Which Crypto Exchanges Do Not Report To the IRS?

Between 2022 and 2023, the market for digital currencies has grown and become even more visible, and against this backdrop, governments have redoubled their efforts to introduce regulations that would “control” the industry most notably taxes on digital assets.

What is the Crypto IRS?

The United States is ahead of the curve when it comes to regulating cryptocurrencies having the taxation of this asset class at the top of the priority list. US crypto enthusiasts are urged to take a close look at the US tax laws in this area. The US Internal Revenue Service, or the IRS, is known as one of the world’s strictest tax enforcement agencies. 

Back in 2014, the IRS issued a rule regarding digital assets such as Bitcoin, stating that it addresses virtual currencies as property for tax purposes. Capital gains are discussed most often in this context as they are taxed at different rates. The tax percentage depends on how quickly the cryptocurrency assets have been utilized. If the IRS cryptocurrency has been retained for more than a year, the tax will be lower accordingly. The standard applicable individual tax rate is also taken into account. It must be remembered that the maximum tax rate for long-range capital gains is much lower than for short-dated ones. Thus, the US government offers benefits to people who are willing to hold their crypto assets for a long period of time.

If, however, a taxpayer received the payment in cryptocurrency for traditional work, staking, mining, running a node, airdrop, or interest from a lender, he must pay income tax based on the US dollar equivalent of the cryptocurrency income at the moment the digital assets were received.

When owning cryptocurrency within a US jurisdiction, it must be remembered that the mere possession of the cryptocurrency is not taxable. If an owner did not spend a cryptocurrency held in the wallet, there is no need to include it on the tax return. However, if he has sold his digital assets or otherwise created a taxable event, then there is a capital gain or loss, which is subjected to reporting crypto to the IRS.

How Does the IRS Track Crypto Transactions?

It has emerged that the IRS bought Bitcoin user identification software from security specialist Chainalysis in November 2015.

Chainalysis monitors crypto transactions for law enforcement, blockchain start-ups, and exchanges in the US and Japan. They offer KYT technology that will track the identity of a digital asset and addresses with questionable ownership history. Because of this, the accounts of a certain group of traders and their accounts could be frozen until they provide documentation proving they did not commit a crime. In March 2022, the company launched related smart contracts that can identify wallets used to circumvent sanctions on the Ethereum blockchain and EVM-enabled networks (Polygon, Avalanche).

The IRS uses subpoenas among other ways to track crypto deals. In recent years, several exchanges have been served with subpoenas demanding the disclosure of certain user accounts.

Ways to avoid crypto taxes

If you are a tax resident of the United States of America, or you have opened a business in this country, have citizenship, or are planning to move for permanent residence, you should carefully choose the legal form and state of incorporation for the source of income related to cryptocurrency trading. However, you may not have to pay a crypto tax if you manage your assets wisely.

Retirement account

An IRA is an individual retirement account in which all transactions are recognized as tax-free (a ROTH IRA) or deferred (a traditional IRA). Since Bitcoin is an asset, it can also be used for trading and earning profits without any tax liability.

In doing so, it is possible to completely eliminate the visibility of crypto products to the US tax authorities. All you need to do is to have an overseas payment system or bank where the digital money will go and to transfer retirement accounts offshore. The scheme is workable and legal, but quite complicated for ordinary citizens.

Business in Puerto Rico

Residents of Puerto Rico are governed by the internal laws of the autonomous territory, including taxation. According to Law 22 of 11 July 2017, residents of Puerto Rico can enjoy the following benefits:

• corporate income tax is 4%;
• any qualified resident is exempt from taxes on capital gains and passive income.

Please note that zero rates on Bitcoin transactions in the US (Puerto Rico) are applied only to the assets acquired after moving and becoming a resident of the territory. Previously acquired and accumulated money, including crypto, is taxed at the US rate.

Zero taxes on Bitcoin in the US through life insurance

If you own cryptocurrencies in large quantities and also consistently make profits from Bitcoin trading, it is possible to transfer them to hedge funds. However, in this case, there is a risk of paying high taxes (up to 50%). The 0% capital gains tax can only be applied through an offshore life insurance policy (PPLI). This instrument is the most advantageous for those who do not plan to use their savings during their lifetime and wish to pass them on as an inheritance.

Private placement life insurance is quite expensive to maintain and is only available to larger investors who are prepared to deposit any assets worth at least $2.5 million or the equivalent in another currency.

