11 Legal Ways to Avoid Paying Taxes on Crypto in 2025

Let’s face it – nobody wants to pay more taxes than they have to, especially when it comes to your crypto investments I’ve been in the crypto space for years, and I completely understand the shock when tax season rolls around and you’re suddenly facing a massive bill on your bitcoin gains

Remember that Reddit user who owed a staggering $500,000 to the IRS after trading ethereum? Their account had dropped from $1 million to less than $200,000 the following year, but they couldn’t deduct those losses from their tax bill. Yikes!

Don’t worry I’m here to help. In this guide I’ll show you 11 completely legal strategies to minimize or potentially avoid paying taxes on your cryptocurrency in 2025. These aren’t shady tax evasion schemes – they’re legitimate tax avoidance strategies that smart investors use every year.

Understanding How Crypto is Taxed

Before jumping into tax-saving strategies, we need to understand how crypto is taxed in the first place:

1. Capital Gains Tax: Whenever you sell, trade, or use cryptocurrency to buy goods/services, you trigger capital gains tax on any profits.

2. Income Tax: If you earn crypto through mining, staking, airdrops, or as payment for services, it’s taxed as ordinary income.

3. Tax Reporting Starting in 2025 crypto brokers must issue the new 1099-DA form reporting all your crypto sales. In 2026 they’ll also include cost basis information.

The key takeaway? The IRS considers crypto as property (not currency), which means it’s taxed similar to stocks, real estate, and other investments.

11 Legal Strategies to Avoid Crypto Taxes

1. Tax-Loss Harvesting

This is probably the most powerful strategy in your crypto tax toolkit. When your crypto investments drop in value, you can sell them to “harvest” those losses, which can:

• Offset an unlimited amount of capital gains
• Reduce up to $3,000 of ordinary income per year
• Carry forward excess losses to future tax years

The awesome part? Unlike stocks, crypto isn’t subject to the “wash sale rule” (at least not yet). This means you can sell your bitcoin at a loss, immediately buy it back, and still claim the tax loss.

I personally used this strategy during the 2022 crypto crash. I sold my bitcoin position at a significant loss, immediately rebought it, and was able to offset gains from other investments while maintaining my crypto position.

2. Hold Long-Term (12+ Months)

This one’s super simple but incredibly effective. The U.S. tax code rewards long-term investors with significantly lower tax rates:

Short-term holdings (less than 12 months):

• Taxed at ordinary income rates: 10-37%

Long-term holdings (12+ months):

• Taxed at preferential capital gains rates: 0-20%

Let me show you how dramatic the difference can be:

If you’re on the fence about selling some crypto that you’ve held for 11 months, waiting just one more month could potentially save you thousands in taxes!

3. Use a Crypto IRA or 401(k)

This is my favorite long-term strategy. By investing in crypto through a self-directed IRA or 401(k), you can:

• Defer taxes on all gains until retirement (Traditional IRA)
• Potentially eliminate taxes on gains completely (Roth IRA)
• Buy, sell, and trade crypto within the account without triggering taxable events

Several platforms now offer crypto IRAs, including iTrustCapital, Bitcoin IRA, and Coin IRA. If you’re under 50, you can contribute up to $7,000 per year to your IRAs.

4. Take Profits in Low-Income Years

This strategy requires some planning but can be extremely effective. The lower your income for the year, the lower your tax rate on crypto gains.

Consider taking profits during years when:

• You’re between jobs
• You’re a full-time student
• You’ve taken unpaid leave
• You’ve had significant deductions that lower your taxable income

I had a friend who took a 6-month sabbatical last year and strategically sold some of his ethereum during that period. Since his income was much lower than usual, he paid significantly less in taxes on those gains.

5. Give Cryptocurrency Gifts

Giving cryptocurrency as a gift is generally not a taxable event in most cases! In 2025, you can gift up to $19,000 per recipient without having to file a gift tax return.

This strategy works great for:

• Helping family members while avoiding taxes
• Teaching younger generations about crypto
• Estate planning purposes

Remember: the recipient will inherit your cost basis, so make sure to provide them with records of when and for how much you originally purchased the crypto.

