Which Crypto Transactions Are NOT Taxable? How To Minimize Your Crypto Taxes - Decrypt (2023)

Need help with your crypto taxes over the long weekend? Check out The Decrypt 2023 U.S. Tax Guide. It's free, and there's a fun quiz at the end so you canreceive a free Proof-of-Knowledge certificate in the form of an NFT.

For U.S. citizens, there are really only two ways to not pay crypto taxes on profitable trades: renounce your citizenship or simply not pay them. Simply not paying them is a risky proposition that may lead to the Internal Revenue Service (IRS) coming after you for unpaid taxes, late fees and fines, and in some instances may even lead to prison time. Renouncing your citizenship for tax purposes is fairly uncommon and can also lead to other issues (like the inability to get a visa to regain entry into the USA).

However, there are some ways that you can legally minimize the taxes you have to pay on profitable crypto transactions. The first thing you should do is try to keep excellent records on all of your purchases and sales. Besides being required by the IRS, detailed records will allow you to implement various cost basis methods and accounting options (discussed in detail below).



Crypto Tax Minimization Tip #1: Keep Good Records

A comprehensive transaction record is called a tax lot and should include the following: amount of crypto or digital asset involved in the transaction, value in fiat currency at the time of purchase (and the corresponding date), value in fiat at the time the crypto was traded, sold, or used to purchase a good or service (and the corresponding date).

Which Crypto Transactions Aren’t Taxable?

To review, crypto transactions that are taxable include selling crypto for U.S. dollars (USD) or another fiat currency, trading one crypto for another (like exchanging ADA for DOGE), or purchasing a good or service with cryptocurrency; this holds true when the trade or purchase results in a net profit. Even if the transaction resulted in a net loss, it should be recorded to be compliant — and to take advantage of capital losses that can lower your tax bill.

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Here is a list of things that are not taxable:

  1. Buying crypto with fiat isn’t taxable until you sell it, trade it, or use it to make a purchase. Without one of these actions, there isn’t a taxable event.
  2. Gifting crypto to a friend or family member isn’t a taxable event if done below the allowable limit. Gifts above the allowance would be subject to a gift tax.
  3. Gifting crypto to a tax-exempt organization (such as a nonprofit) isn’t a taxable event if done properly. Donations in excess of $500 must be noted on Form 8283. This is a tax-deductible donation and the deduction amount depends on how long you have owned the asset you donated.
  4. Transferring crypto between your own wallets isn’t taxable. For example, if you purchase ethereum classic (ETC) from a crypto exchange and send it to a non-custodial software wallet (Exodus, Atomic) this isn’t a taxable event; it’s merely a transfer. You could then take this ETC on your software wallet and freely send it to a hardware wallet (Ledger, Trezor). Later, you could return it back to the exchange from which you originally withdrew it (perhaps to sell it at some future date). None of these actions are taxable events.

While not taxable, the buying of crypto and the gifting of it (to either a person or organization) should be recorded so that your transaction records can be accurate. Wallet-to-wallet transfers don’t necessarily need to be recorded but some keep track of these transactions to account for crypto holding discrepancies that may occur as the result of transaction fees on certain blockchain protocols.

Crypto Accounting Tactics and Terms

While we previously discussed how short-term and long-term capital gains are charged at different rates, we should look more deeply into how these gains are calculated and the options you have to consider when selling assets—provided you keep good records.

Trading and transaction fees can be added to your cost basis when calculating fair market value.

Fair Market Value

The market price or spot price that a crypto asset can be sold for at a particular time is called the fair market value (FMV) for accounting purposes. The FMV of a crypto asset must be used when reporting capital gains — and losses. In the U.S., the FMV is converted to USD when making both sales, purchases, and crypto-to-crypto trades. If you’re doing trades and transactions on a centralized crypto exchange (CEX), they usually have built-in tools that can help you create crypto transaction reports that include the FMV. You can also calculate the FMV by comparing the transaction date and time with the spot price listed on crypto market sites like CoinMarketCap and CoinGecko.

Transferring crypto between your own wallets isn’t taxable.

Trading and Transaction Fees

Many crypto purchases and trades involve a fee. This could be a transaction fee (paid to a blockchain protocol like Bitcoin) or a fee paid to the crypto exchange you are using. In general, these fees can be added to your cost basis to lower your tax bill (by lowering your capital gains or increasing your capital losses).

Cost Basis Methods

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In other countries, the cost basis method that may be required when reporting sales is called average cost accounting. This means that if you have made multiple purchases of an identical crypto asset over time, you must take the average of them to get the fair market price you will be using. The IRS lets you choose from a variety of methods which can allow you to maximize your post-tax investment returns.

