How to Not Pay Taxes on Cryptocurrency

How to Not Pay Taxes on Cryptocurrency

In most countries, cryptocurrency is treated as an asset, similar to stock, and you must pay taxes on any gain you realize when you sell, trade, or otherwise dispose of that asset. The only way to legally avoid paying taxes on cryptocurrency is to become a citizen of a country that doesn't tax cryptocurrency. If such a move is out of the realm of possibility for you, there are still ways you can reduce your tax liability, whether you treat your cryptocurrency as an investment or as a business venture.[1] X Research source

Method 1 of 3:
Moving to a Cryptocurrency Tax Haven

Image titled Get a Man to Marry You Step 11
1
Identify countries where cryptocurrency isn't taxed. The list of countries that don't tax cryptocurrency in any way is relatively short. However, countries that don't tax cryptocurrency, as of 2020, include: [2] X Research source In Europe: Malta, Switzerland, Gibraltar, Slovenia, Estonia, Georgia, Belarus, Germany In Asia: Singapore, Hong Kong, Japan In the Caribbean: Bermuda
2
Compare visa requirements in countries where you'd like to move. Generally, if you want to travel to another country and stay there for an extended period, you'll need a visa. The visa allows you to enter the country for a specific purpose and conduct certain activities while you're there. [3] X Research source Each country has its own application requirements and eligibility criteria. Narrow your list down to 3 or 4 countries you're interested in, then look at the visa requirements for each. Generally, it's a good idea to prioritize those with simpler visa requirements and lower visa fees. If trading cryptocurrency is not your main source of income and you're planning on getting a job in the other country, you'll also want to look at the requirements for getting a work permit. Many countries only allow work permits to be issued for work in specific industries or sectors. In addition to visa requirements, you might also want to look at what it takes to become a citizen of the country. Depending on your nationality, it might not affect your tax liability if you move to another country until you become a citizen of that country.

Warning: The visa application process for most countries is an extensive process that may take at least a year to complete and cost hundreds, if not thousands, of dollars.

3
Apply for a visa and work permit in the country of your choice. Once you've decided which country you want to move to, you'll need to get permission from that country to live and work there. Expect the visa application process to take several months. [4] X Research source As part of the application process, you will have to provide information about your education and work history, your criminal background, your citizenship, and your finances. Typically, you'll need to be able to demonstrate that you will be able to support yourself when you move to the new country. If you're going to need a "day job" other than cryptocurrency trading, you'll typically need to have a job offer before you can enter the country. Your employer will then assist with the visa and work permit application process. However, keep in mind that it can be very difficult to find a job in another country, depending on your occupation.

Tip: If you're a full-time cryptocurrency trader, you may have more flexibility than if you were seeking other employment because you qualify as self-employed.

4
Relocate to your new country. Assuming all goes well with your application and your visa and permits are in order, you can move to your new country. Typically, the easiest thing to do is to sell most of your property and then buy new things once you arrive. [5] X Research source You also want to make copies of all of your important personal and identity documents so you can keep them safe during the move. If your bank doesn't have a presence in your new country, open a new bank account and make sure you'll have access to your financial assets after you move — especially your cryptocurrency.
5
Become a citizen of your new country. Different countries have different conditions you must meet before you can become a citizen. At a minimum, you typically have to become a permanent resident and live in the country for anywhere from 5 to 10 years or even longer, depending on the country. [6] X Research source After you become a citizen of your new country, remember to renounce your citizenship to your country of origin. Typically you can do this by visiting the country's embassy or consulate. Some countries don't require you to renounce your citizenship. However, if you don't take this step, you may end up continuing to have tax obligations in your country of origin.

