If you are a crypto investor and are worried about facing a huge IRS tax bill, there’s no need to panic, as there are ways to reduce your taxable gains.

The IRS’ warning letters issued a few months ago reflect a growing trend that is seeing government’s crackdown on unpaid crypto taxes. As a taxpayer, the smart thing to do is properly file your returns and pay up as legally required. Failure to do so could see the IRS knocking on your door, opening up the possibility of criminal prosecution, as well as potentially hefty fines or imprisonment for tax evasion.

If you’ve made crypto trades and want to offset some of that tax liability, then read on for ten ways to legally reduce your crypto taxes.

1. Consider Tax Loss Harvesting

Do you have crypto holdings that have significantly lost value in the current tax year? Take advantage of these assets via tax-loss harvesting, a legal practice that allows you to sell your devalued positions at a loss and use said loss to offset any capital gains realized earlier in the year.

To fully benefit from this strategy, begin by monitoring market prices to gauge any unrealized gains or losses in relation to your holdings. You can then sell the tokens that have tanked and use the losses to reduce both your capital gains and income tax.

2.  What About Hodling?

IRS guidance on cryptocurrency means that cryptocurrency, such as bitcoin and the like, are treated as property for taxation purposes. What this means is that capital gains tax rates are much lower if you hold your investments for more than a year and are higher if you engage in short-term trading.

Hodling will see you pay between 0% and 20% capital gains tax (depending on your tax bracket). If you hold crypto but also sell it within a year, then you are liable for capital gains tax of up to 37%.

Some tax advisors have referred to hodling as the “billionaire’s strategy” when it comes to minimizing capital gains tax rates. In this case, the trick is to avoid selling crypto short term, which means you won’t trigger any capital gains. In simple words, you don’t report anything if your holdings haven’t realized any gains.

3. Then There’s Crypto Lending/Borrowing

You can also reduce your crypto tax bill by borrowing or taking out crypto-backed loans. Your cryptocurrency will act as collateral and allow you to take out a loan without having to sell your assets. Do bear in mind though that selling cryptocurrencies or converting crypto to another form, triggers taxable events, although you aren’t liable for tax when you get a loan in fiat currencies like the U.S. dollar. Another thing to note is that borrowing stablecoins such as TUSD will also trigger taxable events although selling stablecoins will not actually result in any capital gains unless the value of the coin changes considerably.

4. Try the $3000 Tax-Rebate

A tax rebate is a refund on paid taxes. It also refers to a scenario in which the tax agency allows you to deduct a certain amount from the overall tax you are liable to pay if you realize losses. You can deduct the loss from your cost basis and save up to $3,000 or use them to offset other gains. 

If you have crypto investments with losses that exceed $3000, then you can claim the additional tax loss in the succeeding year. However, ensure that the amount remains below $3,000 in each tax year. 

A little misconception…

Prior to the 2017 Tax Cuts and Jobs Act, stolen/hacked crypto qualified for tax breaks as either casualty or theft loss. However, this has changed. The IRS treats the losses incurred due to hacks, fraudulent ICOs, lost/forgotten passwords; exchange shutdowns, and so on differently. To find out how to report these losses and leverage them for tax deductions, you should strongly consider consulting a tax professional or CPA.

5. Buy Crypto Using Your IRA or 401-K

You can potentially reduce your crypto and bitcoin taxes by purchasing cryptocurrencies via your retirement or 401-K account. You defer taxes on gains and only pay on distributions when you buy cryptocurrency with a traditional IRA account. If the account is within ROTH, you are eligible for no capital gains tax on any gains realized within the account.

6. Or Buy a Life Income Fund (LIF)

Just as you can use your IRA or 401-K to buy cryptocurrency, you can also use your crypto to buy a life income fund. The LIF is much like a registered retirement income fund that offers tax shelter to your investments. When you buy a crypto LIF, your investments will grow tax-free and only attract income tax on the amounts you withdraw much later.

7. Leverage Losses in Stocks to Offset Crypto Capital Gains 

IRS guidelines categorize crypto gains under the capital gains and losses category, and they are similarly filed as gains/losses from other investments. So, if you hold other investment positions like stocks and you incur losses here, then you may need to use these to offset any capital gains realized from your cryptocurrency trades.

For example, if your stock portfolio made losses as a result of the S&P moving -10% in the year, then you can use these stock losses to offset the capital gains on your crypto.

8. Be Generous – Gift or Donate Cryptocurrency

To trim down the tax liability, gift or give away your crypto holdings. The IRS allows you to donate or gift up to $15,000 annually – tax-free! This may not seem like the most attractive option, but you do benefit by avoiding paying tax on these “gifts.” Notably, however, the recipient will be required to pay up if they sell or trade the received crypto. The tax would also be applied if they used the cryptocurrency to pay for goods or services.

9. Deduct Fees and Mining Expenses

Yet another way to save some money on your crypto taxes is by deducting applicable fees and mining expenses when filing your capital gains and crypto income tax. To do this, you need to keep a record of all your transactions, and tax software like TurboTax can help you do this. You may also need the services of a cryptocurrency tax accountant who can save you money by diving through all the nitty-gritty details that you might not spot or be aware of.

10. Convert Your Crypto Profits into Dollars (Not Other Cryptocurrencies)

Here’s another suggestion: start putting money aside in USD every time you make a profitable crypto sale. However, do not convert these profits into other cryptocurrencies as that will attract more capital gains taxes as the IRS will take the sale as another taxable event.

The Bottom Line

Both governments and tax authorities are pushing harder to make sure crypto investors fulfill their tax obligations, and this is likely to persist well into the future. So, even if you are searching for ways to reduce your crypto tax liability, it is still strongly advised that you find a good tax attorney or expert to help navigate you through the confusing labyrinth that is crypto taxation.

Robin Singh is a cryptocurrency tax consultant based in the UK. He is also the founder of Koinly – a cryptocurrency tax software that simplifies capital gains reporting in the US, Australia, Ireland, among other countries.