August 10, 2022

Can I Avoid Paying Taxes on Bitcoin?

We’re going to have a detailed look at seven legal ways to maximize profits and reduce crypto tax bills. But before that, let’s refresh your memory on the Bitcoin tax filing process and laws!

Can I Avoid Paying Taxes on Bitcoin?

As the IRS treats crypto as property, it is nearly impossible to avoid paying taxes when you trigger a taxable event, such as selling, spending, or trading crypto for other services. 

The good news is that there are legitimate ways to reduce your cryptocurrency taxes or even avoid them entirely, using the tax code itself! 

We’re going to have a detailed look at seven legal ways to maximize profits and reduce crypto tax bills. But before that, let’s refresh your memory on the Bitcoin tax filing process and laws.

IRS Regulations on Crypto Assets

The IRS, or the Internal Revenue Service, is the institution in charge of levying taxes in the US. A resident of the country must pay taxes to the IRS every year, including cryptocurrency taxes.

On Schedule 1 for 2019 and Form 1040 for 2020, the IRS asked this question:

"In the last year, did you receive, sell, transfer, exchange, or otherwise obtain any financial stake in any digital currency?” The answer to this financial question is either yes or no.

Those who answered "no" to the IRS' question could be heavily fined if they were found to have been involved in cryptocurrency transactions. And those who write “yes” need to have kept all necessary records of transactions in the past year.

Don’t forget that the IRS will check if you have reported all transactions, income, loss, and trades during the past year accordingly. 

But How Does The IRS Track Cryptocurrencies?

Generally speaking, the US tax policy is based on the voluntary cooperation of taxpayers. But there is no question that the IRS can monitor investors’ cryptocurrency transactions, including Bitcoin, Ether, and a large variety of other coins. 

What is their secret?

For crypto exchanges to operate in the US, Know-Your-Customer (KYC) checks must be completed on all customers, whether they are first-time users or returning. Unlike the past, when these checks only asked for simple information like your address or credentials, they now dig deeper to find who exactly is making these transactions.

With the advancement of ID technology, KYC checks have also become more sophisticated, and the majority of crypto exchanges utilize KYC verification methods that include:

  • A fingerprint-based identification system.
  • Requesting short videos from users.
  • Taking pictures while holding their ID.

Using an algorithm, the Automated Under Reporter (AUR) analyzes and compares your filed information to what you’ve reported on your tax return to find potential errors. Of course, you won’t be fined if there are any discrepancies found on your tax file.

Instead, they will issue a notice that asks you to amend some of your income, payments, credits, or deductibles.

There are some ways to avoid paying taxes on Bitcoin or at least reduce the amount you would have to pay. Before we go any further, let's be clear: we only intend to talk about legal ways to avoid paying taxes.

Note: The IRS has been making headlines for targeting those who own, trade, or use cryptocurrency. They may conduct audits and compliance checks on those individuals. 

It may be a good idea to update your past tax returns to include any missing activities as the IRS and Securities and Exchange Commission (SEC) implement more laws to impose taxes on crypto.

Bitcoin Taxation Laws - A General Overview

You'll earn or lose capital gains if you purchase, trade, or transfer crypto in a regular and taxable account. Like other investments taxed by the IRS, your gain or loss may be short-term or long-term, based on how long you held the cryptocurrency prior to selling it.

Cryptocurrency gains and losses are taxed by the IRS. Depending on the amount of time you held them before trading or exchanging them, there may be two types of gains.

  • Short-term gain or loss: property sold within one year (or shorter) of holding it. 
  • Long-term gain or loss: property sold after a year of holding. 

(Short-term gains are taxed at rates that range from 10% to 37% in 2022. And long-term capital gains are taxed at a much lower rate of 0%, 15%, or 20% in the same year).

Tax authorities treat cryptocurrency differently depending on how it was obtained and how it was used. For example, you are taxed on the gap between your initial investment price and the profit from cryptocurrency sales.

Another example would be the instructions on your Form 1040 tax statement. This part clearly says that there's no need to file tax returns if the only crypto-related activity you did this year was buying a cryptocurrency with US dollars.

Prepare Yourself for The Tax Season

Don’t forget that you'll need to report a variety of crypto activities to the IRS, which takes a lot of time (and worrying) to sort. 

Start making preparations now if you want to streamline your crypto-related 2022 tax filing. Don’t wait until the very last minute to collect your documents and calculate your tax liability, regardless of how you normally handle tax season. 

