Each and every Bitcoin transaction is taxable. If you sell Bitcoin and buy Ethereum, that’s a taxable trade. If you use Bitcoin to buy a laptop on Amazon, that’s a taxable transaction. If you sell bitcoin, hold dollars in your wallet for a week, and then re-buy Bitcoin, that’s a taxable transaction. Here’s how to trade Bitcoin and pay zero capital gains tax.

Basically, anything that you do with Bitcoin is taxable. The IRS has determined that Bitcoin is a capital asset and not a currency. Thus, when you use that asset, you’re exchanging it and not spending it under our tax laws.

Even if you were to buy a Subway sandwich using Bitcoin, that would be a taxable transaction. You would be exchanging a fraction of a Bitcoin for the sandwich.

You would report your sandwich purchase on Schedule D of your personal income tax return. Your basis would be the price you paid for that fraction of a coin and your taxable gain would be the appreciation that occurred from when you bought the coin and when you exchanged it for lunch.

If you’re using a US wallet or cryptocurrency exchange, each and every trade is being tracked for tax purposes. Transfers out of your exchange to another wallet are being recorded as sales.

For example, you send $30,000 in Bitcoin from your Coinbase account to a desktop wallet. This $30,000 is recorded as a sale and reported to the IRS on Form 1099 at the end of the year. If you return that $30,000 to Coinbase, they’ll likely book it as a new deposit with zero basis. For more on this, see Coinbase Support.

And the IRS is coming after taxpayers hard. A district court just ruled that Coinbase must turn over the trading records of over 14,000 clients who had over $20,000 of cryptocurrency in their accounts.

With the IRS getting ready for an all-out war against Bitcoin, many are looking for ways to trade cryptocurrency tax-free. Here are the only 3 legal ways to trade Bitcoin tax-free.

IRA & Retirement Accounts

Because Bitcoin is an asset, you can trade it in your retirement account or your defined benefit plan. All trades in your IRA will be tax-free (ROTH) or tax-deferred (traditional).

And, because of the nature of Bitcoin, you can take control of your retirement accounts and move it offshore. Bitcoin can be held and traded anywhere. You’re not required to use a US wallet or a US trading platform connected to the IRS.

To hold Bitcoin in your IRA in the United States, you should set up a self-directed IRA. This gives you the ability and authority to manage your own account and eliminate investment advisory fees.

To take your retirement account offshore, you need to add an offshore IRA LLC to that self-directed account. Your US custodian invests your retirement savings into your LLC and you take it from there.

Puerto Rico

Residents of Puerto Rico that qualify for Act 22 do not pay tax on their capital gains. As a US territory, Puerto Rico is free to make it’s own tax laws for its residents, which it did with Act 20 and Act 22.

Under Act 20, any qualifying business that moves to the territory will pay only 4% in corporate income tax. Act 20 gives a 100% tax exemption for the capital gains and passive income of any qualifying resident.

So, move out of your high tax state to Puerto Rico and pay zero capital gains on your Bitcoin transactions. No state tax and no federal tax on your investment profits.

Warning: the tax benefits of Puerto Rico only apply to assets purchased after you become a resident. No, you can’t move to Puerto Rico and sell the coins you’ve been holding. Assets acquired while you were in the US are taxable in the US and assets acquired after you become a resident of Puerto Rico are taxable in the territory.

Life Insurance Policy

Capital gains are tax-free inside a life insurance policy. If you set up an offshore private placement life insurance policy, you can trade cryptocurrency tax-free.

If you close the insurance policy during your lifetime, you’ll pay US tax on the gains (you got tax deferral from the policy). If you hold the assets in the policy until your death, they will pass tax-free to your heirs (considering the step-up in basis).

Offshore PPLIPs are expensive to set up and maintain. Therefore, they’re usually only available for accounts of $2.5 million or more.

Conclusion

Those are the three legal ways for a US citizen to pay zero US tax on their Bitcoin trades. Remember that it doesn’t matter where you live in the world. So long as you hold a blue passport, Uncle Sam wants his cut of your capital gains. If you move to a foreign country, you will still pay US tax on your Bitcoin gains.

The ONLY exception to worldwide taxation is found in the US territory of Puerto Rico. As a territory, the income of residents is excluded from Federal tax under Section 933 of the US tax code.