Warning: Some countries, including the US, require expatriates to continue to pay taxes until they renounce their citizenship and become a citizen of another country. If you have a net worth of more than $2 million, you must also pay an exit tax to renounce your US citizenship.[7] X Trustworthy Source Internal Revenue Service U.S. government agency in charge of managing the Federal Tax Code Go to source

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Method 2 of 3:
Reducing Your Capital Gains Taxes

Image titled Write Your Congressional Representative Step 12
1
Hold your cryptocurrency for longer than 1 year. Most countries, including the US, the UK, and Canada, treat cryptocurrency as an asset rather than as a currency. This means when you dispose of your cryptocurrency (by selling it, trading it, or using it to purchase something), you'll pay capital gains taxes on any gain you've realized. You realize a gain when your cryptocurrency is worth more when you dispose of it than it was when you acquired it. [8] X Research source Generally, you pay more taxes for capital gains on assets you've held for less than a year. So by holding your cryptocurrency for longer than a year, you'll automatically reduce your tax liability. The specific rates vary depending on what country you live in. It's also possible to avoid paying taxes entirely on long-term capital gains if you hold your cryptocurrency for longer than a year, depending on your total income. This, too, varies among countries.
2
Maintain detailed records of your cryptocurrency transactions. Whenever you use your cryptocurrency, create a record with the specifics of the transaction. If you use cryptocurrency frequently, a spreadsheet can help you keep track. Include the following information: [9] X Research source The date you acquired the cryptocurrency you used The value (in your local fiat currency) of the cryptocurrency on the date you acquired it The date you disposed of the cryptocurrency (traded, sold, donated, used it to purchase something) The value of the cryptocurrency on the date you disposed of it

Tip: For transactions that occur completely on a cryptocurrency exchange, you can get this information from the transaction report for your exchange account. However, if you dispose of any cryptocurrency outside of an exchange, you'll need to gather and record this information on your own.

3
Track the costs you incurred to realize your gain. In many countries, you can deduct any fees or other transaction costs associated with a cryptocurrency trade to reduce the amount of capital gains you have to pay taxes on. While this may not amount to much, it can add up if you trade cryptocurrency frequently. [10] X Trustworthy Source Official UK government website Official website for the public sector of the UK government Go to source If you're mining cryptocurrency, you typically can't deduct the costs of mining, such as equipment and electricity. These costs would only be deductible if you were treating your cryptocurrency activities as a business.
4
Deduct cryptocurrency losses to offset your gains. If your cryptocurrency has a lower value when you dispose of it than it did when you acquired it, you have a capital loss. You can claim capital losses to offset capital gains, thereby decreasing the amount you owe in taxes. [11] X Research source For example, if you have $1,500 in capital gains through cryptocurrency trading and $1,000 in capital losses, the capital losses would effectively erase $1,000 of your capital gains. You would only need to pay taxes on $500 of capital gains.

Warning: Short-term losses (crypto you've held for less than a year) can only offset short-term gains. Likewise, long-term gains (crypto you've held for more than a year) can only be offset by long-term losses.

5
Use cryptocurrency tax software. Bitcoin and crypto tax programs have built-in tools that can analyze your transactions to minimize your capital gains tax liability. Typically, you can import your transaction history from your exchange accounts directly to the tax software, making it easier to maintain your records. [12] X Research source If you have any trades or purchases that happened outside of an exchange, you'll still have to input that information manually. However, if most of your transactions occur through an exchange, crypto tax software can save you a lot of effort come tax time.

Tip: You might also want to hire a tax professional to help minimize your tax liability. If you do, make sure the pro you hire has experience in cryptocurrency.

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Method 3 of 3:
Treating Crypto-Trading Like a Business

Image titled Date Step 9
1
Confirm that you meet the basic requirements to treat your trading as a business. Different countries have different standards you must meet if you want to treat your trading as a business rather than as investment activity subject to capital gains tax. Generally, your trading must at least meet the following conditions: [13] X Trustworthy Source Internal Revenue Service U.S. government agency in charge of managing the Federal Tax Code Go to source You try to profit from daily or even hourly movements in the value of cryptocurrency. You have a substantial volume of cryptocurrency trades. You trade cryptocurrency regularly and continuously.

Tip: To determine if you meet the standards to treat your trading as a business, look at the typical length of time you hold cryptocurrency, the frequency and amount of your trades, and the amount of time you devote to cryptocurrency trading.

