How to Legally Avoid Paying Taxes on Crypto
Navigating crypto taxes doesn’t have to feel like tiptoeing through a minefield. With a few savvy strategies, you can legally reduce - or even sidestep completely - capital gains taxes on your digital assets.
Here are a few strategies that anyone of any income level can take advantage of:
1. Tax Loss Harvesting
Get rugged on a meme coin? Turn a loss into a win by selling tokens at a loss to offset gains on your taxes. This is especially powerful if you’re down on an L1 token. Swap ETH for stETH, jitoSOL for ezSOL, or even BTC for WBTC on a different blockchain.
This form of tax loss harvesting is unique to crypto, as the IRS has said wash trading rules do not apply to digital assets, so take advantage of this loophole while you can!
2. HIFO Accounting Method
Most traders calculate their taxes using FIFO (“first in, first out”), but HIFO (“highest in, first out”) can save you more if you bought tokens at varying prices. By selling the coins you paid the most for first, you maximize your cost basis and minimize gains. U.S. traders still need to use wallet-by-wallet accounting, but this method could still prove extremely beneficial for some.
3. Borrow Against Your Crypto
Want cash without triggering a taxable event? Use lending protocols to borrow stablecoins against your crypto collateral instead of selling. As long as you don’t sell, there’s no capital gain to report.
This is a particularly good strategy in a bull market because you can get US dollars without missing out on gains. Just remember to manage liquidation risks and monitor the borrowing rate.
4. Diamond Hand Your Tokens (Just Don't Sell!)
Patience pays. Holding your crypto for over a year can slash your tax rate or even eliminate it entirely in some jurisdictions. Most traders underperform the market anyway, so next time you think about making a swap, consider the tax implications ahead of time.
If you’re not an advanced trader, letting time do the work can be one of the easiest ways to save.
5. Tax‑Advantaged Accounts
In the U.S., you can buy crypto ETFs inside a tax‑free IRA or Roth IRA. All gains grow tax‑deferred (or tax‑free on withdrawal), so you never pay capital gains on your crypto appreciation.
⚖️ Legal Gray Areas: Aggressive Strategies
Crypto is a new industry, and digital assets are still in their infancy. That means there are still some gray areas regarding how crypto is taxed. Some traders push the envelope with aggressive interpretations that haven’t yet been tested in court, chiefly:
Airdrops Not Taxed as Income: Arguing that unsolicited token drops are not “income” until you sell.
Bridging as Non‑Taxable: Claiming that moving tokens between chains (e.g., ETH on Base → ETH on Arbitrum) isn’t a disposition and therefore isn’t a taxable event.
Awaken Tax recommends the conservative approach - treating airdrops as ordinary income and bridges as taxable swaps - since the IRS hasn’t issued clear guidance.
Special Crypto Tax Strategies Available to the Whales 🐋
Move to a Tax‑Friendly State or Country: Relocate to jurisdictions with no capital gains tax.
Hire a CPA or Tax Attorney: Specialized advice can uncover niche strategies tailored to high‑net‑worth portfolios.
And, no matter who you are, use Awaken!
At Awaken, we support HIFO accounting and can connect you to crypto-focused tax pros to handle your accounting and legal teams that defend more aggressive tax strategies. Our friendly team is here to answer questions and help shrink your tax bill to the absolute minimum. Legally, of course. 🚀
