Effective methods to avoid crypto taxes in the USA. Our guide provides practical insights for minimizing tax liabilities and making informed financial decisions.
Written byPayam Masood · Head of Content and Social Media - Kryptos
Reviewed byDeepak Pareek · Head of Tax & Accounting - Kryptos
PublishedLast updated5 min read
FAQs
1. Why is it important to keep track of gains and losses in the crypto world?
Keeping track of gains and losses is crucial for staying ahead of your tax responsibilities. It provides you with a comprehensive overview of your actual gains and losses, helping you be aware of your tax liability. Tools like Kryptos - USA’s Top Cryptocurrency Tax Software can simplify this process.
2. How can unrealized losses be utilized to reduce overall tax burden?
Unrealized losses, which occur when the value of an asset decreases but you still hold onto it, can be strategically leveraged to lower your tax bill when they are realized. By selling or swapping assets with unrealized losses, you can offset them against gains, resulting in a lower overall tax payment.
3. Can losses from other investments offset crypto gains?
Yes, losses from other investments, not limited to cryptocurrencies, can offset crypto gains. This means that if you experience losses in one investment, you can use them to counterbalance gains in another, reducing your overall tax liability.
Cryptocurrency has been like a rocket ride for many investors as they aim to the moon. However, what goes up must come down, and in crypto, taxes are the shadow on the moon's dark side. The good news is, there are smart and legal ways to reduce your crypto tax burden without getting on the wrong side of the IRS. Here are 10 ways to avoid paying crypto tax in USA 2024.
How to Avoid Your Crypto Tax
While completely avoiding your taxes is not legal and can lead to hefty penalties for crypto tax evasion, Here are some simple actions you can take now to trim down your tax bill before the end of the financial year. which includes:
Keep track of your gains and losses
Harvest unrealized losses
Offset losses against gains
HODL (Hold On for Dear Life)
Choose the best cost basis method
Use crypto loans for spending
Leverage tax-free thresholds
Crypto Gift and donations
Invest in an IRA (Individual Retirement Account)
Take profits strategically
If you want to know how crypto is taxed in the USA, take a look at our USA Crypto Tax Guide.
1. Keep track of your gains and losses
If you've had a fantastic year in terms of financial gains, be prepared for the impending tax bill. Surprisingly, many investors overlook the importance of tracking their gains and losses throughout the financial year to stay ahead of their tax responsibilities.
Simplify this process by using Kryptos - USA’s Top Cryptocurrency Tax Software. Setting it up is straightforward, and once done, you'll have a comprehensive overview of your actual gains and losses right from your dashboard. This ensures you're always aware of the tax liability associated with your crypto investments.
Additionally, you can also monitor your unrealized losses on both a macro and micro scale. This is crucial because you can strategically leverage these losses to reduce your overall tax burden.
2. Harvest unrealized losses
Losses in the world of finance come in two forms: realized and unrealized. A realized loss occurs when you sell, swap, or spend an asset for a price lower than what you initially paid for it. On the other hand, an unrealized loss happens when the value of an asset decreases after you've acquired it, but you haven't actually realized that loss because you still hold onto the asset. For instance, if you bought BTC for $20,000, and it's now valued at $16,000, but you're still holding onto it, you have an unrealized loss. This loss becomes realized only when you decide to sell, swap, or spend your BTC.
Understanding these concepts is crucial because these losses can be utilized to lower your tax bill when they are realized. Once you've realized a loss, you can offset it against your gains, resulting in a lower overall tax payment.
Deciding when to realize a loss isn't a one-size-fits-all answer and depends on your individual circumstances. However, with the current market trends, your unrealized losses are likely accumulating. The recent NFT boom, for example, has led to significant losses for many investors due to plummeting prices. In such cases, it might be advantageous for you to sell your NFT at a loss and use that loss to reduce your tax bill.
Similarly, for coins that have lost all value, whether due to a rug pull or a crash like with LUNC, it may be in your best interest to realize these losses by selling, swapping, or transferring them to a burn wallet if other options are not available to you.
However, you will have to be mindful of the wash sale rule. A wash sale rule occurs when an investor sells an asset at a loss and then buys back the same or a similar asset thereby creating an artificial loss for tax loss harvesting. To counter this, the IRS restricts taxpayers to utilize losses on assets which have been repurchased 30 days before or after the sale.
3. Offset losses against gains
Just like with any investment, when you realize a profit from your crypto gains, you can offset it by claiming losses on other investments in the same year. For instance, if you earned $30,000 from selling Bitcoin but also experienced a $30,000 loss from selling Ethereum, you wouldn't owe any tax since your gains and losses balanced each other out.
It's worth noting that these losses aren't confined to other cryptocurrencies alone. If you're gearing up to cash in a significant crypto investment, take a glance at the rest of your investment portfolio. You might find other underperforming investments that you can sell to counterbalance your gains.
