Cryptocurrency is moving towards becoming mainstream.
And, it’s becoming more and more difficult to overlook that!
We reached the point where almost everybody wants the piece of “free money.” And neither the most adamant old-school investors nor most unyielding investment companies can ignore this fact any longer.
The only thing is — there’s no such thing as free money.
Investing in crypto, at times, does seem like playing safe. However, the pretty volatile market says otherwise.
Besides, there is a specific crypto tax rate to cover each time you make a crypto profit.
And while tax evasion is never an option, what we can do is:
- Learn more about cryptocurrency taxes in general.
- Discover how cryptocurrencies are taxed and how high the taxes go.
- Learn how to file these types of taxes.
- Find legal ways to reduce your crypto expenses.
These are precisely the topics we’ll be covering.
What Is the Tax on Cryptocurrency?
According to the IRS, cryptocurrency is seen as a property and not as an income.
But why does this matter?
It matters because the income tax can significantly differ from a tax on assets. To be more precise, it’s not the possession of an asset on which you pay tax. You pay the tax on any potential gain you have made through the sale or exchange of that asset.
So, taxes on crypto are pretty much the capital gains taxes, and they can be divided into short-term and long-term ones.
Short-term capital gain taxes
Let’s say you have an asset in your possession for less than a year, and you decide to sell it. If you sell that asset for a price higher than the price you bought it at, and within 365 days, you’ve made a short-term capital gain. The same goes for crypto short-term capital gains.
Usually, short-term capital gains are taxed the same way your ordinary income is taxed, whether your salary, a commission, or any other income category. There will be a tax bracket under which you’ll fall, based on your earnings.
On a global level, the income tax rates differ by country. Currently, in the US, there are seven different income tax brackets. And they fully correspond to short-term capital gains tax brackets. Their range is from 10% to 37%.
Long-term capital gain taxes
Long-term crypto capital gains tax, on the other hand, is somewhat more advantageous.
So if you buy an asset or cryptocurrency and hold it for over a year before you sell it, your capital gain taxes should be lower. Usually, they are 0%, 15%, or 20%, depending on the height of your income.
How Are Cryptocurrencies Taxed?
Let’s now go into more details of cryptocurrency taxation.
First of all, when do you pay taxes on cryptocurrency? Well, that mainly depends on your type of crypto earning.
In case you earned your crypto coin through mining, it immediately becomes a taxable gain. In that case, you’re instantly liable for paying due taxes. That’s because you don’t need to sell your coin to make its value realized. What is more, the whole mined amount is taxable.
Crypto as a present
If you’re lucky to receive any crypto coin as a marketing promotion or a reward, you will instantly owe tax on that cryptocurrency. Again, the whole amount you receive will undergo taxation.
Other crypto earnings
If you make your capital gains through some other method, such as crypto exchange, sale, or conversion, then you’ll be liable to pay tax on crypto gains only once that transaction comes through. You need to make what is called “a realized gain” for it to undergo taxation. What’s more, only the capital gain or the difference you earned in this process is taxable.
Which is your tax bracket?
Let’s now see how to calculate crypto gains taxes more precisely. As we mentioned earlier, it’s the same as calculating your regular short-term and long-term capital gain taxes.
Short-term capital gains tax brackets
Your holding period starts one day after you buy your crypto asset or receive the crypto transaction and ends the day you transfer that capital asset to somebody else. This is how we make the distinction between short-term capital gains and long-term capital gains.
If your holding period was less than a year, refer to the table below.
|Short-term tax rate||Single filer||Married filing jointly||Married filing separately||Head of household|
|10%||Below $9,950||Under $19,900||Below $9,950||Below $14,200|
|37%||Above $523,600||More than $628,300||Above $314,150||Above $523,600|
So, you and your spouse together earn $20,000 a year. And now you decide to sell the crypto coin that you had previously purchased for $1,000 for $2,000. You’ll have to pay a 12% cryptocurrency tax rate on your crypto capital gain ($1,000 in this case). So your total tax on this crypto capital gain is $120.
