You can’t control the price of Bitcoin or the fees a crypto exchange charges – but you do have some control over how much you pay in taxes! If you hold a crypto asset a little longer, choose an optimal accounting method, or harvest tax losses throughout the year, you can reduce the amount you have to fork over to the IRS each year.
In this short guide, you’ll learn five actionable strategies for lowering your crypto tax bill and improving your after-tax returns.
A Brief Review of Crypto Taxes
Before diving into tax strategies, let’s review how crypto taxes work.
The IRS treats cryptocurrencies as “property” from an investor’s tax standpoint, meaning any value increase is taxable as a capital gain. The only exceptions are specific non-fungible tokens (NFTs) that the IRS may consider “collectibles” and tax at a higher collectibles tax rate.
Investors typically pay two types of taxes:
- Capital Gains. If you buy and sell a crypto asset for a profit, you must pay capital gains tax on the difference between your purchase and sale prices. On the other hand, if you lost money, you could deduct the difference as a capital loss.
- Interest Income. If you invest in a decentralized finance (DeFi) protocol that pays interest, you must pay ordinary income tax on the income you receive.
While this may be reminiscent of the stock market, crypto assets have a few notable differences you should consider when preparing your taxes.
The two most significant differences are:
- Reporting. Most crypto exchanges and protocols don’t provide Form 1099s, meaning you must compute your own capital gains or losses. While these rules may change in 2025, crypto tax software can help ensure compliance.
- Cost Basis. Most stock exchanges can reliably compute capital gains and losses since investors don’t typically transfer stocks between brokers. However, crypto investors must look across wallets and exchanges to make these computations.
And, of course, there are still several unknowns. For example, it’s unclear if the IRS treats crypto that you lock into a bridge as a taxable transaction or whether the “wash sale rule” applies to cryptocurrencies similarly to stocks.
Considering these things, evaluate the five ways to reduce your crypto tax bill below.
#1. Tax-Loss Harvesting
The IRS lets you use capital losses to offset any capital gains and up to $2,000 in ordinary income. If you have $1,000 in capital losses and $500 in capital gains, you could pay $0 in capital gains taxes and offset $500 worth of your ordinary income.
Tax-loss harvesting involves intentionally selling crypto assets at a loss to reduce your taxable income. Rather than holding on to your $1,000 capital loss, hoping for the crypto asset to recover in price, you would sell to lock in the loss.
The catch is that you cannot (or, rather, may want to avoid) immediately repurchase it. The “wash sale rule” says you must wait 30 days to repurchase the same asset to claim the capital loss on your taxes. While the IRS hasn’t clarified whether it applies to crypto, lawmakers are keen on closing the loophole, and it may be prudent to err on the side of caution.
You should also ensure you have a plan after harvesting the tax loss. Generally, you can find a highly correlated – but not identical – replacement (e.g., sell Bitcoin and buy Ethereum). Or you may simply move on to another opportunity.
Action Steps
- Review your portfolio regularly to identify opportunities to harvest losses.
- Sell these assets to realize the loss if you have an acceptable alternative to buy.
#2. Long-term Capital Gains
The IRS has two categories of capital gains: Short-term and long-term.
Short-term capital gains fall under your marginal tax rate. If you’re in a high tax bracket, your marginal tax rate may be up to 35%. On the other hand, long-term capital gains have a much lower tax rate. Unless you earn over $500,000 per year, you’ll typically pay a 15% tax rate. And if you earn more, you still pay a maximum of 20%.
But what happens if you need money and only have short-term positions to sell?
If you need cash but don’t want to trigger a capital gain, you might consider taking out a loan against the crypto asset – a popular strategy for the wealthy. That way, you’re not selling the asset from a tax standpoint, but you can still access the money you need until the one-year mark. Just don’t forget that the benefits of the cash must outweigh the loan’s interest rate!
Action Steps
- Before selling an asset, consider if you’re nearing the one-year mark of holding it. If possible, wait until after then to sell to lower your tax exposure.
- If you need cash beforehand, consider taking out a crypto loan instead.
#3. Specific Identification
When computing capital gains, the IRS defaults to first-in, first-out (FIFO). In other words, they match each sale with the earliest purchase transaction. Choosing the oldest transaction maximizes the odds of falling under the long-term capital gains tax rate. Unfortunately, it also maximizes your capital gain when prices are on the rise.
The good news is that you have alternatives! The most powerful alternative is called “specific identification.” Rather than matching transactions based on a preset rule (like FIFO or LIFO), a specific ID lets you match individual transactions to minimize your tax exposure.
ZenLedger makes it easy to import transactions across multiple wallets and exchanges to simplify different accounting methods. Source: ZenLedger
Ideally, you want to minimize capital gains while avoiding the short-term tax rate. You should match sale transactions with the most expensive purchase transactions (minimizing your capital gain) that took place more than one year ago (minimizing your tax rate).
Action Steps
- Carefully document your crypto purchase dates and cost basis. Crypto tax software is often the easiest way to do this.
- To minimize gains, choose the coins with the highest cost basis first—those that still fall under the long-term capital gains tax rate.
#4. Retirement Accounts
Many investors use individual retirement accounts (IRAs) for stocks and bonds. Traditional IRAs enable you to deduct contributions from your taxable income, while Roth IRAs let you avoid taxes on any capital gains. And both can help lower your taxes!
Unfortunately, most conventional IRAs don’t permit crypto assets unless you hold them via exchange-traded funds (ETFs). Instead, you need a unique self-directed IRA (SDIRA) that allows more exotic investment types.
Many SDIRA providers market themselves as Bitcoin or Crypto IRAs. When choosing a broker, consider any restrictions and fees—they’re typically higher than conventional IRAs. You must also ensure that you follow the rules with distributions to avoid incurring any IRS penalties since many SDIRA brokers are hands-off.
Action Steps
- If eligible, consider setting up an SDIRA to hold your crypto assets.
- Work with an accountant to understand the rules and limits to optimize your benefits.
#5. Optimizing DeFi
DeFi platforms enable you to generate a yield from crypto assets, making them more appealing to investors. However, they also create a lot of taxes from rewards, which could increase your tax bill at the end of the year.
Start by choosing a DeFi platform that generates capital gains rather than interest income. Rather than selecting those that pay rewards as interest, try alternatives that provide a reward token that increases in value, like Compound. If you hold that for a year, you could qualify for the lower capital gains tax bracket and avoid paying ordinary income taxes.
You can also reinvest your DeFi income into a tax-advantaged account, like the SDIRA.
Action Steps
- Assess the nature of the DeFi platforms you use and consider transitioning to those with greater tax efficiency.
- Consider reinvesting any income you generate into a tax-advantaged account to offset any taxable income.
The Bottom Line
Taxes are one of the few things you can control regarding investment returns. So, it’s worth taking the time to reassess your portfolio and consider some of the strategies we’ve covered. If you’re new to crypto tax strategies, consider starting with some of the easiest ones (like waiting to sell) before diving into the complex ones (switching DeFi platforms).
Crypto tax software can also help streamline your taxes and avoid any problems with the IRS. ZenLedger helps aggregate transactions across wallets and exchanges, compute capital gains and losses, and generate the paperwork you must file yearly. You can also use our tax-loss harvesting tool to find opportunities to save within your portfolio!
Get started with ZenLedger for free!
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
