Crypto Tax Guide 2023: Tax Saving Strategies For Crypto Holders

by
Brihasi Dey
Reviewed by
min read
Last updated:

Wondering how to save tax on your cryptocurrency? Well, there’s both good news and bad news for you.

While you can’t completely avoid paying taxes, the good news is: there are multiple ways to legally minimize crypto taxes and reduce your tax burden. 

In this article, we share all the details about crypto tax that you need to know and seven simple strategies to minimize it.

How Is Cryptocurrency Taxed?

As per IRS, cryptocurrency is considered a property which makes it subject to both income tax and capital gains tax. A tax of up to 37% on crypto income and short-term capital gains and between 0% to 20% tax on long-term capital gains is applicable. The final tax amount depends on various factors including how long you have held the assets, your earnings, and the type of crypto transactions you are making.

Let’s discuss both types of applicable taxes in detail.

  • Income Tax- You need to pay income tax if you earn any income in cryptocurrency. There are various events that can be considered taxable including income through airdrops, DeFi interests, referral bonuses from crypto applications, or even simply getting paid in crypto.
  • Capital Gains Tax- You are subject to capital gains tax if you dispose of your cryptocurrency in either of the three ways: selling crypto for fiat, trading crypto, or using crypto to buy goods and services. Taxes are applicable on the capital gains you made from the disposal of your crypto.

When Is Crypto Tax-Free?

Not all crypto transactions are taxable. Here are five scenarios when you do not need to pay taxes on your crypto:

  • Buying crypto with fiat
  • HOLDing Cryptocurrency
  • Gifting cryptocurrency
  • Donating your crypto
  • Transferring crypto assets between your own wallets

7 Simple Strategies To Minimize Crypto Taxes

Now that you know how crypto is taxed, let’s dive into seven effective ways to help you save tax on cryptocurrency.

  • HOLD Your Crypto For Long Term

The best way to avoid any capital gains taxes is to HOLD your crypto. Even if you plan to dispose of your crypto, it’s important to note that the longer you hold your assets, the less taxes you need to pay. Remember, long-term capital gains where you have held your crypto for more than 12 months are subject to only 0-20% tax as opposed to 37% tax for short-term capital gains.

  • Tax Loss Harvesting

If any of your crypto assets have depreciated in value, you can sell them at a loss to save taxes on your overall bill. This process is also known as tax loss harvesting and is a great way to minimize crypto taxes, especially if your capital gains are high. For instance, you have a total capital gain of 2000$. To reduce your crypto tax bill, you sell a few of your crypto assets at a loss of 2000$ and offset your capital gains while calculating taxes.

  • Take A Loan With Your Crypto

Taking out loans with your stocks as collateral is a great way to cash out your profits without paying taxes. The good news is, the same strategy can be applied to your crypto assets. Since crypto is considered a form of property as per the IRS, you can use them to borrow money without triggering any taxation. Consider the loan interest rate and your personal income to make the best decision. 

  • Gift Your Crypto

You can gift crypto to your family and friends for up to 15000$ to avoid applicable taxes. If the gift value exceeds the mentioned amount, you simply need to submit a gift tax return form, primarily for informational purposes. This way, you not only enjoy your crypto assets tax-free but the recipients also do not have to pay any taxes until they sell it for a profit.

  • Donate Crypto

This is one of the ways to dispose of your crypto without being taxed. This is also a great way to contribute to a positive cause while receiving tax benefits. If you have held your cryptocurrency for more than a year, the fair market value at the time of donation can be deducted from your tax return.

  • Sell At The Time Of Low Income

You are now already aware that long-term capital gains are subject to 0-20% taxes. But did you know the tax rate for crypto sold after a year is 0% for investors who earn less than $41,676 including crypto income? This idea can be used strategically to avoid your capital gains tax completely. Consider cashing out your profits during years when your income bracket is lower than the above-mentioned threshold to save on your tax bill.

  • Leverage A Crypto Tax Software

Calculating taxes on all your crypto transactions manually can be tedious. It’s difficult to keep track of the US dollar exchange rate at every point of the year and figure out how it relates to your transactions. This may lead to calculation errors or make you lose money as you may overlook tax-saving opportunities such as leveraging HIFO accounting, or tax-loss harvesting when applicable. The best way to ensure you calculate your crypto taxes the right way and reduce taxes on cryptocurrency is to use automated crypto tax software like Kryptos. You do not need to spend hours tracking all your transactions – simply auto-sync all your wallets and exchanges to generate free tax reports in seconds. All these reports comply with your local laws and utilize tax-saving strategies to give you the best result, stress-free.

All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!