Good news, if your capital losses surpass your gains, you can use the excess loss to reduce your income. The maximum amount of excess loss you can claim is either $3,000 ($1,500 if married filing separately) or your total net loss indicated on line 21 of Schedule D (Form 1040) – whichever is lower. If your net capital loss exceeds this limit, you have the option to carry the loss forward to offset future gains in subsequent years. Strategically using this approach is known as tax-loss harvesting and can be a smart way to manage your overall tax liability.
4. HODL (Hold On for Dear Life)
The easy peasy way to Reduce Your Tax Bill? Just HODL for the Long Term.
Reducing your tax liability can be as easy as holding onto your assets for an extended period. The IRS has two different Capital Gains Tax rates – one for short-term gains and another for long-term gains.
Short-term gains tax rates apply if you've held an asset for less than a year, and it's taxed at the same rate as your regular Income Tax Rate. This can be a hefty rate, especially for high-income earners.
Conversely, long-term gains are taxed at a significantly lower rate. Any asset held for over a year falls into this category, with tax rates ranging from 0% to 20%. However, it's important to note that long-term gains from NFTs classified as collectibles may be subject to a higher tax rate, potentially reaching 28%.
In essence, the key is to know which assets to HODL onto. If you have two similar assets, like 2 BTC, and you've held one for over a year and the other for less than a year, you'll pay less tax on the long-term asset. Similarly, if you're just a few weeks or months away from hitting the one-year mark with an asset, holding on a bit longer could result in tax savings.
5. Choose the best cost basis method
Your cost basis method is essentially the approach you use to figure out how much your assets, such as cryptocurrencies or stocks, cost you, and which ones you sold and when, especially when dealing with multiple assets of the same kind.
Although it may not initially seem significant, the cost basis method you opt for can significantly impact the amount of tax you'll have to pay.
According to the IRS, US taxpayers have the option to use the Spec ID cost basis method, which involves specifically identifying each unit sold (which you use in case of NFTs) . This method provides flexibility and can accommodate other cost basis methods like FIFO, LIFO, and HIFO.
There isn't a one-size-fits-all best cost basis method. The choice depends on your crypto assets and transactions. Keep in mind that you can only pick one cost basis method for the entire year, and it's important to stick with it. Therefore, it's worthwhile to invest time in figuring out which method works best for you. Alternatively, consider using crypto tax software like Kryptos, which supports various cost basis methods, making it easier for you to compare them and save valuable time.
6. Use crypto loans for spending
Need quick cash and thinking about cashing out some crypto? It's a convenient way to get money on the spot, but it does come with a tax obligation.
To minimize your tax liability, consider opting for a crypto loan. With this option, you can use your crypto as collateral to access cash when needed and repay the loan over time, allowing you to avoid selling your crypto assets.
There's a catch, though – the IRS hasn't provided clear guidance on how crypto loans are taxed. Since, in most cases (excluding certain DeFi loan protocols), you don't receive additional tokens in exchange for your collateral and don't dispose of your crypto, taking out a loan is generally considered a non-taxable event. It offers a way to generate cash flow without surrendering your hard-earned gains to the IRS.
However, it's crucial to note that you should calculate the interest rate for your repayments to ensure it aligns with your personal financial circumstances and makes sense for you.
7. Leverage tax-free thresholds
The IRS provides many tax deductions and credits for US taxpayers, so it's crucial to understand which ones apply to you and take full advantage of them to reduce your tax bill. When it comes to filing, you have the choice between taking the standard tax deduction or itemizing your deductions, remember you can't do both.
Your decision on which route to take will depend on which option benefits you the most.
$13,850 for single taxpayers & married individuals filing separately.
$27,700 for married couples filing jointly.
$20,800 for heads of households.
This means, regardless of how you're filing, you won't owe Income Tax on the amounts mentioned above.
Many taxpayers prefer the standard tax deduction as it offers quicker processing by the IRS. However, there are numerous other tax deductions available, and if you qualify for several of them, you might find it more advantageous to itemize your deductions in your tax return. There's a multitude of deductions to consider, and some commonly utilized ones include:
Student loan interest deduction, providing up to $2,500 off taxable income.
Lifetime learning credit, allowing a 20% claim on the first $10,000 spent on tuition and other school fees.
Child tax credit, offering up to $2,000 per child.
Child and dependent care tax credit, covering up to 50% of daycare costs under $8,000 per child aged less than 13.
Medical expenses deduction, allowing the deduction of unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
Mortgage interest deduction, reducing federal Income Tax for qualified homeowners by the amount of mortgage interest paid.
IRA contributions deduction, permitting the deduction of contributions to a traditional IRA.
401(k) contributions deduction, allowing the deduction of up to $22,500 contributed to a 401(k).
Health Savings Account contributions deduction, where all contributions and withdrawals from HSAs are tax-deductible when used for qualified medical expenses.