Rule #1: Keep good records

Imagine a crypto investor purchased a full BTC on four separate occasions, paying $5,000; $15,000; $25,000; and $50,000; respectively. Let’s say they purchased the $5,000 BTC first, the $50,000 BTC second, the $15,000 BTC third, and the $25,000 BTC last. Here are some cost basis options in this scenario:

  • Average Cost Basis (ACB): As the four purchases are for an equal amount of BTC, the cost basis is simply the total purchase price divided by four; this equals a cost basis of $23,750 per BTC. One option of many to choose from in the U.S., countries like Canada and the U.K. only allow this cost basis method.
  • First In, First Out (FIFO): The first assets purchased are the first sold. This would be a $5,000 BTC cost basis using this method.
  • Last In, First Out (LIFO): The last assets purchased are the first to be sold. This would equate to a $25,000 BTC cost basis using this method.
  • Highest In, First Out (HIFO): The assets that cost the most are sold first. This would equate to a $50,000 BTC cost basis.
  • Lowest Cost, First Out (LCFO): The purchase that cost the least is sold first. This would equate to a $5,000 BTC cost basis. As the lowest cost purchase was also the first, this cost basis is the same as using FIFO in this scenario.
  • Specific Identification: If you keep solid records, you can simply choose which purchase you want to use to calculate your cost basis. In our example, you have four choices on what your cost basis will be.

How you choose to calculate your cost basis is solely up to you. Which cost basis designation is the best for you depends on your income, your other investments, and a variety of other considerations. You may want to maximize your returns, minimize your tax bill, or even sell for a loss to offset capital gains in other parts of your portfolio.

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While how you calculate your cost basis is your decision, you have to use one method each year; you can’t pick-and-choose methods for individual assets. For example, you can’t use LCFO for your stocks, ACB for your BTC, FIFO for your ETC, and LIFO for your ADA. While creative (and probably a great way to lower your taxes even more), you have to stick with one accounting method for all your assets over the calendar year. On the plus side, you can change your cost basis method every year in order to do what is most beneficial for you during that calendar year.

Capital Gains Taxes and Income Bracket Considerations

When aiming to minimize your crypto taxes, it’s worth considering your filing status, your income tax bracket, and how potential sales may or may not move you into a different tax bracket. Before we explain this further, it’s worth looking at the current tax rates.

This chart shows both the short-term capital gains and taxable income tax brackets for 2023:

Which Crypto Transactions Are NOT Taxable? How To Minimize Your Crypto Taxes - Decrypt (1)

This chart shows the long-term capital gains rate for 2023 for taxable income:

Which Crypto Transactions Are NOT Taxable? How To Minimize Your Crypto Taxes - Decrypt (2)



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Let’s run through some example scenarios where what you sell, the cost basis you choose, your needs, and how close you are to another tax bracket could factor into your decision. These scenarios would be for filing 2023 taxes. 2022 scenarios are very similar but the tax brackets are slightly different than the charts above. For example, the 2022 0% long-term capital gains rate stops at $41,675 (as opposed to a higher limit of $44,625 for 2023).

Scenario 1:

Investor ABC (filing single) has been investing in cryptocurrency for eight years. ABC has an annual salary of $183,000 and has a crypto portfolio of various projects that ABC has been buying for several years. Based on the current market price, ABC has the option to sell some of their BTC for either a profit or a loss. ABC decides to sell for a net loss of approximately $6,000 using a HIFO cost basis. Through this loss, ABC can implement a tax-loss harvesting strategy that will reduce their earned income by up to $3,000. Per the chart above, this would lower their tax rate from 32% down to 24%. ABC can roll over the other $3,000 in losses to implement this same strategy next year (or use them to offset capital gains).

Scenario 2:

Investors DEF and GHI are married and filing jointly. Normally making approximately $120,000 combined income, they experience an unexpected downturn that results in a combined salary of $60,000. They decide to take the opportunity to sell some of their long-term crypto holdings. At this combined income, they can sell crypto for up to $29,250 in profits, tax free. In a typical year (above the $89,250 combined income threshold), they would have to pay a 15% tax on these profits — saving them over $4,000 in long-term capital gains taxes.

Decide What’s Right for You

There are far too many considerations to give you every possible scenario — but here’s one more. You are able to — and want to — harvest substantial long-term crypto gains. However, harvesting them all in one calendar year will bump up your tax rate on long-term gains from 15% to 20%. You realize you could ostensibly sell your crypto in five equal installments to remain at a 15% tax rate if conditions persist. What would you do in this scenario?

