How to Avoid Crypto Taxes – 10 Ways to Not Pay Taxes on Bitcoin

Cryptocurrency profits are taxed in most countries. This means that investors will need to understand some of the most effective ways to reduce tax liabilities on capital gains and income.

In this guide, we explore how to avoid crypto taxes across 10 proven strategies.

A Closer Look at How to Not Pay Taxes on Bitcoin

There are many methods to consider when exploring how to avoid crypto taxes. Irrespective of the chosen method, it is important to discuss tax strategies with a qualified advisor.

Below, we offer insight into some of the most common ways crypto investors reduce their tax liabilities.

1. Buy Products on Crypto Emporium

An increasing number of investors are using their crypto holdings to buy products and services rather than cashing out.

Before going any further, it is important to note that buying things with crypto still triggers a taxable event – this is because the crypto is no longer in the possession of the investor and thus the purchase is defined as a sale.

Nonetheless, there can be instances when buying products with crypto can make sense. For example, let’s suppose that the investor elected to buy Bitcoin when it was priced at $60,000 but it is now trading at just $30,000.

If the investor then uses BTC to buy a product online, this might not result in a tax liability, because the investment resulted in a loss.

Assuming that the investor did not make any capital gains in the respective tax year, there might not be a liability to pay at all. Another instance where buying products with Bitcoin can make sense is if the purchase was made when the cryptocurrency was worth less than its current price.

For example, let’s suppose the investor buys a watch with Bitcoin when BTC/USD is $25,000 and a few days after the purchase was made, BTC/USD increases to $28,000. This means that while there is an opportunity cost, the purchase resulted in a smaller tax liability as Bitcoin was sold at a lower price.

In terms of what can you buy with Bitcoin, Crypto Emporium is well worth checking out. This is an established crypto-only retailer that was launched in 2018 and sells everything from luxury watches and electronics to cars, clothing, and more. The vast majority of products are high-end brands, but all budgets are covered nonetheless.

For example, those in the market for a new Rolex will find models ranging from $20,000 to over $600,000. Similarly, Crypto Emporium lists regular cars from $10,000 to several million dollars. Luxury car brands include Bugatti, Ferrari, Lamborghini, and many others.

Crypto Emporium is also popular with those looking to invest in stores of value, offering hundreds of real estate projects, covering apartments, houses, and villas from over 40 countries. It also lists fine artwork, including paintings and sculptures.

Crypto Emporium also lists everyday electronics, including smartphones, audio equipment, TVs, and cameras, as well as luxury bags, shoes, and other clothing items.

What we also like about Crypto Emporium is that the process of buying products with Bitcoin is extremely simple – after registering and choosing a product, Crypto Emporium displays the wallet address to send the funds.

Not only does the platform accept Bitcoin but some of the best altcoins, including Dogecoin, XRP, Litecoin, Bitcoin Cash, and more.

Moreover, we also like that Crypto Emporium is transparent with fees, charging just 0.87% on sales – all shipping fees are displayed once the product is added to the shopping cart.

The site also offers cashback on all purchases, standing at 4% of the purchase amount, payable in crypto.

2. HODL Long-Term 

When learning how to not pay taxes on Bitcoin, it is important to understand what triggers a taxable event. Put simply, in the vast majority of cases, tax is only applicable if the investor sells their crypto.

This is the same as stocks, ETFs, mutual funds, and other financial products. After selling crypto, this is known as ‘realizable gains‘.

The key point here is that by choosing not the sell, there are no realizable gains, and thus – crypto taxes can be avoided.

This means that one of the best ways to avoid tax is HODL (hold onto) crypto long-term. For example, an investor may buy Ethereum in early 2023 at $1,500 and hold onto ETH until the end of the year where it is trading at $3,000.

While this represents a profit on paper of 100%, no tax is due unless the crypto is sold and an actual profit is made.

Ultimately, the best long-term crypto investments – such as Bitcoin, Ethereum, and Cardano,  often produce the largest gains over extended periods of time. This means that gains can be maximized by HODLing rather than engaging in short-term trading, allowing taxes to be postponed.

3. Open a Tax-Efficient Account

Residents in many countries have access to tax-efficient investment accounts and in the US, for example, residents can invest tax-efficiently via an IRA.

While the IRS allows crypto assets to be held in an IRA, few online brokers permit this – instead, investors will need to go through a specialist crypto-IRA provider, such as iTrustCapital or Bitcoin IRA.

IRAs come in two forms, there is a Roth IRA, which allows investors to make contributions to their IRA with after-tax dollars. Upon the age of retirement, Roth IRAs allow tax-free withdrawals.

