Cashing out cryptocurrency can trigger tax obligations, but there are legal strategies to minimize or defer your tax bill. Here’s a comprehensive guide of how to cash out crypto without paying taxes to help you understand your options.
Key Insights
- Selling or exchanging crypto is a taxable event, generally subject to capital gains tax.
- Simply holding crypto does not incur any tax liability.
- Employing strategies like tax-loss harvesting or using crypto IRAs can help reduce your tax burden.
Do You Owe Taxes If You Don’t Cash Out Crypto?
If you’re only holding your crypto assets and not selling, trading, or earning income from them, you don’t owe taxes on those holdings. Tax is only triggered when you dispose of your crypto—such as selling it for fiat, trading for another crypto, or using it to make purchases.
Risks of Not Reporting Crypto to Tax Authorities
Failing to report your crypto activities is considered tax evasion, a serious offense that can result in hefty fines and even jail time. Regulatory agencies like the IRS have sophisticated tools and partnerships with exchanges and blockchain analytics firms to track crypto transactions and identify individuals behind wallets.
“Not reporting your cryptocurrency transactions to the IRS is considered tax evasion — a serious crime with serious consequences.”
Legal Strategies to Cash Out Crypto With Minimal or No Taxes
While you can’t entirely avoid taxes when cashing out crypto, these strategies can help you minimize your tax liability:
Take Profits During Low-Income Years
Your total income determines your overall tax rate. If you expect to earn less in a particular year—perhaps due to taking a break from work or going back to school—it may be beneficial to realize your crypto gains during that time. Lower annual income can place you in a reduced tax bracket, which means you could pay less tax on your crypto profits.
Use Tax-Loss Harvesting
If you have crypto assets that have declined in value, selling them at a loss can offset gains from other investments. This process, known as tax-loss harvesting, can be used to reduce your taxable income by offsetting capital gains and, in some cases, up to $3,000 of ordinary income per year. Excess losses can be carried forward to future tax years.
Invest Through Crypto IRAs
Self-directed crypto IRAs allow you to invest in cryptocurrency within a retirement account, enabling your investments to grow tax-free or tax-deferred. Withdrawals made after retirement age can be tax-advantaged, but early withdrawals may incur penalties. Providers like iTrustCapital and Bitcoin IRA facilitate these accounts.
Take Out a Crypto-Backed Loan
Instead of selling your crypto, you can use it as collateral for a loan. Loans are not considered taxable events, so you can access cash without triggering capital gains tax. However, this strategy carries risks, such as liquidation if the value of your collateral drops.
Relocate to a Low-Tax Jurisdiction
Some states and countries offer favorable tax treatment for crypto investors. States like Florida, Texas, and Wyoming have no state income tax, and countries such as the United Arab Emirates and Malta do not tax individual crypto gains. Relocating is a significant step, but it can provide substantial tax benefits for high-net-worth individuals.
How is Crypto Taxed in the US?
For tax purposes in the United States, the IRS classifies cryptocurrency as property rather than currency. When you sell, exchange, or otherwise dispose of your crypto, you must report any resulting capital gain or loss, which is determined by the change in value and how long you held the asset. Profits from crypto held for less than a year are taxed as ordinary income, while gains from assets held longer than a year benefit from lower long-term capital gains tax rates.
| Holding Period | Tax Rate |
|---|---|
| Less than 12 months | Ordinary income rates |
| More than 12 months | Long-term capital gains |
How Is Crypto Taxed When You Cash Out?
Cashing out your cryptocurrency isn’t just a financial move—it’s also a taxable event in the eyes of the IRS and many other tax authorities. When you convert your crypto into fiat currency like USD or EUR, you may be liable for capital gains tax, depending on your profit and how long you’ve held the asset.
Here’s what you need to know:
- Capital Gains Tax: If your crypto has increased in value since you acquired it, the difference between your purchase price (cost basis) and the sale price is considered a capital gain. This gain is taxed.
- Short-Term vs. Long-Term:
- If you held your crypto for less than 12 months, the gains are taxed at your ordinary income tax rate, which could be as high as 37%.
- If you held it for more than 12 months, you qualify for long-term capital gains tax, typically taxed at 0%, 15%, or 20%, depending on your income.
- No Gains, No Tax: If you sell your crypto at the same price you bought it, or at a loss, you generally don’t owe any tax. You can even use capital losses to offset other capital gains.
- Crypto Earned is Income: If you’ve earned crypto through activities like mining, staking, or freelance work, the fair market value at the time you received it is taxed as income, not capital gains.
In short, the amount of tax you pay when cashing out depends on how much profit you made, how long you held the asset, and how you acquired it. Keeping accurate records of all your crypto transactions is key to staying compliant and minimizing your tax liability.
Example Scenario
| Scenario | Buy Price | Sell Price | Holding Period | Taxable Gain | Tax Rate (Approx.) |
|---|---|---|---|---|---|
| Bought BTC at $15,000, sold at $25,000 | $15,000 | $25,000 | 6 months | $10,000 | 22% (short-term) |
| Bought ETH at $1,000, sold at $3,000 | $1,000 | $3,000 | 18 months | $2,000 | 15% (long-term) |
Other Crypto Tax Scenarios
| Transaction Type | Is It Taxable? | Tax Type |
|---|---|---|
| Selling crypto for fiat | ✅ Yes | Capital gains |
| Trading one crypto for another | ✅ Yes | Capital gains |
| Buying goods/services with crypto | ✅ Yes | Capital gains |
| Receiving crypto as income (mining, freelancing, etc.) | ✅ Yes | Ordinary income |
| Transferring between your own wallets | ❌ No | Not taxable |
Frequently Asked Questions
Can you avoid taxes when cashing out crypto?
There’s no legal way to completely avoid taxes when cashing out. However, you can reduce your tax liability using strategies like tax-loss harvesting.
Is withdrawing crypto from an exchange taxable?
Transferring crypto between wallets is not a taxable event. Only selling, trading, or using crypto for purchases triggers taxes.
What if I didn’t make a profit?
If you sell crypto at a loss, you can use those losses to offset other gains and reduce your tax bill.
Conclusion
Although it isn’t possible to cash out crypto entirely tax-free, you can implement legal strategies to significantly reduce your tax liability. Consulting with a qualified tax professional can help you stay compliant with tax laws and identify the best approaches for your situation. Accurate reporting and maintaining transparent records are essential to avoid penalties and ensure you remain on the right side of regulations.
