The best way to cash out Bitcoin without paying taxes is by giving Bitcoin as a gift. If you give away Bitcoin as a gift then there won’t be any tax to you as the donor, and no income tax to the recipient. You can also use the overseas account to liquidate your earnings and then show them as a gift to avoid taxation. You can also buy Cryptocurrency in your IRA. This is also another great way to avoid paying taxes. And, the most dramatic way to stop paying the IRS for your cryptocurrency gains is to give up your US citizenship.
- Currently, Bitcoin and other forms of virtual currency are considered property for federal tax purposes according to the IRS Notice 2014-21
- Now, trading Bitcoin or other forms of virtual currency for income will be subject to taxation
- Buying and selling Bitcoins will result in capital gains or losses and three factors determine the capital gain tax rates: income, status, and how long have you held an asset before trading, selling, or disposing of it
- Usually, the income tax rate is not higher than 15% on their net long-term capital gains
- The tax payable amount of your Bitcoin trades depends on your income and it can be from 20% to 50%
The Rules On Bitcoin Tax
Like any other capital asset or investment buying and selling Bitcoins will result in capital gains or losses. Your income will be subject to taxation if you gain capital from Bitcoin trading. Usually, three factors determine the capital gain tax rates –
1. Your income
2. Marital status
3. How long do you hold an asset before trading, selling, or disposing of it
If you hold Bitcoin for less than 12 months then it is considered a short-term capital gain or loss. On the other hand, Bitcoin held for longer than 12 months will be considered as long-term capital. So, if your long-term capital gains exceed your capital losses for the year then you might be subject to a lower tax rate than your income tax rate. Usually, the income tax rate is not higher than 15% on their net long-term capital gains. Below are the Capital Gains tax rates –
|Single||$78,750 to $434,550||15%|
|Married or Qualifying Widow(er) Filing Jointly||$78,750 to $488,850||15%|
|Married Filing Separately||$78,750 to $244,425||15%|
|All||Taxable income exceeds thresholds set at a 15% capital gain rate||20%|
What Are The Bitcoin Taxes In Europe And America?
Bitcoin taxes are not payable in every country. In many EU countries, Bitcoin is not subject to tax. But it can change any time if there is an EU-wide agreement. In fact, HMRC has already decided BTC is an “asset” therefore, Bitcoin incomes are subject to income tax or capital gains tax. At one point, bitcoin was even subject to VAT until HM Treasury thought that it was a ridiculous idea. The tax payable amount of your Bitcoin trades depends on your income and it can be from 20% to 50%. You can reduce the taxable earnings on Bitcoin by paying a “gift” to your wife, husband or children, or offering a donation to charity. If you are living in the USA, then you will either qualify for short-term capital gain or long-term capital gain rate. The short-term rates are in the same tax bracket as your annual salary. So, your tax can be payable at rates of 0% if below $600, otherwise at 15% or 20% depending on your income.
How To Pay Zero Tax On Bitcoin?
If you live in an area that requires you to pay tax on cryptocurrencies then there are a few ways available you can avoid paying the tax. Some effective ways are –
1. Invest in tax-free gold with digital tokens
2. Buy cryptocurrency in your ROTH IRA
3. Purchase an international PPLI
4. Move to a tax-free country
5. Give up US citizenship
6. Use your Bitcoin
1. Invest In Tax-free Gold With Digital Tokens
You might know that gold is tax-free so this is a good opportunity to invest in gold with digital tokens and avoid paying taxes. It is very easy to buy gold using digital assets and it is like buying precious metals with fiat currency. So, gold provides a solid solution to reduce or avoid taxes.
2. Buy Cryptocurrency In Your ROTH IRA
This is another great way to avoid paying tax on Bitcoin. You can purchase your Individual Retirement Account (IRA) to avoid paying taxes. Usually, the IRAs allow investors to defer tax on gains until they start taking distributions. However, if you are eligible for a ROTH IRA, then the money you will be contributed is tax-free. But you can only receive ROTH IRA if you don’t receive a 401(k) that you receive from the employer. On the other hand, if you’re self-employed then ROTH will be the best solution to invest in Bitcoin as a retirement fund.
3. Purchase An International PPLI
You can also consider buying offshore Private Placement Life Insurance and it is a great way to enjoy your Bitcoin profits while you’re alive. The main difference between offshore life insurance policies and traditional life insurance policies is the tax benefits. Usually, the traditional life insurance policies are taxed but Offshore Private Placement Life Insurance is tax-efficient and they can be passed to your heirs without having to pay inheritance tax, which is very convenient. However, there is a problem with international PPLI is, you will need lots of money to buy international PPLI. For example, you will need a minimum of $1.5m to set up the international PPLI account.
4. Move To A Tax-free Country
You can consider moving to a tax-free country if you have lots of investments in Bitcoins you will have lots of capital gain. If you have the required skills and the qualifications to live and work abroad then you can try to move to a tax-free country that won’t charge tax on Bitcoin. Here are some countries with the best tax on Cryptocurrency and Bitcoin –
7. Puerto Rico
5. Give Up US Citizenship
It might sound crazy to hear, but you can give up US citizenship to escape the taxman in your home country regardless of where you live. According to this method, you have to give up your passport and become an expatriate in another country. Moreover, you have to qualify for citizenship in another country where you have lived for at least 7 years or more.
6. Use Your Bitcoin
You should start using your Bitcoin more and more to avoid paying taxes. Nowadays, it has become easier to use Bitcoin as a valid alternative to fiat money. For example, many websites offer extended payment options including Amazon, Expedia, etc. You can buy various products, book hotels online, etc. using bitcoins.
FAQs About Can You Cash Out Bitcoins Without Paying Taxes
Do You Have To Pay Taxes On Bitcoin If You Don’t Cash Out?
Buying and holding Bitcoin is not taxable. If you buy Bitcoin and hold them and if the price increases, then you don’t have to pay any taxes. However, if you sell your Bitcoin and make a profit then you have to pay tax based on your income.
Do You Pay Tax On Bitcoin Withdrawal?
If you live in USA or UK and trade bitcoin then you have to pay tax on any profit that you make by trading Bitcoin. This type of tax is known as Capital Gains Tax (CGT). It means you have to pay taxes based on the buying price and selling price of Bitcoin.
Will The IRS Know If I Sell Bitcoin?
Yes, IRS will know when you sell Bitcoin. Usually, IRS considers Bitcoin or any other cryptocurrency as property and when you sell the bitcoin it will assess as a capital-gains tax.
Do I Pay Taxes On Crypto If I Don’t Sell?
No, you don’t have to pay taxes on crypto that you buy but don’t sell them. However, if you gain cryptocurrency like Bitcoin by mining then that value is taxable immediately. It will consider as a capital gain and it is taxable. You might be taxed at either short-term or long-term rates.
What happens If You Don’t Report Cryptocurrency On Taxes?
If you hide or don’t report crypto on form 8949 then you might face an IRS audit and if proved guilty then you might be fined. Therefore, you should file your cryptocurrency taxes regardless of profits or losses in order to avoid an IRS audit.
References: 1 https://www.benzinga.com/money/cash-out-bitcoin-without-paying-taxes/
References: 2 https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/crypto-taxes/
Last Updated on October 30, 2022 by Magalie D.
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.