How to Avoid taxes on Cryptocurrency?

Cryptocurrency has overnight taken many investors to the moon; such is its impact on the financial system. But they will stay over the moon for a while, as they must pay massive taxes on their returns. Therefore, crypto investors are looking for ways how to avoid taxes on Cryptocurrency.

Fortunately, specific ways can allow investors to avoid taxes on gains made through crypto trade. Although Cryptocurrency is a relatively new asset class, it has helped early stockholders with a vast amount of wealth.

But, whenever wealth comes, it is bound to somehow end up under the taxation radar. Therefore, crypto owners across the globe look for ways how to avoid taxes on Cryptocurrency.

If you, too, are scratching your head in agony, worry not! As we will help you avoid taxes on Cryptocurrency, that too, in a legal way.

How do Crypto Taxes work?

The rule of the world is that you have to pay taxes on your income. Since most people store Cryptocurrency as an investment, they are bound to pay taxes on gains made from the sale of these cryptos.

Income from trade, holding, and NFTs are capital gains. Hence, the tax payable on income from cryptos is capital gain tax. However, capital gains are of two types – short-term and long-term capital gain. The tax rates are different for both.

It is essential to realize that Cryptocurrency is a new class of digital asset for which taxation is developing. However, there are a few ways to avoid taxes on Cryptocurrency.

• Buy Cryptos in an IRA

Undoubtedly you must have an individual retirement account. You can invest in crypto in a tax-advantaged way by buying it in a self-directed IRA since a self-directed IRA allows you to invest in real estate, precious metals, and crypto trading.

First, find a self-directed IRA which allows you to invest in Cryptocurrency, set up an account, and start investing with tax benefits. However, the tax benefit depends on the prevailing tax situation and the type of IRA.

• Move to Puerto Rico

Find it funny? But this is not a joke, as Puerto Rico is a U.S. territory with tax benefits as high as 100% exemption on capital gains. So, if you have substantial digital wealth, get your ticket to Puerto Rico, and cut your tax bill.

However, it is more complex than looking from the out. You have to become a bona fide resident over there. Additionally, all capital gains made before moving to Puerto Rico are still taxable.

• Declare crypto as income

Tax treatment for crypto coins differs if you receive digital currencies for goods and services or generate them through mining. In such cases, you record received coins as income and pay taxes.

Further, incomes are taxable at higher than ordinary rates. So reporting cryptos as income when you receive them is better than recording them as capital gain, which comes from the sale price.

Additionally, mining is a self-employment scenario; thus, you must pay double self-employment and income taxes.

• Keep Cryptocurrency for long-term.

As long as you hold Cryptocurrency and do not sell it – you owe nothing to the government. You become liable for paying tax when you sell cryptos and pocket capital gain. Therefore, you can easily avoid taxation by not trading Cryptocurrency in a particular tax period.

However, likely, you will only keep digital assets for a while. So, you can lower your tax burden by holding your investments for more than a year before selling them. If so, income will fall under the long-term capital gain tax, which has a relatively low rate, thus saving you a significant amount.

• Make a donation

Donating Cryptocurrency to a qualified charity can result in favorable tax treatment. However, you must have held cryptos for more than one year to have that favor.

Additionally, you generally deduct the fair market value of cryptos, but you do not pay capital gains taxes while calculating such a manner.

However, there are a few limitations to making payments to donations, and we recommend consulting your tax lawyer before making such a move so that you make maximum.

• Sell cryptos during a low-income year.

Tax rates are always down to income to make during a financial period, irrespective of short-term or long-term capital gains. The tax rate depends on the income – the lower the payment, the lower the tax rate.

So, selling Cryptocurrency, where you have made low income, is better than selling a high-income year. As doing so, will help you avoid high tax rates. 

Selling Cryptocurrency may result in a high tax rate, but it will only apply to the portion of the income from the trade of Cryptocurrency only. As other income still bear low tax brackets.

• Give gifts to the family.

Gifting Cryptocurrency will result in saving tax for both parties – the giver and receiver of the gift. So who does not want to avoid tax by gifting digital assets to your loved ones? 

However, in the U.S., there is a $15000 limit of gift value per person per year. But still, you can save a handsome amount of tax by adopting this route.

Frequently Asked Questions

Is cryptocurrency taxable?

Yes, you have to pay taxes on Cryptocurrency if you are residing in the U.S. Incomes from cryptocurrency fall under capital gain and are taxed accordingly.

Which country does not tax Cryptocurrency?

Many countries do not tax incomes from Cryptocurrency. These include Portugal, Singapore, Germany, Belarus, and Switzerland.

Can I save tax by offsetting crypto gains with losses?

Tax authorities allow you to offset capital gains and losses from crypto trade.

How can I avoid tax on Cryptocurrency in Canada?

Unfortunately, there is no legal framework to avoid taxes for capital gains from crypto in Canada. You have to report all transactions above $10,000 to CRA.

What happens if I do not pay crypto tax?

You are most likely to receive a penalty if you fail to report capital gains from Cryptocurrency and subsequently do not pay taxes.

Parting Thoughts

How to avoid taxes on Cryptocurrency – is a powerful query for many investors globally.  Cryptocurrency investments usually end up with capital gains, a taxable income. If you are lucky to get income from the crypto trade, then some planning can help you save additional money by avoiding higher income tax rates. 

Fortunately, there are legal ways to avoid or lower the applicable tax slabs. Besides the complicated taxation system, we have outlined a few simple ways of mitigating high tax rates.

However, we recommend consulting a professional tax consultant to get the latest insights into the tax system, which keeps changing as the market evolves. 

Please let us know your paths to save yourself from paying heavy taxes. The comments section is open for your feedback.