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 a seasoned expert in cryptocurrency taxation, my extensive experience in the field equips me to guide you through the complexities of converting cryptocurrency to fiat while minimizing tax liabilities. I have a thorough understanding of IRS guidelines and a deep knowledge of the strategies involved in legally saving thousands on your tax bill.
The article you provided delves into crucial aspects of cryptocurrency taxation in the United States, addressing the fundamental principles that govern the taxation of crypto assets. Let's break down the key concepts discussed in the article:
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Taxation Basics:
- Cryptocurrency in the US is subject to capital gains and ordinary income tax.
- Cashing out crypto to fiat currency is considered a disposal and is subject to capital gains tax.
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Tax Rates:
- Tax rates for cryptocurrency disposals depend on factors like total income and the duration of holding.
- Holding for more than 12 months qualifies for long-term capital gains tax (0-20%).
- Holding for less than 12 months results in ordinary income tax (10-37%).
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Consequences of Non-Reporting:
- Non-reporting of cryptocurrency transactions to the IRS is considered tax evasion, a serious crime with severe penalties.
- The IRS can identify investors through exchanges like Coinbase, which issue 1099 forms containing customer information.
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Tax Reduction Strategies:
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Harvest Losses:
- Selling cryptocurrency at a loss helps offset gains from other assets.
- Net losses up to $3,000 can be used to offset income, with excess losses carried forward.
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Crypto IRAs:
- Individual retirement accounts (IRAs) allow tax-free or tax-deferred growth.
- While most providers don't directly support crypto IRAs, self-directed IRA providers like iTrustCapital, Bitcoin IRA, or Coin IRA can be used.
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Cryptocurrency Loans:
- Taking out a cryptocurrency loan is considered tax-free, providing access to fiat currency without triggering a taxable event.
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Relocation:
- Some investors move to low-tax states or countries where cryptocurrency isn't taxed to reduce their tax burden.
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Taxation on Holding:
- No tax is incurred for merely holding cryptocurrency.
- Taxes are applicable upon disposal or earning interest from existing cryptocurrency.
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CoinLedger Platform:
- CoinLedger is presented as a solution to help users save on cryptocurrency taxes.
- The platform aims to minimize tax liabilities, with over 400,000 investors using it to identify tax-saving opportunities and generate comprehensive tax reports.
In conclusion, the provided article offers a comprehensive guide to understanding and navigating the tax implications of cryptocurrency transactions, accompanied by practical strategies for legally minimizing tax obligations.
