How to Legally Cash Out Crypto Without Paying Taxes in the USA (2025 Guide)

In this comprehensive guide I’ll share the strategies that have helped thousands of crypto investors (including myself) save big on taxes when converting digital assets to cold hard cash.

The Hard Truth About Crypto and Taxes

Before diving into strategies, let’s get one thing crystal clear:

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.

The IRS views crypto as property, not currency. This means:

• Selling crypto for USD = Taxable event
• Trading one crypto for another = Taxable event
• Using crypto to buy goods/services = Taxable event

Not reporting these transactions can lead to serious consequences – we’re talking penalties up to $100,000 and potentially 5 years in prison. The IRS has gotten much more sophisticated at tracking crypto transactions!

7 Legal Strategies to Reduce or Eliminate Crypto Taxes

While you can’t completely dodge taxes when cashing out these strategies can significantly reduce your tax burden

1. Hold Your Crypto Long-Term (Over 12 Months)

This is probably the easiest strategy that so many newer investors miss! The tax difference between short-term and long-term capital gains is massive:

Short-term capital gains (held less than 12 months)

• Taxed as ordinary income
• Can be as high as 37% depending on your tax bracket

Long-term capital gains (held more than 12 months):

• Much lower tax rates: 0%, 15%, or 20%
• Most middle-income earners pay just 15%

For example, if you’re in the 22% income tax bracket and sell crypto you’ve held for 11 months, you’ll pay 22% on gains. Hold just one more month, and you’d only pay 15%!

2. Harvest Your Crypto Losses

This is my personal favorite strategy! Tax-loss harvesting lets you offset your crypto gains with losses from other investments.

Here’s how it works:

1. Identify crypto assets that have decreased in value
2. Sell those assets to realize the loss
3. Use those losses to offset your gains
4. If your losses exceed your gains, you can offset up to $3,000 of ordinary income
5. Carry forward additional losses to future tax years

Real-world example: You made $10,000 profit selling Bitcoin but have $7,000 in unrealized losses in Ethereum. By selling the Ethereum, you can reduce your taxable gains to just $3,000!

Pro tip: After selling for a loss, you can immediately buy a different crypto. Just avoid buying back the exact same crypto within 30 days to prevent “wash sale” issues (though some tax experts debate whether wash sale rules currently apply to crypto).

3. Cash Out in Low-Income Years

Your tax rate depends on your total income for the year. If you’re:

• Between jobs
• Taking a sabbatical
• Going back to school
• Working part-time

These could be perfect opportunities to cash out crypto at a much lower tax rate. In some cases, if your total income (including crypto gains) is low enough, you might qualify for the 0% long-term capital gains tax rate!

4. Use a Crypto IRA

This is a seriously underutilized strategy. By holding your crypto in a self-directed IRA, you can:

• Traditional IRA: Defer taxes until retirement
• Roth IRA: Pay taxes now, but all future gains are completely tax-free!

Companies like iTrustCapital, Bitcoin IRA, and Coin IRA offer specialized crypto IRA services. The downside? Early withdrawals (before age 59½) typically incur a 10% penalty.

5. Take Out a Crypto-Backed Loan

This is my clever “crypto hack” that wealthy investors use all the time! Instead of selling your crypto, use it as collateral for a loan. Since loans aren’t considered income, you receive cash without triggering a taxable event.

Platforms like BlockFi, Celsius, and Nexo offer crypto-backed loans with interest rates typically ranging from 4-12%. You’ll need to put up more crypto than you borrow (usually 2x) as collateral.

Warning: These loans carry risks! If your collateral drops significantly in value, you could face a margin call requiring additional collateral or forced liquidation.

6. Relocate to a Low-Tax State

This strategy requires a bigger commitment but can save massive amounts if you have large crypto holdings. Nine states have no income tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Moving from California (13.3% top rate) to Nevada (0% income tax) could save you tens of thousands on large crypto cashouts.

7. Strategic Gifting and Charitable Donations

Gifting crypto to family members in lower tax brackets can be an effective strategy:

• You can gift up to $18,000 per person annually without gift tax implications
• The recipient assumes your cost basis but pays taxes at their (potentially lower) rate

Donating crypto directly to charities:

• Provides a tax deduction for the fair market value
• Completely avoids capital gains taxes
• Works best with highly appreciated assets you’ve held long-term

How Much Tax Will You Pay When Cashing Out Crypto?

The amount of tax you’ll pay depends on:

1. How long you held the crypto
2. Your total income for the year

Long-Term Capital Gains Tax Rates (2025)

For crypto held longer than 12 months:

Short-Term Capital Gains Tax Rates (2025)

For crypto held less than 12 months (taxed as ordinary income):

How to Cash Out Your Crypto (And Stay Legal!)

When you’re ready to convert your crypto to fiat, you have several options:

1. Centralized Exchanges

The most common method is using exchanges like Coinbase, Binance.US, or Kraken. They:

• Provide direct bank transfers
• Issue tax forms (1099s)
• Have relatively low fees
• Are closely monitored by the IRS

2. Peer-to-Peer (P2P) Trading

Platforms like Paxful let you sell directly to other individuals using various payment methods. While this provides more flexibility, remember that these transactions are still taxable!

3. Bitcoin ATMs

These provide instant cash but usually charge high fees (5-10%). Many also require ID verification, and transactions are typically reported to the IRS.

4. Crypto Debit Cards

Cards from companies like Coinbase and Crypto.com let you spend crypto directly. Behind the scenes, they’re converting your crypto to fiat (triggering a taxable event) with each purchase.

Common Questions About Crypto Taxes

Do I have to pay taxes if I don’t cash out?

Simply holding crypto isn’t taxable. However, if you:

• Earn interest through staking or lending
• Receive mining rewards
• Get airdrops or forks

These are all taxable as ordinary income when received.

What if I don’t report my crypto transactions?

Not reporting is tax evasion with serious consequences. Major exchanges issue 1099 forms to the IRS, and blockchain analytics firms like Chainalysis help the IRS identify tax evaders.

Can I avoid taxes by using a DEX or privacy coins?

While decentralized exchanges (DEXs) and privacy coins like Monero make tracking more difficult, evading taxes is still illegal. The IRS has sophisticated tools to connect wallets to identities.

Do I owe taxes if I lost money on my crypto?

No taxes are owed on losses, and you can use these losses to offset other capital gains or up to $3,000 of ordinary income per year.

Tools to Help Manage Your Crypto Taxes

Managing crypto taxes can be complex. I personally use tax software to make this process painless:

• CoinLedger: Connects to 500+ exchanges and automatically calculates your crypto taxes
• TaxBit: Offers continuous tax optimization suggestions
• Koinly: User-friendly interface with tax-loss harvesting features
• CryptoTrader.Tax: Affordable option with good customer support

Final Thoughts

While you can’t completely avoid taxes when cashing out crypto in the USA, strategic planning can significantly reduce your tax burden. Remember:

• Hold for at least 12 months when possible
• Harvest losses to offset gains
• Consider a Crypto IRA for long-term holdings
• Time your cashouts during lower-income years
• Keep immaculate records of all transactions

The crypto tax landscape is constantly evolving. What worked last year might not work this year, so stay informed and consider consulting with a crypto-savvy tax professional for your specific situation.

I’ve personally used many of these strategies to save thousands on my crypto taxes, and you can too! Just remember – the goal isn’t to avoid taxes completely (that’s illegal), but to legally minimize what you owe.