Gifts to your family

If you acquire a cryptocurrency as a present, you won’t have to pay taxes on it, but you may have to pay them if you later decide to put it on sale or convert the crypto assets. In that case, you will need to know the cryptocurrency basis to determine the amount of tax you have to pay when selling this crypto gift. You will have to pay tax on all gains in excess of the gift basis but this tax may be less than what was imposed on the person who gave it to you.

To accurately record transactions and determine your tax liability, keeping careful records of all cryptocurrency gifts, contributions, sales, and exchanges is crucial.

Keeping digital cash for the long term

As long as you possess the virtual currency as an investment without generating income, you generally don’t have to pay taxes on the cryptocurrency until you sell it. You can avoid paying taxes by not trading the cryptocurrency in a given tax year. To reduce your tax burden, please ensure that you have held the coins you want to sell for over a year, and then it may be qualified for paying lower long-run capital gains tax rates. This could save you a significant amount of money on your tax bill.

Conclusion

So far, the cases of declared crypto assets in the US have not been very numerous, but we should not forget that the US legal system is based on legal precedents, which means that the number of such cases will grow. We hasten to assure those who think that this practice will be limited to the USA that as experience shows the practice in the USA regarding the interpretation of international treaties spreads quite quickly to other countries.

You can try to switch to the preferential tax treatment of legal entities, you can use different methods to optimize taxation. But one thing is clear, if you deal with cryptocurrency, you will have to pay taxes. Maybe it will not happen today, but it will happen for sure.

Crypto exchange services that do not report to the IRS

Which crypto exchange does not report to the IRS? KuCoin, OKX (excluding P2P transactions), and CoinEx, do not collect their customer information (KYC) and do not provide 1099 forms for most small traders. Kraken has refused to fulfill the US Internal Revenue Service’s request to provide the court with information about its users. According to Bloomberg, the crypto platform deemed the IRS demands “an unjustified treasure hunt”. Kraken has asked a federal court in San Francisco to intervene in the matter. Kraken’s lawyers said the IRS was out of line and its claims about customers were unreasonable. In its response, the platform cited a 2017 statement from Coinbase cryptocurrency exchange, noting that the IRS had gone far beyond the rules set by US District Judge Jacqueline Scott Corley. In Coinbase’s case, the IRS backed down, demanding data from only a few thousand customers. Kraken is now hoping for a similar outcome.

FAQ

How is Crypto Taxed?

The USA is one of the biggest players in the cyber market, so it is not surprising the country has very advanced tax regulations.

Cryptocurrency in the US is legally considered a property, and its taxation depends on whether the investment is long-term or nondurable and on the amount of profit or loss the investor makes. If the investor does not sell the cryptocurrency for more than a year, it is considered a long-term investment, in which case, starting from the amount of $41,676 of profit made, the taxation is 15%. And if the cryptocurrency has brought the owner more than $459,750, the tax rate increases to 20%.

Short-term investments in cryptocurrency (for up to one year) are considered the standard income of an individual and are taxed at 10% to 37%, depending on the amount of income received. The smallest tax rate applies when the profit does not exceed $10,275, the topmost tax applies when the profit exceeds $539,900. At the same time, if a cryptocurrency holder suffers a loss due to an unsuccessful investment in it, he can claim a tax deduction of up to $3,000. US President Joe Biden has proposed an additional tax on cryptocurrency mining. The planned excise tax rate could be 30 percent.

The rate would increase by 10 percent every year for three years. In turn, mining companies would have to report on the amount of energy used and the percentage of equipment capacity.

According to the project’s official document, its main objective is to reduce the number of miners and therefore the negative impact on the environment.

How to Avoid Taxes on Crypto?

In the US it is now possible not to be exempt from paying crypto tax on bargains that are less than $200. This means that Americans can now spend their Bitcoins on ordinary purchases: groceries, coffee, any goods, etc.

Millionaires from the United States have finally found a replacement for the classic offshore choosing  Puerto Rico as a tax haven and country to grow their crypto business. Puerto Rico is one of the few US-dependent countries where you can get tax breaks, not be in the disfavor of financial institutions and global agencies, live on the ocean, and build your business legally.

Disclaimer: Please keep in mind that the content of this article is not financial or investing advice. The information provided is the author’s opinion only and should not be considered as direct recommendations for trading or investment. Any article reader or website visitor should consider multiple viewpoints and become familiar with all local regulations before cryptocurrency investment. We do not make any warranties about reliability and accuracy of this information.