How we reviewed this article

Written by
Brihasi Dey

Social Media Manager, Content Writer, Strategist, and Marketer - An IT graduate well versed in SaaS, AI, & Web3, assisting Tech and Blockchain brands in scaling with Content.

Reviewed by

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Crypto Tax Guide 2023: Tax Saving Strategies For Crypto Holders

By
Brihasi Dey
On

Wondering how to save tax on your cryptocurrency? Well, there’s both good news and bad news for you.

While you can’t completely avoid paying taxes, the good news is: there are multiple ways to legally minimize crypto taxes and reduce your tax burden. 

In this article, we share all the details about crypto tax that you need to know and seven simple strategies to minimize it.

How Is Cryptocurrency Taxed?

As per IRS, cryptocurrency is considered a property which makes it subject to both income tax and capital gains tax. A tax of up to 37% on crypto income and short-term capital gains and between 0% to 20% tax on long-term capital gains is applicable. The final tax amount depends on various factors including how long you have held the assets, your earnings, and the type of crypto transactions you are making.

Let’s discuss both types of applicable taxes in detail.

  • Income Tax- You need to pay income tax if you earn any income in cryptocurrency. There are various events that can be considered taxable including income through airdrops, DeFi interests, referral bonuses from crypto applications, or even simply getting paid in crypto.
  • Capital Gains Tax- You are subject to capital gains tax if you dispose of your cryptocurrency in either of the three ways: selling crypto for fiat, trading crypto, or using crypto to buy goods and services. Taxes are applicable on the capital gains you made from the disposal of your crypto.

When Is Crypto Tax-Free?

Not all crypto transactions are taxable. Here are five scenarios when you do not need to pay taxes on your crypto:

  • Buying crypto with fiat
  • HOLDing Cryptocurrency
  • Gifting cryptocurrency
  • Donating your crypto
  • Transferring crypto assets between your own wallets

7 Simple Strategies To Minimize Crypto Taxes

Now that you know how crypto is taxed, let’s dive into seven effective ways to help you save tax on cryptocurrency.

  • HOLD Your Crypto For Long Term

The best way to avoid any capital gains taxes is to HOLD your crypto. Even if you plan to dispose of your crypto, it’s important to note that the longer you hold your assets, the less taxes you need to pay. Remember, long-term capital gains where you have held your crypto for more than 12 months are subject to only 0-20% tax as opposed to 37% tax for short-term capital gains.

  • Tax Loss Harvesting

If any of your crypto assets have depreciated in value, you can sell them at a loss to save taxes on your overall bill. This process is also known as tax loss harvesting and is a great way to minimize crypto taxes, especially if your capital gains are high. For instance, you have a total capital gain of 2000$. To reduce your crypto tax bill, you sell a few of your crypto assets at a loss of 2000$ and offset your capital gains while calculating taxes.

  • Take A Loan With Your Crypto

Taking out loans with your stocks as collateral is a great way to cash out your profits without paying taxes. The good news is, the same strategy can be applied to your crypto assets. Since crypto is considered a form of property as per the IRS, you can use them to borrow money without triggering any taxation. Consider the loan interest rate and your personal income to make the best decision. 

  • Gift Your Crypto

You can gift crypto to your family and friends for up to 15000$ to avoid applicable taxes. If the gift value exceeds the mentioned amount, you simply need to submit a gift tax return form, primarily for informational purposes. This way, you not only enjoy your crypto assets tax-free but the recipients also do not have to pay any taxes until they sell it for a profit.

  • Donate Crypto

This is one of the ways to dispose of your crypto without being taxed. This is also a great way to contribute to a positive cause while receiving tax benefits. If you have held your cryptocurrency for more than a year, the fair market value at the time of donation can be deducted from your tax return.

  • Sell At The Time Of Low Income

You are now already aware that long-term capital gains are subject to 0-20% taxes. But did you know the tax rate for crypto sold after a year is 0% for investors who earn less than $41,676 including crypto income? This idea can be used strategically to avoid your capital gains tax completely. Consider cashing out your profits during years when your income bracket is lower than the above-mentioned threshold to save on your tax bill.

  • Leverage A Crypto Tax Software

Calculating taxes on all your crypto transactions manually can be tedious. It’s difficult to keep track of the US dollar exchange rate at every point of the year and figure out how it relates to your transactions. This may lead to calculation errors or make you lose money as you may overlook tax-saving opportunities such as leveraging HIFO accounting, or tax-loss harvesting when applicable. The best way to ensure you calculate your crypto taxes the right way and reduce taxes on cryptocurrency is to use automated crypto tax software like Kryptos. You do not need to spend hours tracking all your transactions – simply auto-sync all your wallets and exchanges to generate free tax reports in seconds. All these reports comply with your local laws and utilize tax-saving strategies to give you the best result, stress-free.

All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!

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