Remember that you may need to adjust your specific tax bracket if you add cryptocurrency earnings to your regular income, depending on how much you earn.

It would be helpful to have a qualified accountant check your transactions. You might also want to use a service like Financial Coaching or Tax Strategy to be on the safe side. 

Effective Strategies to Avoid Taxes on Bitcoin

Did you know you can reduce your tax amount in more ways than one? You can take extreme measures like leaving the country or be cautious and simply hold on to your gains longer.

Remember that the IRS and SEC are paying especially close attention to crypto taxes in 2022. Rules might change, and so might the consequences of your actions. Consider consulting a certified CPA before making a decision.

With that in mind, let’s now get into the details of seven methods to avoid taxes on crypto.

Crypto Tax-Free Countries

We wouldn’t go so far as to recommend you leave everything behind and move to a whole new country to avoid paying cryptocurrency taxes. But if you DO want to leave everything behind to move to a crypto tax haven, consider the following countries.

Managing taxes carefully is crucial to avoiding risks, especially if you become a tax resident in another country. It is always helpful to seek advice from local financial advisors before making a decision as big as this one.


The authorities are going to review and most probably change Bitcoin tax regulations in 2023, so make sure you speak with a financial consultant before moving there.

The Cayman Islands 

Absolutely zero taxes, people.  

El Salvador 

As with any legal currency, Bitcoin exchanges are not subject to capital gains tax in El Salvador.


In Germany, cryptocurrency is considered a private asset (like in the US), so individual income tax applies rather than capital gains tax. Also, sales under $611 are exempt from tax each year. 


You can only avoid taxes on Bitcoin if you don’t make frequent or repetitive transactions. So if you’re a day-trader, taxes still apply.


Same as Malaysia, except that frequent traders pay a 35% business income tax.


VAT and income taxes do not apply to Bitcoin, Ethereum, or other coins in Portugal unless you are a business. 

Puerto Rico 

The island is tax-free on capital gains, profits, and interest, making it particularly appealing to cryptocurrency investors.


There is no capital gains tax in Singapore, but property trading businesses are taxed on their sale profits as trade income. 


Investing in crypto is tax-free in Switzerland for private investors.

Invest In An Opportunity-Zone Fund

Trying to avoid crypto taxes by moving abroad? That's certainly an option. 

However, there are more convenient ways to avoid paying crypto taxes. For example, US crypto investors can defer a portion of their tax bill if they invest in Opportunity Zone funds.

The 2017 Tax Cuts and Jobs Bill introduced the Qualified Opportunity Zone initiative to promote private, sustainable investments in economically struggling communities. These programs give investors the chance to defer and possibly lower their capital gains taxes.

But there are a few terms and conditions, too.

  1. Taxpayers must choose from among the areas that have been certified in all 50 states, the District of Columbia, and territories under US jurisdiction.
  2. When a taxpayer makes investments during the 180-day period starting at the sale date, they may be eligible to avoid the tax on some or all of the gain.
  3. The basis of a taxpayer who defers gains through a Qualified Opportunity Fund investment is stepped up by 10% after five years and by 5% after seven years.
  4. The capital gains rate at the time of sale or in 2026 may be more than in 2021, depending on future tax laws.

Offset Losses

Although crypto losses are frustrating, at least you can write them off on Bitcoin and other digital currencies, the same way you would with stocks. Yes, if your cryptocurrency's price falls below its original price at the time you bought it, selling it will allow you to realize or harvest the loss.

You may be able to cut your income tax burden and maybe qualify for a lower tax bracket by balancing your capital gains with your losses and subtracting the remainder of your losses from your gross income.  

Of course, you can only reduce your burden up to $3000 each year and no more. 

Note: Investors may sometimes buy back assets at reduced prices in order to hold onto them for a future profit. However, this re-purchase entails its own risks. 

In our detailed guide about Bitcoin Losses Taxes: Essentials You Should Know, we have explained how you can harvest your losses in great detail. You can learn more about the Wash Sale rule in this blog post too.

Spend Tax-Deductible Money on Charity

You can deduct donations from your taxable earnings as do not have to pay capital gains taxes on them. This can amount to quite a bit of tax reduction. 

For example, cryptocurrency donations to tax-exempt institutions (like charities) are not liable for capital gains tax and may be subtracted from your gross income. 

