Priyeshu Garg · 20 hours ago · 4 min read
Taxes, in and of themselves, can be complex, and throwing your crypto gains on top of it makes things even more challenging. However, that doesn’t mean that there aren’t ways around paying taxes on your Bitcoin gains. Here are some practical tips we’ve discovered that allows you to pay no taxes on your cryptocurrency gains.
There are plenty of people in the world of cryptocurrency who are trying to find a way to “make it big.” Of course, once you do so, then you’re dealing with taxes on your cryptocurrency gains. You have to deal with governing authorities, regulations, and requirements for tax purposes.
Crypto Taxes in the United States
In 2014, the Internal Revenue Service (IRS) made the announcement that digital currencies would be viewed as properties or assets. Basically, they wouldn’t be considered currencies. That means crypto traders have to treat cryptocurrencies the same way they would any investments, stocks, real estate, or rental properties.
As a result, people are paying 50 percent of their short-term gains and 20 percent of long-term profits out to the IRS as taxes. This applies to any loss or gain associated with your cryptocurrency trades. Specifically, all transactions involving cryptocurrency—including trading, exchanges, airdrops, and mining—are all viewed as taxable.
So how do you get around paying taxes on your cryptocurrency profits? Let’s take a look at a few options.
Give them away
Yes, we know it sounds crazy. No, we’re not suggesting you donate all your hard earned cryptocurrency gains to a charity. However, if you give them to a family member or a friend, you can partially address your problem with cryptocurrency taxes. In 2018, the IRS allowed U.S. citizens to offer a gift of up to $15,000 without documented proof of the transaction.
This is a particularly interesting alternative considering that when the recipient of your gift decides it’s time to cash out, that value that’s taxed is based on the market value on that given day. Something to think about as you ponder what to do with your crypto gains.
Invest for the future
Arguably, the easiest method of avoiding taxes on your cryptocurrency gains is to put them into a 401k, IRA, or any other qualifying retirement plan. We already mentioned that the Internal Revenue Service views all cryptocurrencies as capital assets. Based on the law, retirement accounts can hold, buy, or sell cryptocurrencies.
There are already a number of investment companies that are in on this type of “loophole” when it comes to cryptocurrency taxes. Several are using their retirement plan options as a way to defer on taxes. Using this method, the taxes are either deferred until the retirement account is distributed or completely fall off if the account is a Roth IRA, which is completely tax-free.
Let your crypto insure your life
Another less used method of avoiding paying taxes on your cryptocurrency gains is through a life insurance policy. Although this option isn’t as easily accessible as a 401k or IRA, it can go a long way toward reducing your capital gains taxes.
You can create an international offshore life insurance policy that requires no money. However, these are tough to find as most private life insurance policies that exist offshore need a minimum investment between one and two million dollars.
The policy is held until the death of the holder. At that time, the cryptocurrencies are distributed to your descendants, tax-free. On the date of your passing (a little morbid, right?) your heirs get all your cryptocurrency at its current market price. The nice thing is they’re getting it all completely tax-free.
Head down to Puerto Rico
If you’ve ever thought about pulling up roots and moving to a romantic island in the Caribbean, you should give serious consideration to Puerto Rico if you want to avoid cryptocurrency taxes. The country has a very friendly tax system, which is why many crypto investors and entrepreneurs move there to establish residency.
This is perfect for U.S. citizens because even though they have to pay taxes no matter where in the world they work, there is a lone exception: Puerto Rico. That means any income earned in Puerto Rico is excluded from your United States taxes. The catch, if you want to call it that? You have to spend at least 183 days out of the year in Puerto Rico to qualify as a resident.
Say good-bye to the U.S. of A.
Even crazier than giving away all your cryptocurrency might be renouncing your U.S. citizenship. This isn’t much of a loophole, but rather simply running away from the system itself. This is a very drastic move to avoid taxes, however, there are many who view the stance the IRS has on crypto to be draconian at best.
Once you renounce your citizenship, the IRS can no longer dictate what you have to do with your income. Of course, if you’re serious about doing something like this, you’ll probably be required by the IRS to pay an exit tax. Additionally, you’ll need a second passport. This is a serious step to take and should be given the consideration it deserves.
It’s no secret that many within the crypto industry simply do not like how the IRS treats cryptocurrencies as capital gains. However, if you’re a United States citizen, you’re still required to pay these taxes or find creative ways to avoid doing so.
That doesn’t mean you’re on your own though. If you’re a U.S. citizen and spend a lot of time buying, selling, and trading cryptocurrencies, you should reach out to a CPA to get help. There are plenty of options available so you don’t have to try to navigate through U.S. tax laws alone.
Find a CPA or crypto tax accountant that will ensure that you are 100 percent compliant on your taxes. Hopefully, these tips provide a starting point for you so you can discover the best method to use to avoid paying capital gains on your taxes.