6. Donate Crypto to Charity

If you’re charitably inclined, donating crypto offers two major tax benefits:

1. You avoid paying capital gains tax on appreciated crypto
2. You can deduct the fair market value of the donation on your tax return

This is particularly powerful for crypto that has significantly appreciated in value. Instead of selling, paying taxes, and then donating the remainder, you can donate the crypto directly and potentially deduct the full value.

7. Take Out a Crypto-Backed Loan

Need cash but don’t want to trigger a taxable event by selling your crypto? Consider taking out a loan using your crypto as collateral.

Platforms like BlockFi, Celsius, and Nexo allow you to borrow against your crypto holdings. Since loans aren’t considered income or capital gains, this strategy lets you access liquidity without triggering taxes.

Just be careful with the loan-to-value ratio and potential liquidation risks if the crypto market crashes!

8. Hire a Crypto-Specialized CPA

This might seem counterintuitive – spending money to save money? But a good crypto tax specialist can often save you far more than their fee.

A qualified CPA who understands crypto can:

• Identify tax-saving opportunities you might miss
• Help structure your crypto activities in a tax-efficient manner
• Keep you compliant while minimizing your tax burden

Finding a crypto-savvy tax professional isn’t easy, but it’s worth the effort. Look for CPAs who specifically advertise cryptocurrency tax expertise.

9. Move to a Tax-Friendly Location

This is definitely the most extreme strategy, but for high-net-worth crypto investors, relocating to a tax-friendly jurisdiction can result in enormous savings.

Tax-free states in the US:

• Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income taxes.

Tax-friendly countries:

• Portugal, Malta, Singapore, and the UAE offer very favorable tax treatment for crypto investors.

I know several crypto millionaires who have relocated to Puerto Rico to take advantage of their Act 60 tax incentives, which can reduce capital gains tax to 0% in some cases.

10. Keep Meticulous Records

This isn’t exactly a tax avoidance strategy, but poor recordkeeping can lead to paying more taxes than necessary. When you can’t prove your cost basis, the IRS may assume it’s $0 – meaning you’d pay taxes on the entire amount!

Make sure to track:

• Date of acquisition
• Cost basis (what you paid)
• Date of disposal
• Sale price
• Fees paid

11. Use Crypto Tax Software

Managing crypto taxes manually is incredibly difficult, especially if you’re active on multiple exchanges or participate in DeFi. Crypto tax software like CoinLedger can:

• Automatically import transactions from exchanges and wallets
• Calculate your gains and losses
• Identify tax-loss harvesting opportunities
• Generate IRS-ready tax forms

I’ve personally used crypto tax software for years, and it’s saved me countless hours of spreadsheet nightmares while ensuring I don’t miss any deductions.

What’s Changing for Crypto Taxes in 2025?

There are some important changes happening with crypto taxes that you should be aware of:

• New 1099-DA Form: Starting January 1, 2025, crypto brokers must report gross proceeds from all crypto sales through a new 1099-DA form.

• Cost Basis Reporting: Beginning January 1, 2026, brokers will also need to include cost basis information for crypto purchased on their platform after that date.

• Increased Scrutiny: With these new reporting requirements, the IRS will have much more visibility into crypto transactions, making compliance more important than ever.

Legal Tax Avoidance vs. Illegal Tax Evasion

I can’t stress this enough – all the strategies I’ve shared are for legal tax avoidance, not illegal tax evasion:

Tax Avoidance = Taking legal steps to reduce your tax bill
Tax Evasion = Deliberately hiding income or providing false information

With the new reporting requirements coming into effect, attempting to hide crypto income is becoming increasingly risky and could result in severe penalties or even criminal charges.

Final Thoughts

Cryptocurrency taxation is complex and constantly evolving, but with proper planning, you can significantly reduce your tax burden while staying completely legal.

My top recommendations for most crypto investors would be:

1. Hold long-term whenever possible
2. Harvest losses during market downturns
3. Consider a crypto IRA for tax-advantaged growth
4. Use quality crypto tax software to stay organized

Remember, while nobody wants to pay more taxes than necessary, the goal should be legal tax optimization, not evasion. Always consult with a qualified tax professional before implementing any advanced tax strategies.

Crypto Tax Rates for Long-Term Capital Gains (Tax Year 2024)