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How to Avoid Capital Gains Tax on Cryptocurrency

crypto strategy crypto tax Mar 14, 2024

Strategies to avoid crypto capital gains

Everyone wants to know how to avoid capital gains tax on cryptocurrency. The magic is in the strategy and the mindset rather than “tax loopholes.” There are a few standard ways to avoid the tax, but crypto offers a cornucopia of returns and therefore different types of income. You should be thinking “tax impact” every time you play with crypto, whether it’s a trade, staking rewards, airdrops or LPs.  

Sometimes just a little bit of forethought goes a long way in whether you end up triggering a tax liability. I don’t know how many times I’ve heard someone say, “I wish I’d thought of that beforehand.” Get in the habit of asking yourself, “What’s the tax impact?” and it will become a natural thing over time.

Here are three standard ways to avoid capital gains tax on cryptocurrency:


HODL equals buy and hold. It’s a simple strategy of buying, accumulating and never selling. Michael Saylor/MicroStrategy is a mega Bitcoin HODLer. It takes less time and has zero compliance cost because you don’t have to calculate crypto taxes. You can still be a HODLer with some crypto trades so the no-trade HODLer is an example with extra benefits.  

HODlers can get whacked on 90% market downturns by failing to take profits, but all factors considered it’s a great way to avoid crypto capital gains in the long term.

2. Retirement accounts

Self-directed IRAs and SEP IRAs are great for deferring taxes so any trading in these accounts does not trigger a tax liability. You can trade to your heart’s content in a self-directed IRA without taxes which also means there is no expensive and time-consuming crypto tax calculation to go along with it.


Key Takeaway

Retirement accounts provide two major benefits, no taxes and no tax prep cost. This is true whether you typically hire someone or do it yourself.


3. Strategic Income

The U.S. provides a 0% capital gains rate to avoid capital gains tax on cryptocurrency altogether. The trick is hitting the sweet spot so it applies to you.The same strategy can be applied to any jurisdiction that has 0% or low rates at certain thresholds. 

IRS Tax Topic No. 409 says:

“Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%. For taxable years beginning in 2023, the tax rate on most net capital gain is no higher than 15% for most individuals.

A capital gains rate of 0% applies if your taxable income is less than or equal to:

  • $44,625 for single and married filing separately;
  • $89,250 for married filing jointly and qualifying surviving spouse; and
  • $59,750 for head of household”


Bob is a HODLer and a crypto degen. He fits the optimal scenario because he is frugal, crypto-rich, operates on a very low income to expense ratio and owns his house outright. Bob is also married to Alice. He simply takes enough profits (capital gains) from crypto every year up to $89,250 for 2023 and so on in subsequent years, and pays $0 federal tax. He has no other income and can live comfortably with Alice on that amount of annual income.

Now let’s look at some other secret weapons to avoid capital gains tax on cryptocurrency.

Don't let tax season drain your profits. 
Avoid 7 Costly Crypto Tax Pitfalls

Economic losses vs tax losses

An 80 to 95% loss of value for crypto has not been uncommon for the market as a whole and for specific coins. Obviously, those are huge losses, but you get no tax benefit watching from the sidelines. An economic loss is simply a paper loss. Taxpayers must sell coins with a 95% loss to realize tax losses. Even mega losses have value. For example, if Alice realized a $100,000 loss it could be worth as much as approximately $40,000 in the future. In addition, Alice can always buy back her coins later.

Key Takeaway

Don’t get double rekt by suffering a 95% economic loss and then leave money on the table by forgetting to sell your crypto for a tax loss.

Accumulate capital losses

U.S. taxpayers can only deduct $3,000 in capital losses with an unlimited carryforward to future years but no carryback. Regardless of limitations on capital losses in other jurisdictions, taxpayers should always be on the lookout for harvesting tax losses. To avoid crypto capital gains, think of selling crypto with big economic losses and accumulating as many capital losses as possible.

Key Takeaway

Most people are focused on gains, but savvy investors should always be thinking about BOTH gains and losses. For every $1,000 in capital losses you accumulate, your corresponding gains of $1,000 are tax-free.


Bob aped into three meme coins big time in 2023 after they’d already pumped. He also had several other bad bets, but he heeded the advice and realized $146,500 of capital losses in 2023. Bob knows 2024 is going to be a mega bull run so he is looking forward to taking his first $146,500 of capital gains tax-free. 

Invest in advanced DeFi strategies to match your tax situation

There are several ways to deploy crypto for double-digit gains. For example, be a liquidity provider (LP) by supplying USDC and SOL (Solana) on a decentralized exchange and earn trading fees. You are considered an LP and the position is also called an LP. Those fees are ordinary income and can’t be offset with capital gains and losses, at least in the U.S., and similarly in other jurisdictions. Earning handsome fees is a great feeling, but Bob wouldn’t be able to offset the income from fees against his loss carryforward. 

On the other hand, a crypto bot like Paloma is designed to maximize crypto gains and minimize losses so the returns are capital gains, not ordinary income. The dapps show the position (the amount you invested) and the returns either fees or gains. It’s easy to focus on juicy returns and never think about the tax impact, but not all crypto income is the same.  

 If you want to know how to avoid capital gains tax on cryptocurrency, always be thinking “tax impact” and ask yourself, “What type of income am I generating and what tax liability will I trigger by getting into this position?”

Managing risk is more important than return and managing tax liability is a risk management activity. An LP position has divergent loss or impermanent loss (this means you lose your original capital invested) while the bot typically uses leverage, and the upside gains can also easily swing to the negative. Both of those risks are very high, albeit very different from one another. The tax impact of all these activities is simply another risk.


Bob assesses the risk of an LP position vs. a bot position and concludes the risk is essentially the same based on years of degen experience. He apes into the bot for potential big-time capital gains to offset his massive capital loss carryforward. Bob sees the biggest difference in risk between the two investment opportunities is the tax risk. He pays NO tax on the bot and could pay as much as 40% on the income from the LP fees.

Key Takeaway

No one likes paying taxes, but people tend to collapse a disdain for taxes into not investing the time to understand taxes. Tax can be your friend if you’re willing to look at it the right way.

Get straight on your current tax situation and start thinking about using it to your crypto advantage. Then you’ll see why Tax and Tracking has its own zone in the Crypto Bullseye Zone™.

Remember your goal is always to get a Crypto Bullseye™.

Yours in Crypto,

Kirk David Phillips, CPA, CMA, CFE, CBP

Content Insight

This content has been created through a collaborative effort, combining the capabilities of artificial intelligence (AI) technology and the expertise of a seasoned professional with extensive experience in the crypto space. While AI played a role in generating portions of this material, it has been carefully reviewed, researched, and refined by a human expert to ensure accuracy, relevance, and a nuanced understanding of the subject matter. The information presented herein reflects a synthesis of AI-generated insights and the real-world knowledge contributed by the human expert, aiming to provide a comprehensive and well-informed perspective on the topic. Users are encouraged to verify details independently and seek advice from qualified professionals before making any financial or investment decisions.

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