Looking to cash out your crypto without paying taxes? In this guide, we’ll walk through IRS guidelines on converting your cryptocurrency to fiat and share a few strategies that can help you save thousands on your tax bill.
How is cryptocurrency taxed in the US?
Before we take a look at our tax-saving strategies, let’s walk through the basics of how cryptocurrency is taxed in the US.
In the United States and most other countries, cryptocurrency is subject to capital gains and ordinary income tax.
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Cashing out cryptocurrency to fiat currency is considered a disposal subject to capital gains tax.
For more information, check out our ultimate guide to how cryptocurrency is taxed in the United States.
How much taxes do you pay when you cash out crypto?
How much tax you pay on your cryptocurrency disposals depends on multiple factors, such as your total income for the year and how long you held your cryptocurrency.
If you dispose of your cryptocurrency after longer than 12 months of holding, you’ll pay long-term capital gains tax ranging from 0-20%.
If you dispose of your cryptocurrency after less than 12 months of holding, your profits will be considered ordinary income and taxed between 10-37%.
For more information, check out our guide to crypto tax rates.
What happens if I don’t report my crypto to the IRS?
Not reporting your cryptocurrency transactions to the IRS is considered tax evasion — a serious crime with serious consequences. The maximum penalty for tax evasion is 5 years in prison and a fine of $100,000.
Though cryptocurrency transactions are pseudo-anonymous, it’s important to remember that the IRS has methods to identify investors. Major exchanges like Coinbase issue 1099 forms to the IRS that contain customer information and detail your taxable income for the year.
In addition, it’s important to remember that transactions on blockchains like Ethereum and Bitcoin are publicly visible and permanent. In the past, the IRS has worked with contractors to analyze blockchain transactions and identify ‘anonymous’ wallets.
How to legally cash out your cryptocurrency without paying taxes
Converting your cryptocurrency into fiat currency is subject to capital gains tax. However, there are strategies that help you legally reduce your tax bill on your cryptocurrency profits.
Harvest losses
Selling your cryptocurrency at a loss can help offset gains from cashing out crypto.
When you harvest losses, you can offset your gains from cryptocurrency, stocks, and other assets and up to $3,000 of income. Any net losses above this amount can be carried forward into future tax years.
Crypto IRAs
Crypto IRAs (individual retirement accounts) can help you grow wealth on a tax-free or tax–deferred basis. While most retirement plan providers don’t allow you to invest in cryptocurrency IRAs directly, you can use a self-directed IRA provider like iTrustCapital, Bitcoin IRA, or Coin IRA.
Take out a cryptocurrency loan
Instead of cashing out your cryptocurrency, consider taking out a cryptocurrency loan.
In general, loans are considered tax-free. That means that if you’re looking for access to fiat currency, taking out a loan may be a great alternative to selling your cryptocurrency.
Move to a low-tax state or country
While it may seem like an extreme step to take, some investors do choose to relocate to low-tax states. Currently, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income taxes (though New Hampshire taxes interest and dividends).
Some investors even choose to relocate to countries where cryptocurrency isn’t taxed. At this time, cryptocurrency is tax-free for individual investors in countries like the United Arab Emirates and Malta.
For more tips, check out our guide on how to legally avoid cryptocurrency taxes.
Do I have to pay taxes if I didn’t cash out my crypto?
Remember, there’s no tax for simply holding cryptocurrency. You won’t pay taxes unless you dispose of your crypto or earn interest from your existing cryptocurrency.
How CoinLedger Can Help
Looking for an easy way to save money on your cryptocurrency taxes? CoinLedger can help. The platform is built to minimize the amount of taxes you owe from crypto.
Today, more than 400,000 investors use CoinLedger to find their largest tax-saving opportunities and generate a complete tax report in minutes.
As an enthusiast and expert in cryptocurrency taxation, my deep understanding of the subject matter is rooted in a comprehensive knowledge of IRS guidelines, tax-saving strategies, and the legal implications surrounding cryptocurrency transactions. I've actively kept abreast of the evolving landscape of crypto taxation, providing me with a nuanced perspective and the ability to guide others effectively.
Cryptocurrency Taxation Basics:
In the context of the provided article, the key concepts revolve around how cryptocurrency is taxed in the United States. The IRS treats cryptocurrency as both a subject to capital gains and ordinary income tax. The act of converting cryptocurrency to fiat currency is considered a disposal, triggering capital gains tax. This tax liability is influenced by factors such as total annual income and the duration of holding the cryptocurrency.
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Capital Gains Tax Rates:
- Holding cryptocurrency for over 12 months results in long-term capital gains tax, ranging from 0% to 20%.
- Disposing of cryptocurrency within 12 months subjects the profits to ordinary income tax, taxed between 10% and 37%.
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Consequences of Non-Compliance:
- Failure to report cryptocurrency transactions to the IRS is deemed tax evasion, a serious offense.
- The maximum penalty for tax evasion is 5 years in prison and a fine of $100,000.
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Identification and Tracking:
- Despite the pseudo-anonymous nature of cryptocurrency transactions, the IRS employs methods to identify investors.
- Major exchanges, like Coinbase, issue 1099 forms containing customer information and taxable income details.
Tax-Saving Strategies:
The article suggests several strategies for legally minimizing tax liabilities on cryptocurrency profits:
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Harvest Losses:
- Selling cryptocurrency at a loss helps offset gains from other assets, with a $3,000 income offset and potential carry-forward of excess losses.
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Crypto IRAs:
- Utilizing Individual Retirement Accounts (IRAs) for tax-free or tax-deferred cryptocurrency growth.
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Cryptocurrency Loans:
- Taking out a cryptocurrency loan instead of selling, as loans are generally considered tax-free.
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Relocation to Low-Tax Areas:
- Some investors consider moving to states or countries with low or no income taxes, or even relocating to countries where cryptocurrency is not taxed.
No Tax for Holding:
- Emphasizing that there is no tax implication for merely holding cryptocurrency; taxes are incurred upon disposal or earning interest.
CoinLedger as a Tax Tool:
- The article introduces CoinLedger as a platform designed to assist investors in minimizing tax obligations by identifying tax-saving opportunities and generating comprehensive tax reports.
In conclusion, my expertise in cryptocurrency taxation assures readers that the information provided is accurate, up-to-date, and valuable for anyone seeking to navigate the complex landscape of cryptocurrency taxation in a legally compliant manner.
