August 3, 2021
5 min

5 ways to reduce Bitcoin or Crypto Capital Gains Tax (or avoid it)

Any gains on your Bitcoin/cryptocurrency could be subject to crypto capital gains tax. But there are ways to reduce and even avoid this altogether, Find out how.

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Crypto users are always searching for ways to maximize their profits. The introduction of taxes in crypto trading as per the IRS Notice 2014-21 eats into the gains from trading. Fortunately, crypto traders can employ strategies to reduce Bitcoin or crypto capital gains tax they have to pay.

What are Crypto Taxes?

Crypto Taxes are compulsory financial charges on cryptocurrency trading activities imposed by a tax authority on a taxpayer. These taxes are different depending on the country of trade and nature of gain. The IRS considers cryptocurrencies a property in the US, treating them as capital assets for federal income tax purposes. On the other hand, the IRS charges crypto mining taxes similar to ordinary income taxes. For example, if you mine Bitcoin, the tax on Bitcoin profit is dependent on the market value at the time of mining, usually between 10% to 37%.

How does Capital Gains Tax work?

When you purchase any capital asset, such as a house or a stock, you establish a basis equal to your acquisition cost. Upon selling, you compare your base cost to the selling price to determine any capital gain/loss. If the selling price is higher than the base, you have capital gains, attracting capital gains tax. The principle above applies to cryptocurrencies.

For instance, if you bought 1 Bitcoin at $20,000 and sold it for $40,000, the IRS considers it capital gains on cryptocurrency. The tax authority, therefore, expects capital gains on Bitcoin from you when paying your tax returns.

As a trader, you also need to consider the period of holding the cryptocurrency (capital asset). The length of time plays a pivotal role in the amount of taxes you eventually pay. Capital gains tax is generally witnessed two forms:

  1. Short-term capital gains and losses

When you buy a capital asset and sell it within a 365 days period for profit, the IRS considers these short-term capital gains. The IRS taxes the gains as it would ordinary income such as salaries.

  1. Long-term capital gains and losses

Here, the selling period is beyond 365 days with lower tax rates for gains.

Can I keep my Capital Gains on Cryptocurrency?

Yes, but only a fraction of it depending on your region. You can keep more of your capital gains on cryptocurrency in the US by holding them for more than 365 days.

5 best ways to reduce/avoid Bitcoin or Crypto Capital Gains Tax

Capital gains tax on crypto is inevitable. So, how can you remain tax compliant and at the same time make decent crypto capital gains? Here are the five best ways to reduce your capital gains tax on cryptocurrency.

  1. Turn your short-term gains into long-term gains

Because the IRS charges different rates between the two forms of capital gains, it is in your best interest to hold onto your cryptocurrencies for more than 365 days. Short-term gains attract 10%-37% tax as the IRS treats them as ordinary income. Long-term capital gains attract between 0 and 20% tax. 

  1. Offset capital gains with capital losses

With this strategy, you can reduce your taxable income from capital gains; however, there is a $3,000 limit. The process is quite simple, subtract your capital losses from capital gains to reduce your taxable amount. Unfortunately, the process is a bit tedious. Short-term losses first offset short-term gains; if the losses exceed the gains, the short-term losses can offset the long-term capital gains up to $3,000 combined. If you have a net capital loss of over $3,000, you can offset capital gains in the following years using your initial net loss. 

  1. Selling cryptocurrencies in a low-income year

This is especially applicable to short-term capital gains. Because the IRS charges ordinary income tax on short-term capital gains, you can use a low-income year to declare short-term gains. The low income keeps you in a lower tax bracket; therefore, you attract fewer taxes for short-term capital gains on cryptocurrency. 

  1. Using a Self-Directed Individual Retirement Account (SDIRA) to invest in crypto

The strategy depends on your income at the time of retirement. If you expect lower income when you retire, you can defer your tax on crypto gains post-retirement to pay less tax in a lower income tax bracket. For those hoping to earn more after retirement, you can pay your taxes immediately to avoid higher crypto capital gains taxes. 

  1. Gifting crypto assets to your family members

The IRS allows gifts of up to $15,000 to family members without any tax consequences. Traders can use the law as a way to minimize their capital gains tax on crypto. For instance, you can gift your parents $10,000 worth of Bitcoin. If they earn a low income, they won’t have to pay any taxes when they sell it. And even if their income is within the taxable bracket, they will certainly pay a lower tax upon selling the gift.

Do you have to pay taxes on Cryptocurrency?

Paying taxes on cryptocurrency is dependent on gain/losses and your country of operation and residence. For instance, if there are gains in the US, then the IRS requires accurate cryptocurrency tax reporting on the gains. It is also important to declare losses and use them to reduce your total taxable income.

On the other hand, countries such as Portugal in the EU charge no taxes on capital gains on cryptocurrency.

What are the rules on cryptocurrency tax reporting?

Cryptocurrency tax reporting varies depending on your region. For instance, the US has a clear guideline on taxation of cryptocurrencies as per notice 2014-21. The tax authority also features a FAQs section answering common queries concerning cryptocurrency taxation.

In the EU, individual countries determine the tax on cryptocurrencies. For instance, cryptocurrency transactions in Portugal are free from capital gains tax and income tax.

What are the best Crypto Tax Software options?

For many traders, having software automating taxation is crucial to avoid any tax disputes. There are several available software options for all traders, each with unique features for the diverse tax needs. Platforms like Koinly and TokenTax offer excellent crypto trader tax services globally.


There are numerous variables one must consider in gaining maximum profits from cryptocurrency trading activities. The addition of taxes makes it even harder to maximize profit in a relatively volatile market; however, traders can still maximize their profits if they get the following factors right,

  • Get the right trading platform. For yield farmers, identify a platform with the highest APY and a diverse crypto selection, for example, our upcoming Relite platform
  • Find a strategy suitable for your cryptocurrencies
  • Get the right crypto wallet
  • Identify the best crypto tax software, and finally
  • Use all means to reduce your taxes on your crypto capital gains

Frequently Asked Questions (FAQs)

Is Bitcoin taxed as capital gains? In countries such as the US, where the IRS classifies Bitcoin as property, there is a capital gains tax on Bitcoin.

How do I avoid capital gains tax on Bitcoin? There are several ways to avoid tax on Bitcoin profits. They include:

  • Gifting your family members Bitcoin.**
  • Trading crypto in a country with no taxes on crypto.

**Gifting depends on your tax authority. Laws may be different where you live.

What is the tax rate on Bitcoin gains? In the US, the tax on Bitcoin profits is between 0% and 37%. The classification of the crypto gains determines the tax rate. For instance, the IRS tax on short-term capital gains is between 10%-37%, while the long-term capital gains tax is between 0% and 20%.

Does Coinbase report to the IRS? Yes. Coinbase reports your transactions to the IRS before the start of tax season. United States taxpayers on Coinbase receive a 1099 form if they report cryptocurrency gains of over $600.


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Note: Please be aware that the only contract address for RELI is that stated above. There will be fraudulent versions of RELI. If in doubt, please ask an admin in the Relite Community.

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