all that attractive. However, once you combine them with the additional income you receive for the rest of the term, you’ll realize that you may leave with the same, or more, of what you invested or donated throughout the term.
Contrast that to what you would have left with if you paid capital gains taxes on the same amount of crypto, and you’ll see the difference.
This is probably the only method that theoretically allows you to avoid all crypto taxes in the US.
Gift Crypto to your Spouse
Gifting crypto is tax-free in the US, with a few exceptions. So, if you’re married and your spouse has some tax allowances left, you can gift them your crypto and reduce your overall tax bill.
For example, if your total income, including your crypto gains, exceeds the tax-free allowance of $41,675, you’ll have to pay capital gains taxes. But if your spouse hasn’t exceeded that limit, you can gift your spouse the crypto, realize gains in her name and avoid paying taxes.
The only limitation of this method is it only works in very specific scenarios like this one and doesn’t apply to everyone.
Tax Breaks
One of the best and simplest ways to avoid crypto taxes in the US is by not exceeding your tax allowance threshold. If you don’t know, you’re exempted from capital gains taxes if your total income in a tax year, including your crypto gains, is less than $41,675 (in 2022).
The only problem with it is most US taxpayers have a higher average annual income than $41,675, which means only a small minority of people can actually utilize this tax break.
Nonetheless, similar to the “gifting crypto to your spouse” method, there ARE some clever ways you use this tax break to save more taxes. However, it’s better you consult a tax professional before going forward.
Bitcoin.Tax is instrumental to many of these methods. Not only it helps you save more taxes, but it’s a complete package of everything you need for your crypto taxes – tracking transactions across multiple exchanges and wallets, calculating gains and losses, creating tax reports, etc.