These are just a few examples, and those who are self-employed or running a small business have even more deductions at their disposal. If several of these deductions align with your circumstances, opting to itemize may be more beneficial than taking the standard tax deduction. Seeking advice from an accountant is recommended.
In addition to the mentioned deductions, individuals with lower incomes can benefit from not paying any Capital Gains Tax on short or long-term capital gains. For instance:
Single taxpayers earning under $44,625 a year won't incur tax on capital gains.
For married individuals filing jointly, this threshold increases to $89,250 a year.
If you're the head of the household, you won't pay Capital Gains Tax on income up to $59,750 a year
8. Crypto Gifts and donations
When it comes to cryptocurrency, giving not only brings a sense of fulfillment but also comes with perks for you.
For American taxpayers, there's an annual gift tax exclusion of $17,000 (for 2023) per recipient. If your gift exceeds this amount, it could potentially trigger a 40% gift tax, but only if you surpass the lifetime gift tax exemption of $12.92 million (for 2023). By gifting cryptocurrency, you can dispose of your crypto without incurring a Capital Gains Tax event.
Another option is donating crypto, which comes with its own set of tax benefits. When you donate cryptocurrency, you're eligible for a deduction equal to the full value of your crypto, including any capital gains – as long as the charity is registered.
In the United States, verifying a charity's 501(c)3 status can be done through the IRS' exempt organization database. To deduct your donation from federal taxes, the charity must have 501(c)3 status.
An important note: report any donations on Form 8283. Depending on the donation amount, you may also need receipts from the charity. Additionally, donations exceeding $5,000 must be appraised by an independent and qualified party.
9. Invest in an IRA (Individual Retirement Account)
An impactful strategy to enhance your tax situation is to invest through retirement plans, pensions, or annuities.
Opting for a crypto IRA can offer substantial tax advantages based on the type you choose. Traditional IRA contributions, for example, are tax-deductible up to a certain limit. This means you can lower your tax bill by deducting your IRA contributions, and you won't owe taxes until you withdraw your funds during retirement when you're likely to be in a lower tax bracket.
On the other hand, contributions to a Roth IRA are not tax-deductible. However, the benefit lies in the fact that you won't incur any taxes when you withdraw your funds later on.
10. Take profits strategically
Whether it's holding onto your assets for the long term, changing jobs, or anticipating a move to a state with lower Income Tax rates, HOLDing off the realization of your gains until a year with a lower income can result in significant benefits. Waiting it out might just pay off in a big way.
Streamline Your Crypto Taxes with Kryptos
Kryptos is Your Personal Crypto Tax Assistant that simplifies crypto taxes. Not only does it effortlessly calculate your crypto taxes such as capital gains, losses, income, and expenses, but it also provides features to optimize your tax position.
Track your unrealized gains and losses with Kryptos, gaining insights into when to HODL and when to make decisions about your investments.
Kryptos offers support for various cost basis methods, including FIFO, LIFO, and HIFO. You can customize these settings to see how they impact your crypto taxes.
Beyond saving you from hours of spreadsheet work and calculations, Kryptos also cuts down the time spent on form-filling. For US investors, Kryptos generates pre-filled forms ready for submission to the IRS or your tax portal. These include - IRS Form 8949 & Schedule D, TurboTax Report, Tax Act Report, Complete Tax Report.
Make your crypto tax experience more efficient with Kryptos.
FAQs
1. Why is it important to keep track of gains and losses in the crypto world?
Keeping track of gains and losses is crucial for staying ahead of your tax responsibilities. It provides you with a comprehensive overview of your actual gains and losses, helping you be aware of your tax liability. Tools like Kryptos - USA’s Top Cryptocurrency Tax Software can simplify this process.
2. How can unrealized losses be utilized to reduce overall tax burden?
Unrealized losses, which occur when the value of an asset decreases but you still hold onto it, can be strategically leveraged to lower your tax bill when they are realized. By selling or swapping assets with unrealized losses, you can offset them against gains, resulting in a lower overall tax payment
3. Can losses from other investments offset crypto gains?
Yes, losses from other investments, not limited to cryptocurrencies, can offset crypto gains. This means that if you experience losses in one investment, you can use them to counterbalance gains in another, reducing your overall tax liability.
4. How does HODLing for the long term help in reducing tax liability?
Holding onto your assets for the long term can significantly reduce your tax liability. The IRS has lower tax rates for long-term gains (held for over a year) compared to short-term gains. By strategically choosing which assets to HODL onto, you can pay less tax on the gains.
5.What is the significance of choosing the best cost basis method for tax purposes?
The cost basis method is crucial in determining how much your assets cost and when you sold them. The method chosen can impact the amount of tax you'll have to pay. Understanding and selecting the best cost basis method for your crypto transactions is essential, and using tools like Kryptos or consulting with tax professionals can help.
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!