There is also the traditional IRA, which allows investors to make contributions with pre-tax dollars, meaning larger investments. But upon retirement, tax will be payable on withdrawals.

Nonetheless, both IRA plans may be considered when exploring how to avoid crypto taxes. Roth and traditional IRAs come with annual limits of $6,500 in 2023, while those over 50 can contribute an extra $1,000.

When allocating crypto to a retirement plan, it is important to do some homework as even the best crypto assets are volatile, and virtually all advisors will advise against this. With that said, some investors will limit their crypto IRA investments to just 5% of the overall portfolio – this permits tax-efficient access to the crypto markets without being over-exposed.

Those based in the UK will find that tax-efficient crypto investments can be made via a Stocks and Shares ISA. Once again, however, most providers that offer ISAs are not set up for crypto custodianship.

One of the best workarounds to this is to opt for crypto-related stocks (e.g. Coinbase) or funds (e.g. ProShares Bitcoin Strategy ETF).

4. Maximize Annual Tax-Free Allowances

The next strategy to explore when assessing how to avoid crypto tax is to check what tax-free allowances are available in the current and future years.

For example, those based in the UK can accumulate up to £12,300 in capital gains without paying any tax, although this will be reduced to just £6,000 in the 2023/24 tax year.

However, with the correct planning in place, crypto investors can avoid paying taxes by maximizing their annual allowances.

For example, let’s suppose that somebody in the UK invested £20,000 in Bitcoin and the same investment is now worth £30,000 – this means that the investor is looking at gains of £10,000.

A possible strategy here would be to cash out £6,000 from the investment – leaving £24,000 in the crypto portfolio – which would trigger a taxable event as some Bitcoin was sold. However, in the 2023/24 tax year, the entire £6,000 gains could be tax-free on the proviso that the investor did not make any other capital gains in the same tax year.

Let’s now fast forward to the following tax year, where we will assume that the capital gains allowance remains at £6,000. The crypto portfolio has grown from £24,000 to £40,000.

In the 2024/25 tax year, the investor could once again sell £6,000 worth of crypto, all of which would again be tax free.

5. Avoid Crypto Income Strategies

Earlier in this guide, we explained that one of the best ways to avoid crypto taxes is to HODL long-term. This is because in most cases, no taxes will be due until the crypto investment is actually sold.

However, tax authorities view things differently when earning income from a crypto investment.

Examples of income earned from crypto investments include staking, yield farming, and interest accounts – drucially, these yield services are classed as income by tax authorities.

That means there is no way to avoid paying taxes in the year the income was earned.

For example, suppose an investor deposits $10,000 worth of crypto in a savings account and the savings account pays an annual yield of 10%, with the investor keeping it open for six months.

This means the investor collects $500 in passive income – not only is the $500 taxed as income, but the specific amounts are based on the date the crypto was earned. This can have catastrophic consequences if the income was earned during a bull market.

After all, the income might have been worth a lot when it was received, but the respective crypto might have dropped significantly in value.

Moreover, if the crypto tokens earned from a savings account are sold, this will also trigger capital gains tax liabilities. Overall, to avoid taxes altogether, it might be best to avoid crypto income strategies.

6. Consider Tax-Loss Harvesting

While nobody wants to sell crypto at a loss, this can be one of the most effective ways to reduce taxes, with the strategy known as tax-loss harvesting.

Put simply, the idea is to sell some crypto holdings that are currently at a loss – just like capital gains, these losses will be included in the overall tax obligation for the year.

This means that the amount of capital gains owed will be reduced. For example, an investor has made two crypto trades in the current tax year – the first was a $10,000 investment in Bitcoin, which was sold for $15,000, a $5,000 capital gain. The second was a $5,000 investment in Ethereum, which was sold for $4,000, resulting in a $1,000 capital loss.

The crypto investor has made capital gains of $4,000 ($5,000 – $1,000). Now let’s say that the current tax year is about to close and the investor has a trade outstanding. If the investor were to close the trade, it will result in a $4,000 loss.

While not ideal, add this to the previous trades and the investor no longer has capital gains. This is because the $4,000 loss counters the $4,000 gains – therefore, no tax is owed.

In most countries, the investor would then be able to use the proceeds from the loss to buy another asset for the portfolio. They would need to ensure they do not sell the new asset before the tax year ends.

However, being aware of the ‘wash sale rule‘ is also important. This means that if the exact same asset is repurchased within 30 days of making the loss, no tax benefits can be realized.

To date, the wash sale rule does not cover crypto, but legislation is already being discussed to include it.

7. Gifting Bitcoin to Avoid Tax

Another strategy when exploring how to avoid crypto taxes is gifting Bitcoin – although rules vary widely from one jurisdiction to another.

