How to Cash Out Bitcoins Without Paying Taxes: A Comprehensive Guide

As Bitcoin’s popularity has soared, many investors are sitting on substantial capital gains. Cashing out on some or all of a Bitcoin position can lower risk and realize gains, but it also triggers capital gains taxes. This guide explores legal ways to cash out Bitcoins without paying taxes in the US.

Overview of Cryptocurrency Tax Rules and Regulations

Cryptocurrencies are taxed similarly to other assets. Selling virtual currency incurs capital gains or losses based on the purchase and sale price. Net losses across investments can be deducted, while capital gains are taxed by the IRS.

Tax rates depend on income, marital status, and holding period. Higher income pushes you into higher tax brackets and filing single can increase capital gains taxes for incomes over $434,550. Holding Bitcoin for over a year reduces capital gains taxes.

Do You Have to Pay Taxes on Crypto?

Without using tax protection strategies, you will have to pay taxes on crypto, as it’s considered an investment subject to the same rules as other assets. You’ll pay taxes on capital gains if you report a profit across your assets, but you can offset crypto profits by selling stocks, real estate, and other assets at losses.

Understanding Taxes and Cryptocurrency

Many investors have questions about taxes. While everyone wants to avoid them, ignoring this expense can lead to overestimating profits. Understanding how taxes affect your crypto payments helps you make smarter financial decisions and save for tax day.

Purchasing Cryptocurrency

No taxes are incurred when purchasing digital currencies. Some people buy and hold assets for decades to defer tax payments. If you give your assets to an heir, they get the stepped-up cost basis, eliminating capital gains. For example, if your Bitcoin appreciates by $100,000 and you pass it onto your heirs, they won’t owe taxes on that capital gain if they sell.

Mining Cryptocurrency

The IRS views mined crypto as ordinary income. Any crypto earned from mining is taxed at the ordinary income rate. Miners must pay taxes based on the crypto’s fair market value upon mining. If you mine three Bitcoins at $20,000 each, you have to report it as $60,000 in ordinary income. Even if Bitcoin falls to $10,000 or rises to $30,000 while you hold onto the position, you still have to report $20,000 per coin in ordinary income. Crypto from mining can push you to a higher tax bracket and impact your tax percentage on income earned outside of crypto mining.

Trading/Exchanging Cryptocurrency

Trading and exchanging assets on a cryptocurrency exchange leads to short-term capital gains. Capital gains are short-term if you held the asset for less than a year before selling. These gains are taxed as ordinary income, which can raise you to a higher tax bracket. You get taxed on your net gain or loss at the end of the year instead of per trade. A net loss becomes tax-deductible, while a net gain will increase your taxes.

Cashing Out Cryptocurrency

Long-term investors who cash out on cryptocurrency often get taxed at the long-term capital gains rate. However, if you held onto crypto for over a year before selling, you would pay less or no taxes depending on your income level and filing status.

Tax Rates for Long-Term Capital Gains

You will pay no taxes on your crypto gain if you earn less than $78,750 in annual income. Anyone with income over $78,750 has to pay the following tax rate:

• Single filers: 15% capital gains tax rate for income between $78,570 and $434,550; 20% capital gains tax rate for income over $434,550
• Married and filing jointly (or qualifying widows): 15% capital gains tax rate for income between $78,570 and $488,850; 20% capital gains tax rate for income over $488,850
• Married and filing separately: 15% capital gains tax rate for income between $78,570 and $244,425; 20% capital gains tax rate for income over $244,425

Can You Cash Out Bitcoins Tax-free in the US?

Some people can cash out Bitcoins tax-free in the US. Investors who do not exceed a $78,570 income can cash out at a 0% capital gains tax rate. You can also avoid taxes by investing Bitcoin in strategic investment accounts or modifying your citizenship.

How to Avoid Taxes When Cashing Out Bitcoins

1. Buy Bitcoin in Your Life Insurance Policy

Life insurance policies provide financial stability to heirs after the policyholder’s passing. The beneficiary receives the benefit immediately and avoids taxes. Additionally, your beneficiaries can avoid paying taxes on the Bitcoin accumulated in your life insurance policy.

2. Buy Bitcoin in Your IRA

Individual retirement accounts shield investors from taxes. You can use pretax or aftertax dollars to fund your IRA account. Using pretax dollars for a traditional retirement account or similar resource saves money on your current tax bill. Using aftertax money for a ROTH retirement account or similar resource lets you avoid capital gains taxes on your Bitcoin.

3. Buy Bitcoin as a Puerto Rico Resident

Puerto Rico is a US territory with different tax treatments from the rest of the country. IRC Section 933 protects Puerto Ricans from paying federal taxes. This ruling lets qualifying Puerto Ricans avoid capital gains taxes on short-term and long-term capital gains. You will have to live in Puerto Rico for 183 days per year and buy a home in Puerto Rico within two years of moving to the territory to qualify for this tax advantage. The benefits extend to stocks, real estate, and other assets.

4. Give Up Your US Citizenship

Giving up your US citizenship is a dramatic way to avoid taxes, but some investors have large enough capital gains to consider this course of action. The IRS can’t touch your capital gains or income if you are an expatriate. You’ll need a passport from another country and funds for an exit tax before making it official. You can buy a passport or earn it by residing in a foreign country. Buying a passport is expensive and can cost well over $50,000. At that point, it may be better to pay the capital gains.

While there is no way to legally avoid taxes when cashing out cryptocurrency, strategies like tax-loss harvesting can help you reduce your tax bill legally. Carefully consider your options and consult a financial advisor to determine the best approach for your specific situation.