How to Minimize Your Crypto Taxes

Your tax strategy may be every bit as important as your investment strategy, say two crypto tax experts.

AccessTimeIconApr 12, 2021 at 7:38 p.m. UTC
Updated Sep 14, 2021 at 12:39 p.m. UTC
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How far does your U.S. tax address determine the amount you'll pay in crypto taxes?

The answer: A lot. 

As a U.S. investor, 25% to 50% of your hard-earned money may go toward taxes, depending on your jurisdiction. That means your tax strategy is every bit as important as your investment strategy. 

Clinton Donnelly, the CryptoTaxFixer, specializes in crypto tax return preparation and defending crypto traders from Internal Revenue Service audits. He is the founder of CryptoTaxAudit and Donnelly Tax Law. Dennis Wohlfarth is the CEO and founder of For a full guide to U.S. crypto taxes, see CoinDesk's post here.

Most governments want to encourage investment, so they offer long-term capital gains incentives. In other words, you pay less tax the longer you hold an asset without selling it.

The U.S. capital gains tax rates are 0%, 15%, or 20%, with most citizens paying 15% for long-term capital gains. In certain countries, tax on capital gains goes down to zero percent, or close to zero percent, rapidly.  

A popular strategy for investors is to go for the long-term capital gains incentive on your taxes, which means waiting to reap the benefits from your crypto assets.

Global crypto tax opportunities

There's only one special tax haven reserved for the largest of crypto whales: Puerto Rico. As an American, moving to Puerto Rico allows you to pay 0% capital gains tax, which means you’ll keep all of your profits on crypto assets.

However, this strategy makes more sense for the whales than the shrimps of the crypto world. 

Puerto Rico is America's tax haven, but the savings you make on your crypto will be diminished by recent spikes in living costs. Due to the bona fide residency requirement to buy a home within two years under Act 60-2019, real estate on the island has skyrocketed in price.  

Therefore, we encourage this option only if you are a significant crypto whale with the means to buy high and sight unseen in Puerto Rico. 

For smaller-scale U.S. investors, moving to a crypto-friendly state with moderate living costs can allow you to live large off your crypto gains, even if you are not a whale.

The key is to drive your income up and your expenses down, and you can do that by choosing a tax-friendly ZIP code and/or lifestyle. As a crypto investor, you want to look at the end-of-year expenses and make some lifestyle choices pronto. 

Moving to a state without income tax is a smart tax move and is an attractive option for investors who are able to work remotely. Nine U.S. states have no income tax as of 2021: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

There's only one special tax haven reserved for the largest of crypto whales: Puerto Rico.

Even if you can’t hack the move to a crypto-friendly state with zero income tax, moving to a ZIP code with lower living costs could save you a bundle on taxes that eat into your crypto gains.

It's key to remember that if you jack up your lifestyle costs at the same time your income shoots up, then you are no better off except for having more giant toys than you had before.

Moving to an area with low property tax is an obvious way to save big-time.

The second biggest expense is a house, and home-ownership comes with an array of tax implications. Property taxes have risen astronomically in many U.S. states, particularly in California, with people shelling out tens of thousands of dollars a year.

Here's the thing about a property tax: A property tax is a wealth tax. It's a tax you have to pay because you have the wealth to own that asset and the amount is arbitrarily determined by ZIP code.

If you were living in Colorado, your property tax on a $350,000 home might be no more than $1,700 for the year. So that starts to look attractive compared to the $10,000-$20,000 property tax each year, say, back in New Jersey.  

Someone paying $25,000 a month on property tax in California could have bought another house with the money he or she ends up spending on property taxes in California over 10 years.  

So, your property tax address is a key area where you could change your tax picture.

Based on data from ATTOM Data Solutions, states with the lowest effective property tax rates were Hawaii (0.36%), Alabama (0.48%), Colorado (0.52%), Utah (0.56%) and Nevada (0.58%).

Other states in the top 10 for lowest effective property tax rates were Tennessee (0.61%); West Virginia (0.61%), Delaware (0.62%), Arizona (0.63%) and Wyoming (0.65%).

Where to pay your taxes

Depending on your income level and the state where you live, U.S. crypto investors will end up paying about 33%-40% of their income in both federal and state taxes.

For an American, there are some attractive options to consider when it comes to crossing state lines to avoid high rates of income tax that eat away at your crypto gains.

Your lifestyle is another consideration. You want to be careful about increasing your expenses because you'll squander the wealth you have. 

This is the time to look at your lifestyle costs attached to your ZIP code. If you position yourself to increase your income but keep your living costs low, you will maximize your crypto tax situation. 

If you are American wanting to limit your taxes, where and how you live matters. Don’t let your ZIP code stop your crypto assets from taking off.


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