Would you sell it all and lock in your gains, but pay the higher tax rate? Would you decide to sell a portion this year to pay a lower tax rate, but take the risk that these gains could diminish — or disappear over the coming years? A decision in a scenario like this isn’t easy; even some of the best crypto hedge funds have struggled to time the crypto markets or determine market sentiment. For these reasons, any strategies to maximize your returns and minimize your losses should consider the risk:reward ratio and the pros and cons of various investing decisions. These can be done by yourself — or with the guidance of an investment or tax advisor.

Cheat Sheet:

  • Keeping accurate and detailed crypto transaction records can help you minimize your tax obligations and maximize your investment returns.
  • Gifting crypto can be a tax-deductible donation if done properly.
  • Trading and transaction fees can be added to your cost basis when calculating fair market value.
  • There are various cost basis methods you can use when filing your taxes. The best method may be based on your personal situation and personal preferences.

Disclaimer: This crypto tax series is merely for informational purposes and should not be considered legal or tax advice. Please solicit the services of a crypto knowledgeable certified public accountant, tax professional, or lawyer should you need further guidance.

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Which Crypto Transactions Are NOT Taxable? How To Minimize Your Crypto Taxes - Decrypt? ›

Buying crypto with fiat isn't taxable until you sell it, trade it, or use it to make a purchase. Without one of these actions, there isn't a taxable event. Gifting crypto to a friend or family member isn't a taxable event if done below the allowable limit. Gifts above the allowance would be subject to a gift tax.

How do I legally avoid taxes on crypto? ›

How To Minimize Crypto Taxes
  1. Hold crypto long-term. If you hold a crypto investment for at least one year before selling, your gains qualify for the preferential long-term capital gains rate.
  2. Offset gains with losses. ...
  3. Time selling your crypto. ...
  4. Claim mining expenses. ...
  5. Consider retirement investments. ...
  6. Charitable giving.
Mar 9, 2023

Do you have to report crypto under $600? ›

You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.

What type of crypto transactions are taxable? ›

Capital gain income can be long-term or short-term. If you're receiving crypto as payment for goods or services or through an airdrop, the amount you received will be taxed at ordinary income tax rates. If you're disposing of your crypto, the net gain or loss amount will be taxed as capital gains.

How do you keep track of crypto profits for taxes? ›

There are 5 steps you should follow to file your cryptocurrency taxes:
  1. Calculate your crypto gains and losses.
  2. Complete IRS Form 8949.
  3. Include your totals from 8949 on Form Schedule D.
  4. Include any crypto income.
  5. Complete the rest of your tax return.

Can I trade crypto without paying taxes? ›

The IRS generally treats gains on cryptocurrency the same way it treats any kind of capital gain. That is, you'll pay ordinary tax rates on short-term capital gains (up to 37 percent in 2022, depending on your income) for assets held less than a year.

Will you get caught if you don't pay taxes on crypto? ›

If you don't report taxable crypto activity and face an IRS audit, you may incur interest, penalties, or even criminal charges.

Will the IRS know if I don't report crypto? ›

If, after the deadline to report and any extensions have passed, you still have not properly reported your crypto gains on Form 8938, you can face additional fines and penalties. After an initial failure to file, the IRS will notify any taxpayer who hasn't completed their annual return or reports.

Do I have to report crypto if I made less than 10k? ›

Regardless of whether you had a gain or loss, these transactions need to be reported on your tax return on Form 8949. When you receive cryptocurrency from mining, staking, airdrops, or a payment for goods or services, you have income that needs to be reported on your tax return.

What is the IRS penalty for not reporting crypto? ›

Investors must report crypto gains, losses and income in their annual tax return on Form 8940 & Schedule D. Evading crypto taxes is a federal offence. Penalties for tax evasion are up to 75% of the tax due (maximum $100,000) and 5 years in jail. The IRS knows about your crypto already.

How do I avoid capital gains tax? ›

9 Ways to Avoid Capital Gains Taxes on Stocks
  1. Invest for the Long Term. ...
  2. Contribute to Your Retirement Accounts. ...
  3. Pick Your Cost Basis. ...
  4. Lower Your Tax Bracket. ...
  5. Harvest Losses to Offset Gains. ...
  6. Move to a Tax-Friendly State. ...
  7. Donate Stock to Charity. ...
  8. Invest in an Opportunity Zone.
Apr 4, 2023

Do I need to report crypto if I didn't sell? ›

Do you need to report taxes on crypto you don't sell? If you buy crypto, there's nothing to report until you sell. If you earned crypto through staking, a hard fork, an airdrop or via any method other than buying it, you'll likely need to report it, even if you haven't sold it.

What size crypto transactions are taxable? ›

Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain. For example, if you buy $1,000 of crypto and sell it later for $1,500, you would need to report and pay taxes on the profit of $500. If you dispose of cryptocurrency and recognize a loss, you can deduct that on your taxes.