In the US, for example, individual taxpayers can give up to $17,000 in assets to anyone else in the 2023 tax year, with most assets eligible for gifting, including cryptocurrencies.

Let’s suppose that an investor buys a full Bitcoin in 2020 at $5,000. The investor is still holding their Bitcoin, and it is now worth $20,000. This means that should the investor sell their Bitcoin, there is $15,000 in capital gains. As we have discussed, this would ordinarily result in capital gains tax.

However, let’s now suppose that instead of selling, the investor transfers $15,000 worth of Bitcoin (leaving them with the original $5,000) to another person as a gift. This is within the annual limit of $17,000, so no crypto taxes would be due – moreover, the person receiving the gifted Bitcoin would not be liable for tax either.

However, capital gains tax will apply when the giftee sells their Bitcoin. We should also note that US residents have a lifetime gifting allowance of $12.92 million (as of 2023), meaning that even if the investor gifts more than $17,000 in 2023, they can use some of their lifetime allowances.

8. Make a Crypto Donation

Making a donation with crypto can be a win-win situation for some investors as not only does this allow investors to do something good for society but also avoid taxes.

This is because any crypto donated can be reduced from the investor’s annual tax bill. It is important to note that the crypto should not be sold in the same year – if it is, then capital gains will be due.

Considering the triggered tax event, this also means that the charity will get a smaller amount and the investor will need to transfer the crypto to their chosen charity. This means that the charity will get the full amount. Plus, the investor will be able to make a bigger deduction from their tax obligation for the year.

Investors considering this tax reduction method will need to be strategic, this means deciding which crypto investments to sell and when. For example, long-term crypto investments that have seen the most appreciation will likely come with the greatest benefits, because more gains will be allocated toward the annual tax bill.

Another option is to donate short-term crypto holdings that have appreciated in value. Short-term capital gains tax is higher than long-term holdings, which can also reduce tax obligations toward the end of the year. Tax harvesting is a better option than making a donation if the investor is only holding crypto that is currently at a loss.

9. Sell Some Crypto During a Low-Income Year

Wondering how to avoid capital gains tax on crypto? In many countries, the capital gains tax rate is determined by the amount of income earned during the year.

In other words, the higher the income, the higher the capital tax rate – US residents that earn between $44,626 and $492,300 in 2023 will pay a capital gains tax of 15%.

However, those earning below $44,626 will pay a 0% capital tax rate. If, in 2023, income sits below $44,626, this could be a smart time to sell some crypto.

Doing so might allow the investor to avoid capital gains tax in that particular year. Do note that married couples filing jointly will need to consider both individual incomes.

10. Hold the Crypto Until Death

The final option to explore when assessing how to not pay taxes on Bitcoin is to never sell and hold onto the crypto assets until death.

The tax implications for the person receiving the inherited crypto can be hugely beneficial.

For instance, suppose a US investor bought 10 Bitcoin when it was worth $500 per coin, a total investment of $5,000, and BTC is worth $50,000 – meaning the total investment is valued at $500,000.

If Bitcoin were sold today, the capital gains tax would be based on a profit of $495,000, a huge tax bill.

However, the capital gains would reset if the Bitcoin was sold a day after death, meaning that the person inheriting the Bitcoin would have a cost price of $500,000 and instantly sell the Bitcoin without paying any tax.

While estate planning is always an awkward talking point, this is an option to consider nonetheless.

How do Crypto Taxes Work?

Understanding how crypto taxes work before deploying a tax avoidance strategy is important.

Here’s what investors need to know when learning how to pay less tax on cryptocurrency:

Capital Gains Tax

Capital gains are the most common tax to be aware of when investing in crypto. Put simply, capital gains refer to the profit element of an investment.

For example:

• Let’s say a $10,000 investment is allocated to BNB in 2022
• When the investment is made, BNB is trading at $300
• Now it’s 2023, and BNB is trading at $450 – a 50% increase
• This means the $10,000 investment is now worth $15,000
• The capital gains on this trade is $5,000

As per the above, the investor might need to pay tax on their capital gains of $5,000. But there are many factors to consider in this regard. For example, tax rules and rates vary from one country to another.

In the UK, for example, investors can make £6,000 in capital gains without paying any tax.

In the US, capital gains tax is based on the investor’s income for the year. As noted earlier, if the investor earns under $44,625 in income for the year, the capital gains tax rate amounts to 0%. If the income earned is between $44,626 and $492,300, the capital gains tax rate is 15%.

In Australia, capital gains tax on crypto depends on how long the asset was held. If the crypto is sold at least 12 months after the original investment was made, the capital gains tax is reduced by 50%.