2
Value your inventory in cryptocurrency. Even though traders don't maintain "inventory," the way the owner of a brick-and-mortar retail store would, the cryptocurrency you're holding constitutes your inventory. Until you dispose of crypto, it has the value it had when you first acquired it, even if the market value is drastically different. [14] X Research source If you're treating your cryptocurrency as inventory, you can either value it based on the price you paid for it or its value at the end of the tax year. However, you generally have to use the same valuation method every year, so choose wisely. The cost of acquiring cryptocurrency generally includes any transaction fees associated with buying it.
3
Maintain detailed records of your trading activities. Treating your cryptocurrency trading as a business means following the same record-keeping requirements you would if you were buying and selling any other type of good or service. Keep transaction records that include all of the following information: [15] X Research source The date of the transaction Receipts for the purchase or transfer of cryptocurrency The value of the cryptocurrency in local fiat currency at the date of the transaction Digital wallet records and cryptocurrency addresses A description of the transaction and the other party, including their cryptocurrency address Exchange records Any accounting or legal costs associated with the transaction Any related software costs

Tip: Keep these records for at least 6 years from the end of the tax year they relate to.

Image titled Become a Veterinarian Step 11
4
Deduct business expenses you incurred while trading cryptocurrency. Since your trading is a business, all of your related expenses can be deducted to offset your gains. This might include everything from equipment, utilities, and internet access to subscriptions and educational materials devoted to blockchain and cryptocurrency trading. [16] X Trustworthy Source Internal Revenue Service U.S. government agency in charge of managing the Federal Tax Code Go to source Generally, you can deduct any expenses related to your trading that any other small-business owner could deduct. For example, if you have a home office where you conduct your trading, you could deduct the costs of that home office. It's a good idea to work with a tax professional, at least for the first couple of years you treat your trading as a business, to get a handle on your deductible expenses. They might find expenses that you wouldn't have considered on your own. If you can't find someone who has experience with cryptocurrency, at least use a tax professional who's worked with stock market day traders, since the tax status is similar. In some countries, including the US, commissions and fees related to buying or selling cryptocurrency are not considered business expenses, even if your crypto-trading qualifies as a business. Rather, these are used to calculate the gain or loss on individual transactions.

Tip: Scan your receipts and reports for deductible expenses so you have digital copies in the event of an audit or record-keeping compliance check.

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Method 1 of 3:
Moving to a Cryptocurrency Tax Haven

Image titled Get a Man to Marry You Step 11
1
Identify countries where cryptocurrency isn't taxed. The list of countries that don't tax cryptocurrency in any way is relatively short. However, countries that don't tax cryptocurrency, as of 2020, include: [2] X Research source In Europe: Malta, Switzerland, Gibraltar, Slovenia, Estonia, Georgia, Belarus, Germany In Asia: Singapore, Hong Kong, Japan In the Caribbean: Bermuda
2
Compare visa requirements in countries where you'd like to move. Generally, if you want to travel to another country and stay there for an extended period, you'll need a visa. The visa allows you to enter the country for a specific purpose and conduct certain activities while you're there. [3] X Research source Each country has its own application requirements and eligibility criteria. Narrow your list down to 3 or 4 countries you're interested in, then look at the visa requirements for each. Generally, it's a good idea to prioritize those with simpler visa requirements and lower visa fees. If trading cryptocurrency is not your main source of income and you're planning on getting a job in the other country, you'll also want to look at the requirements for getting a work permit. Many countries only allow work permits to be issued for work in specific industries or sectors. In addition to visa requirements, you might also want to look at what it takes to become a citizen of the country. Depending on your nationality, it might not affect your tax liability if you move to another country until you become a citizen of that country.

Warning: The visa application process for most countries is an extensive process that may take at least a year to complete and cost hundreds, if not thousands, of dollars.

