How to Cash Out Crypto Without Paying Taxes
Pro tip: Do I need to pay taxes on crypto if I don’t cash out?
There is no tax for simply holding cryptocurrency. You won’t be required to pay tax unless you dispose of your crypto or earn interest income on your cryptocurrency.
What happens if I don’t report my crypto to the IRS?
Not reporting your cryptocurrency transactions to the IRS is considered tax evasion — a serious crime with serious consequences. The maximum penalty for tax evasion is 5 years in prison and a fine of $100,000.
Though cryptocurrency transactions are pseudo-anonymous, it’s important to remember that the IRS has tools to match your wallet to your identity. Major exchanges like Coinbase issue 1099 forms to the IRS that contain customer information and detail your taxable income for the year.
In addition, it’s important to remember that transactions on blockchains like Ethereum and Bitcoin are publicly visible and permanent. In the past, the IRS has worked with contractors to analyze blockchain transactions and identify ‘anonymous’ wallets.
How to legally cash out your cryptocurrency without paying taxes
Converting your cryptocurrency into fiat currency is subject to capital gains tax. However, there are strategies that help you legally reduce your tax bill on your cryptocurrency profits.
Take your profits in low-income years
The lower your income for the year, the lower the tax rate you’ll pay on your cryptocurrency income.
To minimize your tax bill, consider cashing out your crypto in years when your income is low. Many investors choose to realize profits in years where they are between jobs or they are studying full-time.
Harvest losses
Selling your cryptocurrency at a loss can help offset potential gains and reduce your tax bill!
When you harvest losses, you can offset your gains from cryptocurrency, stocks, and other assets and up to $3,000 of income. Any net losses above this amount can be carried forward into future tax years.
Crypto IRAs
Crypto IRAs (individual retirement accounts) can help you grow wealth on a tax-free or tax–deferred basis. While most retirement plan providers don’t allow you to invest in cryptocurrency IRAs directly, you can use a self-directed IRA provider like iTrustCapital, Bitcoin IRA, or Coin IRA.
Remember, crypto IRAs are recommended for those who are looking to hold their cryptocurrency for long periods of time. There are penalties for withdrawing your crypto before retirement age.
Take out a cryptocurrency loan
Instead of cashing out your cryptocurrency, consider taking out a cryptocurrency loan.
In general, loans are considered tax-free. That means that if you’re looking for access to fiat currency, taking out a loan may be a great alternative to selling your cryptocurrency.
Move to a low-tax state or country
While it may seem like an extreme step to take, some investors do choose to relocate to low-tax states. Currently, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income taxes (though New Hampshire taxes interest and dividends).
Some investors even choose to relocate to countries where cryptocurrency isn’t taxed. At this time, cryptocurrency is tax-free for individual investors in countries like the United Arab Emirates and Malta.
For more tips, check out our guide on how to legally avoid cryptocurrency taxes.
How is cryptocurrency taxed in the US?
Before we take a look at our tax-saving strategies, let’s walk through the basics of how cryptocurrency is taxed in the US.
In the United States and most other countries, cryptocurrency is subject to capital gains and ordinary income tax.
Cashing out cryptocurrency to fiat currency is considered a disposal subject to capital gains tax.
For more information, check out our ultimate guide to how cryptocurrency is taxed in the United States.
How much taxes do you pay when you cash out crypto?
How much tax you pay on your cryptocurrency disposals depends on multiple factors, such as your total income for the year and how long you held your cryptocurrency.
If you dispose of your cryptocurrency after longer than 12 months of holding, you’ll pay long-term capital gains tax ranging from 0-20%.
If you dispose of your cryptocurrency after less than 12 months of holding, your profits will be considered ordinary income and taxed between 10-37%.
For more information, check out our guide to crypto tax rates.
How do I cash out Bitcoin and other cryptocurrencies?
Centralized exchanges
Centralized exchanges like Coinbase, Binance, and Kraken are the easiest way to cash out cryptocurrency. These exchanges allow you to sell your crypto for fiat — then transfer the funds to your bank account!
Peer-to-peer trades
Peer-to-peer (P2P) trading platforms — such as Paxful — allow users to sell cryptocurrencies directly to other individuals. Sellers can choose from multiple payment methods — such as wire transfer and even cash in a face-to-face transaction!
Cash out at a Bitcoin ATM
Bitcoin ATMs allow you to automatically trade your Bitcoin for cash. These ATMs automatically connect to the blockchain to verify your identity. Then, you’ll be able to make a cash withdrawal!
Bitcoin ATMs typically charge high fees — especially compared to traditional exchanges.
Trade crypto for another
Most centralized exchanges allow you to trade one cryptocurrency for another. Some exchanges may require you to convert to a stablecoin like USDC or USDT before purchasing another cryptocurrency.
How to prepare your Crypto Taxes
Are you looking for a straightforward way to handle your digital asset taxes? Taxing Cryptocurrency offers a seamless, efficient solution for calculating your crypto tax obligations. Our firm is trusted by many, and with good reason: it makes crypto tax preparation easier than ever.
Here’s How Taxing Cryptocurrency Can Help with Your Crypto Taxes
Taxing Cryptocurrency’s digital asset reconciliation process is designed to simplify your digital asset tax calculations. We accurately track and calculate your gains, losses, and taxable events, so you don’t have to. In just a few weeks, you’ll have a full report ready for tax season.