Crucially, investors should speak with a qualified advisor in their home country to assess how to avoid paying tax on cryptocurrency.

Income Tax

Now for the tricky part – income tax on crypto investments. Once again, the specific rules will vary from one jurisdiction to another. But nonetheless, investors are often unaware that many governments will now tax investors on income derived from crypto.

This generally includes the following income-earning methods:

• Staking
• Yield Farming
• Crypto Savings Accounts

Let’s look at an example of how taxes on crypto income works:

• Let’s say that an investor deposits 4 ETH into a crypto savings account
• The savings account pays an APY of 8%
• The investor keeps their 4 ETH in the savings account for 12 months
• This means at 8%, the investor receives 0.32 ETH in interest

At face value, the 0.32 ETH would be taxed as income. However, tax authorities will base the tax calculation on the value of the 0.32 ETH when it was received. This is where things get complicated because some crypto income methods make weekly or even daily distributions.

This means that the investor would need to assess the value of the income rewards every time a distribution is made. This can be a logistical nightmare considering that crypto prices are volatile and change as each second passes.

In reality, using third-party software is the only surefire way of calculating crypto income taxes correctly. This will automatically calculate the value of the crypto rewards when they are received. In addition, investors will also need to consider the value of the original investment.

For instance, in the example above, we noted that the investor originally deposited 4 ETH into a savings account. The 4 ETH was held in the account for 12 months, so the value will either have risen or fallen. If it’s the former, then capital gains tax might apply. But this will only be the case if the investor sells their 4 ETH.

Crypto Mining Tax

Crypto miners follow similar rules as discussed above. This means that when mining rewards are received, this is classed as income. The income tax will be based on the value of the mined crypto on the day it is received.

If the miner sells the crypto, capital gains tax will apply. This will be based on the difference between the price when the crypto was received and when it was sold.

For example, let’s say that a miner receives rewards of 0.5 BTC. On this day, BTC is trading at $20,000. The miner sells their 0.5 BTC when the market price is $25,000. This amounts to capital gains of $5,000 ($25,000-$20,000).

Fortunately, many governments allow crypto miners to make tax deductions on any expenses occurred. For instance, electricity consumption and mining hardware maintenance.

How Much Tax Do I Pay on Bitcoin & Other Cryptocurrencies?

Understanding tax obligations on cryptocurrency investments is complex, but it’s important if you’re looking for how to not pay tax on Bitcoin. As noted, there are many variables to consider. For instance, the country where the investor is a tax resident and their personal circumstances, such as the amount of income earned in the year.

Additionally, some countries – such as the US and Australia, have different rules in place depending on how long the crypto investment was held. The US is also proposing a new bill to increase crypto tax rates from 20% to nearly 40% on gains of over $1 million. This is why consulting with a qualified crypto tax advisor is important.

Nonetheless, the basis for calculating capital gains and income tax on crypto is largely the same in all jurisdictions. For instance, capital gains tax only applies if the investor sells their crypto. This will not trigger a taxable event if the crypto remains unsold in a portfolio.

But in the case of rewards from staking, yield farming, or savings accounts – the taxable event is triggered as soon as the income is received.

Ultimately, active crypto traders are advised to keep suitable records for all positions. This should include the cost basis when the trade opened and the sale price when it was closed. Otherwise, attempting to calculate applicable taxes for the year can be ultra-challenging.

Is it Legal to Avoid Tax on Crypto?

It is crucial to understand that tax avoidance is legal but tax evasion is illegal. As stated by the IRS, tax avoidance is an “action taken to lessen tax liability and maximize after-tax income”.

This means that the methods discussed on this page are within the realms of US tax laws – this is also the case in the vast majority of other nations.

However, tax evasion is a completely different talking point, with the IRS defining it as “the failure to pay or a deliberate underpayment of taxes”.

Ultimately, taxes are complicated – especially in the case of crypto. This is why it’s best to obtain advice from a qualified advisor, as no two personal circumstances are the same.

Conclusion – How to Spend Crypto Without Paying Taxes?

In summary, we have explored the question – how do you avoid tax on crypto? We have covered 10 potential methods to consider, from tax-loss harvesting and maximizing annual tax allowances to making donations and gifting.

Some investors will also look to spend their crypto as a means to avoid cashing out. In this instance, Crypto Emporium is worth considering. The crypto-only retailer sells everything from real estate, cars, luxury watches, clothing, electronics, and artwork.

Crypto Emporium has a great reputation in this space, and the retailer has been in business since 2018. Head over to Crypto Emporium today to check out the many thousands of products on offer.

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