3
Apply for a visa and work permit in the country of your choice. Once you've decided which country you want to move to, you'll need to get permission from that country to live and work there. Expect the visa application process to take several months. [4] X Research source As part of the application process, you will have to provide information about your education and work history, your criminal background, your citizenship, and your finances. Typically, you'll need to be able to demonstrate that you will be able to support yourself when you move to the new country. If you're going to need a "day job" other than cryptocurrency trading, you'll typically need to have a job offer before you can enter the country. Your employer will then assist with the visa and work permit application process. However, keep in mind that it can be very difficult to find a job in another country, depending on your occupation.

Tip: If you're a full-time cryptocurrency trader, you may have more flexibility than if you were seeking other employment because you qualify as self-employed.

4
Relocate to your new country. Assuming all goes well with your application and your visa and permits are in order, you can move to your new country. Typically, the easiest thing to do is to sell most of your property and then buy new things once you arrive. [5] X Research source You also want to make copies of all of your important personal and identity documents so you can keep them safe during the move. If your bank doesn't have a presence in your new country, open a new bank account and make sure you'll have access to your financial assets after you move — especially your cryptocurrency.
5
Become a citizen of your new country. Different countries have different conditions you must meet before you can become a citizen. At a minimum, you typically have to become a permanent resident and live in the country for anywhere from 5 to 10 years or even longer, depending on the country. [6] X Research source After you become a citizen of your new country, remember to renounce your citizenship to your country of origin. Typically you can do this by visiting the country's embassy or consulate. Some countries don't require you to renounce your citizenship. However, if you don't take this step, you may end up continuing to have tax obligations in your country of origin.

Warning: Some countries, including the US, require expatriates to continue to pay taxes until they renounce their citizenship and become a citizen of another country. If you have a net worth of more than $2 million, you must also pay an exit tax to renounce your US citizenship.[7] X Trustworthy Source Internal Revenue Service U.S. government agency in charge of managing the Federal Tax Code Go to source

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Method 2 of 3:
Reducing Your Capital Gains Taxes

Image titled Write Your Congressional Representative Step 12
1
Hold your cryptocurrency for longer than 1 year. Most countries, including the US, the UK, and Canada, treat cryptocurrency as an asset rather than as a currency. This means when you dispose of your cryptocurrency (by selling it, trading it, or using it to purchase something), you'll pay capital gains taxes on any gain you've realized. You realize a gain when your cryptocurrency is worth more when you dispose of it than it was when you acquired it. [8] X Research source Generally, you pay more taxes for capital gains on assets you've held for less than a year. So by holding your cryptocurrency for longer than a year, you'll automatically reduce your tax liability. The specific rates vary depending on what country you live in. It's also possible to avoid paying taxes entirely on long-term capital gains if you hold your cryptocurrency for longer than a year, depending on your total income. This, too, varies among countries.
2
Maintain detailed records of your cryptocurrency transactions. Whenever you use your cryptocurrency, create a record with the specifics of the transaction. If you use cryptocurrency frequently, a spreadsheet can help you keep track. Include the following information: [9] X Research source The date you acquired the cryptocurrency you used The value (in your local fiat currency) of the cryptocurrency on the date you acquired it The date you disposed of the cryptocurrency (traded, sold, donated, used it to purchase something) The value of the cryptocurrency on the date you disposed of it

Tip: For transactions that occur completely on a cryptocurrency exchange, you can get this information from the transaction report for your exchange account. However, if you dispose of any cryptocurrency outside of an exchange, you'll need to gather and record this information on your own.

3
Track the costs you incurred to realize your gain. In many countries, you can deduct any fees or other transaction costs associated with a cryptocurrency trade to reduce the amount of capital gains you have to pay taxes on. While this may not amount to much, it can add up if you trade cryptocurrency frequently. [10] X Trustworthy Source Official UK government website Official website for the public sector of the UK government Go to source If you're mining cryptocurrency, you typically can't deduct the costs of mining, such as equipment and electricity. These costs would only be deductible if you were treating your cryptocurrency activities as a business.
4
Deduct cryptocurrency losses to offset your gains. If your cryptocurrency has a lower value when you dispose of it than it did when you acquired it, you have a capital loss. You can claim capital losses to offset capital gains, thereby decreasing the amount you owe in taxes. [11] X Research source For example, if you have $1,500 in capital gains through cryptocurrency trading and $1,000 in capital losses, the capital losses would effectively erase $1,000 of your capital gains. You would only need to pay taxes on $500 of capital gains.