How will the IRS know I sold crypto? ›

Yes, the IRS can track cryptocurrency, including Bitcoin, Ether and a huge variety of other cryptocurrencies. The IRS does this by collecting KYC data from centralized exchanges.

How does IRS know my crypto income? ›

The IRS can and has requested these records from exchanges. In the past, the IRS has issued John Doe Summons to exchanges like Coinbase and Kraken. In addition, major exchanges issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity.

How do I cash out crypto without paying taxes USA? ›

Take out a cryptocurrency loan

Instead of cashing out your cryptocurrency, consider taking out a cryptocurrency loan. In general, loans are considered tax-free.

What happens if I don't do crypto taxes? ›

That means you must disclose any cryptocurrency trading activity conducted over the past year on your tax return. If you don't, you're subject to the same civil and criminal liabilities for not reporting capital gains.

How does the IRS audit crypto? ›

All this to say, if the IRS wants to know about your crypto transactions - they have many means to do so. They use previous tax returns, your financial records and any KYC data they have access to to identify you and audit you.

Can I write off crypto losses? ›

Yes, cryptocurrency losses can be used to offset taxes on gains from the sale of any capital asset, including stocks, real estate and even other cryptocurrency sold at a profit.

How do I hide crypto transactions? ›

As we have describe below there are several ways to pay in crypto anonymously:
  1. Тo hide IP addresses use TOR or other methods.
  2. Use anonymous email addresses.
  3. For each transaction create a new Bitcoin address wallet.
  4. Never use your real private information details.
  5. With bitcoins use a mixer service.
Sep 1, 2022

Do you file my cryptocurrency on taxes if made less than 100? ›

It's important to note: you're responsible for reporting all crypto you receive or fiat currency you made as income on your tax forms, even if you earn just $1.

Can I reinvest capital gains to avoid taxes? ›

The taxpayer must reinvest capital gains into a QOF within 180 days. The longer the QOF investment is held, the more tax benefits apply: Holding for at least five years excludes 10% of the original deferred gain. Holding for at least seven years excludes 15% of the original deferred gain.

What is the 6 year rule for capital gains tax? ›

Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they moved out of their PPOR and then rented it out.

How many times can you avoid capital gains tax? ›

How Often Can You Claim the Capital Gains Exclusion? You can exclude capital gains from the sale of a primary residence once every two years. If you want to claim the capital gains exclusion more than once, you'll have to meet the usage and ownership requirements at a different residence.

How can I buy crypto without IRS knowing? ›

Buy crypto in an IRA

Depending on your retirement plan, you can invest in cryptocurrency in a tax-advantaged manner by purchasing it in a self-directed IRA. Most IRAs allow you to invest in standard investments, including stocks, mutual funds, or exchange-traded funds (ETFs).

Can the IRS track Metamask? ›

Metamask does not have to send any information to the IRS because Metamask is an ETH wallet, and the IRS cannot keep track of Metamask.

Why does IRS ask if you bought crypto? ›

People might refer to cryptocurrency as a virtual currency, but it's not a true currency in the eyes of the IRS. According to IRS Notice 2014-21, the IRS considers cryptocurrency to be property, and capital gains and losses need to be reported on Schedule D and Form 8949 if necessary.

What states do not tax crypto currency? ›

However, there is no tax for simply owning cryptocurrency. What states have no crypto tax? Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income taxes (although New Hampshire and Tennessee tax interest and dividends while Washington taxes capital gains).

What crypto wallet does not report to IRS? ›

There are a number of crypto exchanges that do not issue 1099 forms nor collect KYC data for most small traders including: KuCoin. OKX (excluding for P2P trades) CoinEx.

What is the most crypto-friendly state in the US? ›

Cryptocurrency enthusiasts may want to consider moving to Nevada: It ranks as the No. 1 most crypto-friendly state in the U.S., according to a 2022 SmartAsset study. This is due to a number of factors, including high availability of jobs within the crypto industry and crypto-friendly legislation.

Where is the lowest tax on crypto? ›

Switzerland: Switzerland is a traditional tax haven and is also a hub for cryptocurrency innovation. The country has a low tax rate of just 11-24%, and there is no capital gains tax on cryptocurrency profits.

What is the IRS loophole with crypto? ›

The IRS treats virtual currency as property. When you sell it at a loss, meaning you weren't able to recoup the amount you paid for it, the agency allows you to use those losses to offset profits made from other investments, known as capital gains.

Can the IRS track your crypto transactions? ›

The IRS can and has requested these records from exchanges. In the past, the IRS has issued John Doe Summons to exchanges like Coinbase and Kraken. In addition, major exchanges issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity.


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