In 2021 alone, UPenn received a $5 million donation of Bitcoin, and Vitalik Buterin donated $1.1 billion worth of Dogecoins to India's COVID relief program.

Note that there is a limit to how much you can deduct based on the length of time you've owned your crypto. When you donate your cryptocurrency, you may be able to reduce its fair market value if you've held it for at least one year.

But you can only subtract your coin's cost basis from your gross income if you’ve owned it for less than a year.

According to the IRS, those filing jointly with their spouse may itemize deductions up to $3,000.

Make sure you seek tax advice about cryptocurrency donations exceeding $5,000, especially if you donated a non-fungible token.

Retirement Account

You can also reduce your crypto tax liability by setting up a tax-deferred or zero-tax self-directed individual retirement account (SDIRA).

The most convenient way to reduce or eliminate tax on your cryptocurrency holdings is to buy them through an IRA, 401(k), or a defined benefit plan.

You are not liable for taxes until you withdraw funds from an individual retirement account (IRA). The self-directed IRA can be an alternative to a traditional retirement account since it allows you to invest directly in cryptocurrency.

Remember that cryptocurrency cannot be purchased in a retirement account located in the United States; it must be purchased inside an offshore IRA LLC. IRA LLC can then establish an overseas bank account and wallet for investing.

Nicaragua and Panama both allow you to get residency through your IRA too. But as with every other method on this blog, there’s a catch. Well, catches, in this case. 

  • Regardless of where you are or what type of account you control, you must always adhere to IRS laws.
  • You can’t gain profits from this account.
  • You must treat your investments just as a financial advisor would. That is, to make sure every transaction, sale, or purchase is for the account’s good.
  • You can’t borrow from this account.

Hold Your Coins for Longer

The value of the coins in your portfolio may quickly rise dramatically due to the high volatility of the cryptocurrency world.

As a result, many investors may feel compelled to sell their coins and possibly invest in alternative cryptocurrencies or projects. Just imagine the profits that could be made, they think to themselves.

But before you give in to the temptation in an attempt to up your profits, you should know that the rate on capital gains is lower for coins held for one year or more before selling.

As you read above, long-term investments in crypto are taxed at a more favorable rate of 15% to 20%. Generally speaking, long-term gains are not taxed if they are less than $80,000 in taxable income.

Use The Right Crypto Tax Software

If you are a cryptocurrency trader, you will most likely make a lot of transactions per year. And everyone who has ever filed crypto taxes knows how difficult it can be to calculate them when dealing with hundreds of transactions. 

However, there are ways to simplify the confusing process for yourself. You may not be able to get rid of all crypto taxes, but you can use crypto tax software to keep tabs on your activities and calculate your tax bill.

Each software provides users with powerful tax and financial tools to analyze massive amounts of information points in service of their users. Some of the most useful crypto tax software options we’ve listed before include:

  • Koinly
  • CoinLedger
  • CoinTracking
  • Accointing
  • ZenLedger
  • TaxBit

What Should I Do If I Forget To Report Cryptocurrency On My Taxes?

There is no limit to how far the IRS can scrutinize you if it suspects that you have committed tax fraud. The good news is that crypto tax evasion penalties can be avoided in a few ways.

Your amended tax return needs to be submitted using IRS Form 1040X. There is no need to re-file your taxes; you only need to complete the missing and incomplete data.

You can also submit virtual currency on your taxes if you have deliberately concealed or avoided reporting it altogether. In fact, Form 14457 has just been updated to include a subsection on submitting virtual currencies.

The IRS forms 14457 allows taxpayers who may be at risk of criminal charges for violation of tax laws the option to reveal previously withheld information to the IRS.

Final Word

In the eyes of the IRS, cryptocurrency is the same as any ordinary property, like a house. Basically, you pay capital gains taxes on any property you own and ordinary income taxes when you exchange or pay for it.

But as you read, there are several legal ways you can lower (or completely avoid) your taxes, given that you take every precaution before making a decision.

We hope you have found this guide on how to avoid paying taxes on cryptocurrency gains helpful. For more information and to discuss your future crypto investments and taxes, make sure you contact Lorenzo Tax financial experts.

20505 E Country Club Drive
Aventura, FL 33180
(631) 357-0701

Social Media
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

(631) 357-0701

   © 2022 LorenzoTax. All Rights Reserved.  

 Terms  & Condition     Privacy Policy      Contact Us