Warning: Short-term losses (crypto you've held for less than a year) can only offset short-term gains. Likewise, long-term gains (crypto you've held for more than a year) can only be offset by long-term losses.

5
Use cryptocurrency tax software. Bitcoin and crypto tax programs have built-in tools that can analyze your transactions to minimize your capital gains tax liability. Typically, you can import your transaction history from your exchange accounts directly to the tax software, making it easier to maintain your records. [12] X Research source If you have any trades or purchases that happened outside of an exchange, you'll still have to input that information manually. However, if most of your transactions occur through an exchange, crypto tax software can save you a lot of effort come tax time.

Tip: You might also want to hire a tax professional to help minimize your tax liability. If you do, make sure the pro you hire has experience in cryptocurrency.

Advertisement

Method 3 of 3:
Treating Crypto-Trading Like a Business

Image titled Date Step 9
1
Confirm that you meet the basic requirements to treat your trading as a business. Different countries have different standards you must meet if you want to treat your trading as a business rather than as investment activity subject to capital gains tax. Generally, your trading must at least meet the following conditions: [13] X Trustworthy Source Internal Revenue Service U.S. government agency in charge of managing the Federal Tax Code Go to source You try to profit from daily or even hourly movements in the value of cryptocurrency. You have a substantial volume of cryptocurrency trades. You trade cryptocurrency regularly and continuously.

Tip: To determine if you meet the standards to treat your trading as a business, look at the typical length of time you hold cryptocurrency, the frequency and amount of your trades, and the amount of time you devote to cryptocurrency trading.

2
Value your inventory in cryptocurrency. Even though traders don't maintain "inventory," the way the owner of a brick-and-mortar retail store would, the cryptocurrency you're holding constitutes your inventory. Until you dispose of crypto, it has the value it had when you first acquired it, even if the market value is drastically different. [14] X Research source If you're treating your cryptocurrency as inventory, you can either value it based on the price you paid for it or its value at the end of the tax year. However, you generally have to use the same valuation method every year, so choose wisely. The cost of acquiring cryptocurrency generally includes any transaction fees associated with buying it.
3
Maintain detailed records of your trading activities. Treating your cryptocurrency trading as a business means following the same record-keeping requirements you would if you were buying and selling any other type of good or service. Keep transaction records that include all of the following information: [15] X Research source The date of the transaction Receipts for the purchase or transfer of cryptocurrency The value of the cryptocurrency in local fiat currency at the date of the transaction Digital wallet records and cryptocurrency addresses A description of the transaction and the other party, including their cryptocurrency address Exchange records Any accounting or legal costs associated with the transaction Any related software costs

Tip: Keep these records for at least 6 years from the end of the tax year they relate to.

Image titled Become a Veterinarian Step 11
4
Deduct business expenses you incurred while trading cryptocurrency. Since your trading is a business, all of your related expenses can be deducted to offset your gains. This might include everything from equipment, utilities, and internet access to subscriptions and educational materials devoted to blockchain and cryptocurrency trading. [16] X Trustworthy Source Internal Revenue Service U.S. government agency in charge of managing the Federal Tax Code Go to source Generally, you can deduct any expenses related to your trading that any other small-business owner could deduct. For example, if you have a home office where you conduct your trading, you could deduct the costs of that home office. It's a good idea to work with a tax professional, at least for the first couple of years you treat your trading as a business, to get a handle on your deductible expenses. They might find expenses that you wouldn't have considered on your own. If you can't find someone who has experience with cryptocurrency, at least use a tax professional who's worked with stock market day traders, since the tax status is similar. In some countries, including the US, commissions and fees related to buying or selling cryptocurrency are not considered business expenses, even if your crypto-trading qualifies as a business. Rather, these are used to calculate the gain or loss on individual transactions.

Tip: Scan your receipts and reports for deductible expenses so you have digital copies in the event of an audit or record-keeping compliance check.

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