How to Avoid Paying Taxes on Cryptocurrency Gains?

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For some people, making money in the cryptosphere is the biggest concern, while others who already made it “big” in terms of cryptocurrency gains, it’s definitely dealing with the authorities, government regulations, and tax requirements.

The topic of government regulations and taxes on cryptocurrencies is without a doubt a very complex topic, one that is different for each specific country. For the purpose of this article, we will be focusing on the situation of cryptocurrencies in the US. In short, we will provide a few practical tips on how to avoid paying taxes on cryptocurrency gains in the US (for US citizens, both residents and green card holders).

The crypto situation in the US

Back in 2014, the IRS (Internal Revenue Service) declared cryptocurrencies as being assets or properties, in short, anything but currencies. With this change, cryptocurrencies are treated the same as profits from any active or passive investments, as well as rental, real estate, or sale of stock.

This translates in people having to give half of their short term profits and 20% of their long term gains to the IRS, and the US government as taxes. These changes apply for any type of gain or loss related to cryptocurrencies. To be even more specific, all cryptocurrency transactions (such as crypto trading, coin exchanges, crypto-to-fiat exchanges, receiving crypto, airdrops, as well as crypto mining) are considered taxable events.

With that out of the way, let’s look at how you can avoid tax on your cryptocurrency profits in 2019.

– Buy crypto in your IRA

One of the easiest ways to bypass the tax requirements on your cryptocurrencies is to buy inside of an IRA, 401-k, or any other retirement plan of the sorts. As mentioned above, the IRS considers cryptos as being capital assets. According to the law, these capital assets are more than allowed to be managed by the IRS, and retirement accounts are allowed to buy, sell, or hold cryptos.

This is why a great number of investors are already taking advantage of this “workaround,” and have started to use their retirement plans as a means to defer tax responsibilities, as the taxes are either deferred until distribution or fall into the case of a Roth IRA (which is tax-free).

– Buy crypto in your life insurance policy

Another great method (even though it might not be as accessible or reducing or even eliminating capitals gains tax) is with the help of an international life insurance policy used to purchase the cryptocurrencies.

An Offshore Private Placement Life Insurance can be created without needing money. However, it’s worth noting that most offshore private placement policies require a minimum investment of $1,5 or $2,5 million.

A private placement policy is held until the person’s death, by which time the cryptocurrencies will be passed onto the legal heirs tax-free. On the day of the passing, the heirs receive the coins at the current market price and won’t be required to pay any sort of taxes.

– Become a resident of Puerto Rico

Puerto Rico, the romantic and famous Caribbean island has a very lean and beneficial tax system which has led many entrepreneurs and crypto investors to establish residency there. According to IRC section 933, all US citizens are required to pay tax on worldwide income, with the only exception being Puerto Rico. In short, all income providing from Puerto Rico is excluded from the US tax. More details about how Puerto Rico sourced income is managed can be found here.

Last but not least, in order to qualify as a resident of Puerto Rico, you must spend at least 183 days a year (or permanently move) on the island.

“Gift” your cryptos

It might sound strange, but giving away your cryptos to a friend or a family member can partially solve the problem with crypto taxes. At the end of 2018, it was possible for US citizens to gift as much as $15,000 without having to document the transaction.

A very interesting aspect to consider here is the fact that when the recipient cashes out, the taxable value of the gift is determined by the market value on that specific day.

Give up US citizenship

For most US citizens this is something unheard of. It’s not much of a workaround the tax system, but an actual runaway. The method is quite drastic, but there are many that consider the IRS stance on cryptos to be exactly the same. For example, any US citizen is required to pay US tax on their capital gains (hence, her/his crypto gains as well) regardless of where they live.

It goes without saying that once a US citizenship is renounced, the IRS no longer has any rights over that person’s income. If you’re really considering this option, then please note that you may be required to pay an exit tax. Furthermore, you will also need a second passport. As far as options for a second passport are concerned here are the most popular ones: you can buy one from countries like Malta, Dominica, or St. Lucia, or you can earn one by becoming a resident of a foreign country if you’re not already. 

Conclusion

Ever since the IRS “cracked down” on cryptocurrencies in 2014, many taxpayers simply preferred to not report the capital gains. However, we highly recommend to not follow their example, as the consequences can be very dire.

If you’re a US citizen and your heavily involved in the cryptosphere and you want to invest in cryptos, then you must have a plan in order to ensure that you are tax compliant. These tips should provide you with a general idea of what you can do in order to ensure total tax freedom for your cryptos.

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