How To Cash Out Cryptocurrency Without Paying Taxes?

How To Cash Out Cryptocurrency Without Paying Taxes?

written by John Murphy | January 8, 2023

Many people have made millions of dollars from investments in cryptocurrency, but they do not consider that they have to pay taxes on their gains. So, learning how to cash out cryptocurrency without paying taxes is an added advantage, as it will help you save extra coins.

Since crypto trading has created vast amounts of wealth for many investors, whenever wealth is generated, there is a possibility it will end up getting taxed by authorities. Similar is the story of cryptocurrencies, including Bitcoin and Ethereum.

However, reporting cryptocurrency on taxes will lead to a shortage of funds at the investor’s disposal; therefore, people seek legal ways to avoid taxes on crypto incomes.

Thankfully, there are ways by which investors can reduce taxes owed on digital currency. Please read through the entire article to understand how to avoid taxes on cryptocurrency.

Cryptocurrency Tax Framework

Let us first understand how cryptocurrency taxes work. Although incomes from crypto trading remained out of the tax net for more than six years, as the market grew, tax authorities worldwide have started to develop means to bring it under the net.

Therefore, in most countries, it is now taxable and usually categorized as capital gains, just like stock trading. For instance, in the U.S., income from blockchain-based assets and NFTs are treated as capital gains. So, you must pay out capital gains tax on income from cryptos.

  • Classification

If we classify capital gains, there are two types, depending on the duration of an asset you hold with you.

  • A short-term capital gain occurs if you sell digital currency within one year of purchasing it. In such a case, you must pay an ordinary taxpayer’s rate like a wage income.
  • A long-term capital gain happens when you sell cryptocurrency after holding it for more than one year, and your selling price is higher than buying price. Such incomes have lower tax rates, which sometimes may even reach 0%.

However, since the crypto market is relatively new and tax rules are currently evolving, there are chances that regulations may change in the future. But, based on the current taxation system, here are a few ways how to cash out cryptocurrency without paying taxes.

  • Buy Crypto in an Individual Retirement Account (IRA)

Investing in a self-directed IRA can lead you to tax-advantaged incomes. IRAs are special retirement accounts that allow investment in real estate, precious metals, and crypto trading.

First, you must search for a self-directed IRA that allows cryptocurrency investment. Once you have set up an IRA, you can avail yourself of tax benefits. However, it depends on your tax situation and the kind of IRA you have chosen.

Traditional IRAs will allow you to make tax-deductible contributions. However, you are required to pay income taxes on withdrawals in retirement. However, it still is a preferred way of saving your cryptocurrency from falling under high tax rates.

  • Long-term Crypto Investment

Generally, you do not have to pay taxes on cryptocurrency until you sell them at a price higher than the purchase price. Therefore, you can avoid tariffs by not selling your digital assets in a particular tax year. Similarly, you can hold your coins with cryptocurrency exchange for free, for instance, Coinbase.

However, you may want to sell cryptos to make gains to reduce the tax burden; make sure to sell cryptos after one year of purchase. In this case, your income will fall under the long-term investment threshold, where the tax rate is lower. Hence, you can significantly reduce your tax bill.

  • Declare Crypto as Income

Another way to report cryptocurrency on taxes under a lower tax rate is to record it as ordinary income. For instance, when you receive digital coins in your digital wallet in exchange for goods or services rendered. Such an income is treated as standard, and you must report the cryptocurrency’s fair market value.

Similarly, it is considered a self-employment activity when you receive cryptos by offering mining services. Tax rates for such an income are generally higher than ordinary income rates.

  • Offset Crypto Gains with Losses

When you sell an investment, you make a gain or loss. It depends on how much you sold and its cost basis. The good thing is that many countries allow you to offset your losses with capital gains. 

Generally, gains and losses of the same type offset each other. For example, short-term profits will offset short-term losses. Subsequently, any remainder loss will offset another kind of gain.

  • Donate to Charity

Hold any digital assets for one year, and then donate them to a qualified charity. Such donations usually result in favorable tax treatment. You get to deduct the fair market value of your crypto; however, you do not have to pay taxes.

  • Give Gifts to your Family

Gifting cryptocurrency may save you from paying taxes. The plus point is that neither do receivers have to pay tax. In the U.S., you can give up to $15,000 per person annually. 

However, gift receivers have to pay capital gain tax when he will sell cryptocurrency.

  • Sell Cryptos during the low-income year

The lower the taxable income, the lower your tax rate will be. So, you can save tax money by selling your digital assets in a year where you have made less income.

In this case, your tax bracket will remain on the lower side, thus benefitting from a low tax rate.

Frequently Asked Questions

Do I have to pay taxes on my crypto gains?

Yes! Incomes from crypto trade in categorized as capital gains and taxes accordingly.

Which countries do not apply tax on cryptocurrencies?

The following countries do not have cryptocurrency tax:

  • Germany
  • Singapore
  • Portugal
  • Belarus
  • Switzerland

How much capital loss can I offset in a tax year?

In the U.S., you can compensate a maximum of $ 3,000 long-term capital loss against your capital gain.

Parting Thoughts

As the crypto market grew, tax authorities started bringing it under tax nets. Therefore, investors look for ways – how to cash out cryptocurrency without paying taxes.

Luckily, numerous legal ways exist to avoid or reduce tax rates. For instance, you can move to Puerto Rico, as cryptocurrency is currently not taxable in the region. Similarly, you can gift it to your loved ones or report it as ordinary income to avoid hefty tax rates.

Furthermore, you can reduce taxes by holding your digital assets for more than a year or donating to a qualified charity. So, there is no shortage of methods to avoid taxes on cryptocurrency.

We hope you enjoyed and learned a thing or two from this guide and will use them for your benefit. Please leave your feedback and let us know what other methods you used to avoid hefty taxes on cryptocurrency income.