Taxes and Crypto: Are There Non-Taxable Crypto Transactions?

Crypto started as the Wild West of financial experimentation. Bitcoin, the first crypto asset, proposed a decentralized financial world where people could transact peer-to-peer without a central bank or trusted third party to validate each transaction.

Over the past decade, however, and with thousands more crypto assets trading in the market, the regulatory climate has evolved along with adoption and technology. The current global crypto market cap is over a trillion dollars. Regulators have already noticed the vast opportunity in crypto assets and their pitfalls as investments and as tools for money laundering.

Moreover, crypto is no longer the “new asset on the block.” Crypto has gone mainstream. It has undergone some maturation and financialization over the years, thanks to a dynamic developer community that has learned to merge crypto with traditional financial models.

As of 2023, crypto-derived income is getting attention from the IRS and other tax bodies from various governments. Today, digital assets are commonly taxed as property. Some countries’ laws classify cryptocurrencies, tokens, and NFTs (Non-Fungible Tokens) as property. Some jurisdictions choose to have looser regulations regarding cryptocurrency tax, and others provide havens for crypto holders.

However, due to the complexity of inter-jurisdictional rules and increased coordination among governments in crypto transaction reporting triggered by the FATF Travel Rule, even those who refuse to report their crypto holdings or travel to crypto tax havens can only partially escape crypto taxes.

Tax reporting and taxation practices may concern investors in crypto, where privacy and secrecy are considered foundational values. Crypto holders often ask: In this day and age, are there non-taxable crypto transactions? This article explores the complex environment around crypto taxes.

Do non-taxable crypto transactions exist?

Are there non-taxable crypto transactions? The simple answer to this often-asked question is: yes, there are. However, such transactions do not exist in a vacuum.

While they may be non-taxable on their own, the blockchain—an immutable record of all transactions for a particular cryptocurrency or token—represents a continuity of activities that legislators and government agencies may treat as a whole rather than as isolated transactions.

Furthermore, developing KYC regulations and increasingly interconnected international crypto watchdogs may limit the extent of such non-taxable transactions. When attempting to minimize crypto taxes, whether as a business or an individual taxpayer, it is best to map out the larger context regarding compliance, AML (anti-money laundering) rules, and tax reporting.

Essential Things To Know About Crypto Taxation

Before you delve into non-taxable transactions, you must be familiar with crypto taxation principles in the current environment and the history of events that have led to the existing legal thinking.

In 2023, the crypto market rebounded, gaining back some of the value lost in the crash of 2022. However, the previous market crash generated negative publicity for the crypto industry. This negativity was fueled by the failure of large projects like Terra and Luna, followed by the fraudulent FTX debacle.

Such events brought further regulatory scrutiny to crypto and accelerated some efforts to classify and tax it correctly. To protect themselves, crypto investors must be mindful of the current or upcoming taxation rules around crypto.

In the US, crypto is classified as property for federal tax purposes. Thus, the general tax principles that apply to property transactions also apply to digital assets. Any asset with the characteristics of a digital asset as defined under US law will be treated as such for taxation purposes.

When evaluating crypto taxes under US law, you must understand digital asset adjusted basis, purchase price, or cost basis. The tax method is similar to what happens in stocks. The terms cost basis, digital asset adjusted basis, and purchase price refer to the amount you pay for any digital asset.

The cost basis includes the transaction fees and other acquisition costs of purchasing your crypto. Certain deductions, credits, and expenses may increase or decrease and thus affect the eventual amount on your adjusted basis.

Why is it important to know your digital asset-adjusted basis?

If you dispose of any financial interest in your crypto, exchange it, or sell it, you need the digital asset adjusted basis to determine whether you realized a gain or loss.

What are the factors that affect your tax rate?

Certain factors affect how much you are taxed. The first factor affecting your tax rate is how long you hold onto your crypto before selling. If you have owned crypto for over a year, your tax rates will be between 0 and 20 percent.

If you have had crypto for a year or less, your rates are higher—between 10 and 37 percent. The second factor is the total income for the year. The larger your income, the higher your tax rates.

Which activities can trigger crypto taxes?

In the US, the federal government tracks crypto earnings on the blockchain. US citizens are required to pay crypto taxes on profitable trades. Buying goods and services using crypto has the same tax implications as selling your crypto.

You can be taxed on a Bitcoin purchase at Starbucks if it equates to a taxable gain. When buying goods with crypto, you calculate the taxable gain or loss based on what you paid for the crypto during purchase and its value when you made the transaction.

