Just like any other type of investment, taxes can cut a healthy chunk out of your earnings. For that reason, there are always going to be those watching the latest crypto news and seeking to exploit loopholes in the system in order to keep more of those earnings in their pocket.
There are loopholes in the current global cryptocurrency tax system that can be exploited. Certain strategies have become prevalent, but there are inherent risks and crackdowns being executed. In this guide, you will learn about those loopholes as well as the risks and potential crackdowns that could follow.
Strategies for Utilizing Crypto Tax Loopholes
Taxes can certainly dampen a big win within the digital assets market. That said, there are certain strategies that can help you potentially avoid paying extra in crypto taxes. These are the most commonly exploited loopholes when it comes to the crypto tax system.
1.) Harvest Losses
Losses from digital assets like cryptocurrencies can be used as a way to offset capital gains. It can even offset up to $3,000 of income when you file your taxes. Additional losses are eligible to be rolled forward into future tax years as well. Because of this, investors may sell their crypto at a loss intentionally in a strategy known as tax-loss harvesting.
This isn’t a strategy that is unique to crypto, either. That said, there are some inherent advantages compared to other asset classes. For instance, securities like stocks are subject to the wash sale rule, which states that you can’t claim losses on securities if you buy them back within 30 days of them being sold. There are no such rules for crypto because it’s not considered a security, so you can sell your crypto for a loss, buy it back soon after, and claim a loss when filing taxes.
2.) Hold Your Crypto
Maybe the easiest way to avoid having to pay taxes on your cryptocurrency holdings is to not sell them at all. There are no taxes on crypto holdings, only on crypto that you sell. If you dispose of it at any time or use it to earn income, then you would be subject to paying crypto tax.
3.) Contribute to Retirement Accounts
A growing trend is in crypto individual retirement accounts (IRAs). These allow you to invest your cryptocurrency on either a tax-deferred or tax-free basis. It is a great way to minimize taxes incurred over the long-term when holding onto cryptocurrency.
Keep in mind that most of the IRA providers out there won’t allow you to hold crypto. But if you have a self-directed IRA, you can invest digital assets like Ethereum and Bitcoin with those tax advantages that are offered by traditional IRAs.
4.) Donate Crypto
There are rare occasions where the IRA will allow you to ‘double dip’ on certain tax benefits and donating cryptocurrencies is one of those occasions. When you donate crypto, it can be treated as a tax deduction when you file your tax return, even helping to reduce your overall tax bill.
Additionally, when you donate cryptocurrency to charity, it isn’t considered a taxable disposal. What this means is that you won’t be required to pay any kind of capital gains tax even if you have seen a significant increase in value of that crypto since receiving it.
5.) Dispose of Crypto After 12 Months
The structure of the American tax code is to encourage investment over the long term. So, if you hold crypto and other digital assets for more than a year, the taxes paid on profits will be reduced drastically.
If you have held your crypto assets for close to a year, hold on to them just a little longer before selling. It will have a much kinder impact on your tax bill when it comes time to file.
6.) Gifting Cryptocurrency
There is one significant loophole when it comes to crypto and the IRS: if you give $18,000 or less in cryptocurrency gifts throughout a single tax year, you don’t need to report those gifts. You are required to fill out gift tax forms if the amount exceeds $18,000 but most of the time that doesn’t come with tax liability.
For the most part, filling out a gift tax return is used for informational purposes. Anything below $18,000 is fine and you have a $13.61 million lifetime exemption threshold that won’t be taxed.
The Risks of Exploiting Crypto Tax Loopholes
While there are certainly a number of ways to exploit the system and keep more of your crypto earnings, there are inherent downsides as well. These are just a few of the risks that come with attempting to use a crypto tax loophole to your advantage.
1.) Poor Tracking
Most crypto traders don’t realize that buying and selling crypto is definitely taxable. Whether you exchange that crypto for fiat money or other cryptocurrencies, the transaction is meant to be taxed. Traders are accountable for keeping track of every trade.
Failing to track your transactions can come back to bite you if you are audited. Keep track of your trades using reputable platforms. There are even those platforms that will help when it comes to tracking transactions, making it easier to keep them in line.
2.) Failing to File Earnings/Losses
Though there are other ways to go about it, far too many traders simply mark that they did not receive, send, sell, or exchange virtual currency in the prior year. Though there are means through which you can exploit the loopholes, failing to disclose that you had any crypto assets can be a huge mistake.
Properly filing your earnings and losses is crucial because failing to do so at all can come with serious repercussions. If you aren’t confident in your ability to report accurately, get help from a qualified accounting service in order to make sure that everything is lined up properly.
3.) Making Payments Using Crypto is Taxable
One of the biggest myths surrounding cryptocurrencies is that they aren’t taxable if you use them as a form of payment. Far too many people still believe in this myth because cryptocurrency is not treated in the same way that fiat currencies are.
Having said that, cryptocurrencies are still taxable even though they are listed as property. You are essentially selling those assets when you make crypto-based payments, according to conditions set out by the IRS. When you sell anything, it triggers capital gain taxation rules.
Crackdowns Have Already Been Seen
Though there haven’t been any monumental shifts in policy, we have seen an effort to close crypto tax loopholes. Former president Joe Biden’s 2025 budget proposal aimed to change the capital gains tax, taking the crypto investment community into its sights.
Part of the proposed change would include tracking for specific crypto transactions. It will require crypto “brokers” to collect all the data surrounding a specific transaction and submit it to the IRS. The goal is to eliminate the loopholes when it comes to harvesting losses in crypto.