Earning in crypto is taxable income. Your taxes are based on the price of the crypto when you received it under the following activities:

Regular salary or bonuses in crypto
Cryptocurrency mining
Income from crypto staking
Crypto account yields

Are there ways to avoid crypto taxes?

Despite crypto being known for anonymity or pseudonymity, blockchain forensics is evolving fast, and governments may identify or penalize those who do not pay their taxes. There is no way to avoid crypto taxes entirely.

The IRS uses several methods to keep tabs on the crypto industry. One way is to issue subpoenas to exchanges for information on traders. You must disclose your crypto transactions to avoid them becoming costly.

Ignoring tax rules or regulations, including not reporting gains and losses on crypto trades, will result in fines on top of your taxes. Skipping tax reporting on crypto investment earnings may also trigger an audit.

Examples of Non-Taxable Crypto Transactions

After familiarizing yourself with the general tax milieu around crypto, you can look into the kinds of crypto transactions that do not trigger a tax event—at least not immediately. These are:

Moving crypto to your wallet

You will not be taxed when you move crypto from one wallet or account you own to another registered under your name. You can transfer your original cost basis and the information on the date you acquired your crypto to the next wallet. You can then track your tax impact through the recipient account if you sell your crypto in the future.

Buy-and-hold: Purchasing crypto with cash and holding it

Buying crypto and owning it is not taxable on its own, generally. Holding crypto means you have unrealized gains. Crypto is taxed when you realize your gains—the moment you sell.

Receiving crypto as a gift

You do not incur taxes when someone sends you crypto as a gift. However, you still trigger taxes once you participate in any activity that gives you gains or profits, such as staking or selling.

Giving crypto as a gift

You can give as much as $15,000 annually per recipient in the US without paying taxes. Moreover, you can provide a higher amount to a spouse. Gifts above $15,000 must be included in your tax filing, although they may not result in a tax liability.

Gifts may also be defined as any crypto transfer outside of a purchase of services or goods, even if the transfer was not intended as a personal gift.

Donating to qualified nonprofits or tax-exempt charities

Direct donations to a 501(c)(3) charitable organization may earn a charitable deduction. This measure provided you with potential tax benefits while supporting your philanthropic endeavors.

5 Strategies To Reduce Your Crypto Tax

While you can’t avoid paying crypto taxes, you can explore legal ways to reduce them. Based on the list of non-taxable transactions and the principles mentioned previously, you can figure out how to lessen the taxes you pay on crypto.

1. Invest in crypto for the long term

The simplest way to reduce your crypto tax burden is if you hold your crypto for more than 12 months and thus qualify it as long-term property. This strategy reduces your taxes and helps improve your investment returns.

2. Take profits in a low-income year

As previously stated, your income bracket affects your tax rate in a given year. Therefore, when your income is low, you can use crypto profits to reduce your tax bill.

3. Give crypto as a gift

When you give some of your crypto as a gift, it is not a taxable event. However, the recipient of your crypto gift will need to track the price of the crypto you gave them to calculate a gain or loss.

4. Take out a crypto loan

Instead of cashing out profits, you can take out a crypto loan. In a crypto loan, you use your digital assets as collateral to reduce taxes. When you take out a crypto-backed loan, it is a non-taxable event.

Note that the guidance on this can change anytime, and the IRS can issue guidance on DeFi loans soon. With the loan interest rate coupled with your income bracket, you can find a way to save money on your profits.

5. Move to a low-tax jurisdiction

You can choose to move to a low-tax state or country. While the situation may not be ideal, relocation is always a choice if reducing taxes is your top priority. In the US, Wyoming, Florida, Alaska, Nevada, New Hampshire, Texas, South Dakota, Tennessee, and Washington have favorable tax rules for crypto.

Outside the US, several countries offer tax-free or drastically reduced tax regimes. Popular crypto tax haven destinations include Malta, the UAE, Puerto Rico, the Cayman Islands, Georgia, and Belarus. Note, however, that crypto is a tax minefield even when residing in these countries, and the travel rule only complicates this.

When Computing Crypto Taxes, Don’t Forget the Bigger Picture

It is impractical to entertain the notion that you can eliminate taxes on crypto, especially if you live in the US. Instead, plan your tax reporting well and use the benefits of non-taxable events combined with other strategies within the law to reduce crypto tax. Several jurisdictions that have created tax-free or tax-minimized havens for crypto holders can be an option for those who like to relocate or travel.

There are benefits to understanding which crypto events trigger taxes and which ones are non-taxable. When managing your assets, you must make the most of your knowledge to preserve the value of your portfolio while remaining compliant with existing laws. Remember to stay vigilant because international crypto laws are complex and constantly in flux.

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