Long-term capital gains tax brackets
However, if you’re interested in:
How is Bitcoin taxed based on the IRS long-term capital gains?
Here is the table.
|Long-term tax rate||Single filer||Married filing jointly||Married filing separately||Head of household|
|0%||Below $40,400||Under $80,800||Below $80,800||Below $54,100|
|20%||Above $445,850||More than $501,600||Above $250,800||Above $473,750|
So let’s say you are single and your yearly earnings don’t exceed $40,000. If two years ago you had bought a cryptocurrency for $1,000, and now you’ve sold it for $2,000, your capital gain is $1,000. Still, you won’t have to pay any taxes on cryptocurrency gains since you fall under the first bracket (0% tax rate).
But, if your yearly earnings are above $445,850, you’ll have to pay 20% on your crypto profit, which, in this case, is $200.
Keep in mind that these are the federal capital gains tax brackets and that your state or local government may apply some additional tax on Bitcoin or any other crypto coin for that matter.
For more precise estimates, you can use the IRS tax estimator or one of the many crypto tax calculators available on the web.
How to File Your Crypto Taxes?
In this section, we’ll show you five simple steps to help you take care of your cryptocurrency and taxes efficiently and timely.
1. Start on time
Although the taxes are usually due in the spring, that certainly doesn’t mean you should be waiting until the last moment to start your tax preparation.
It may seem like you have plenty of time and that paying taxes on crypto is nothing complicated. But, don’t forget that, as your crypto transactions and conversions multiply, the situation furthermore entangles.
For example, you have to be careful if you’re frequently switching between different cryptocurrencies. Every single time you perform a conversion, it’s considered a taxable event.
For this reason, it’s crucial that you neatly and precisely keep track of each crypto action that you take. That way, when the due date arrives, all you need to do is reconcile the numbers and submit the final IRS crypto tax papers.
2. Make the distinction between taxable and non-taxable crypto gains
Still, not everything that you do with your Bitcoin or altcoin is taxable.
So while you’re keeping track of your crypto business, it will help you to know which types of transactions you should file in as cryptocurrency capital gains tax and which don’t.
So here is how it goes.
|Taxable crypto actions||Non-taxable crypto actions|
|Any method of earning cryptocurrency (including mining, stalking, or DeFi)||Receiving crypto gifts|
|Spending any cryptocurrency on goods or services||Transfers between same person’s wallets and exchanges|
|Cashing out cryptocurrency, regardless if into stablecoin or fiat||Buying cryptocurrency with USD|
|Conversion of one cryptocurrency into another||Holding|
|Receiving free coins via Airdrop or Hard Forks||Cash rewards, and similar, on spending crypto|
|Gifting over $15,000 in cryptocurrency||Gifting under $15,000 in cryptocurrency|
3. Use all the available tools and help to calculate your crypto trading taxes
Luckily, today, with the help of the right cryptocurrency tax software, such as CoinTracker, TokenTax, and CryptoTrader.Tax, you can easily reconcile your transactions to summarize your capital gains and losses and reach the final numbers.
Alternatively, if you perform too many transfers and trades each year and you find dealing with all these numbers overwhelming, hiring a professional tax advisor could be the right solution for you. Even if all you seek is tax-related advice, professional help could make a lot of difference.
4. Use the appropriate forms for filing your crypto taxes
After you’ve learned about different tax rates and gathered the info about all your previous taxable crypto transactions, it’s time to fill up the right tax forms.
Make sure to report most of your capital transactions and calculate the capital gain or loss per IRS forms and instructions. You can use Form 8949 for these purposes.
Next, you can summarize capital gains and deductible capital losses on Form 1040.
5. File taxes with the IRS
Now, once the needful calculations and paperwork are done, the only thing left is to figure out:
How to report crypto taxes? Or how to submit your reports?
There are the two most common ways of doing this. You can either use a tax filing software like TurboTax or TaxAct. Or, you can hire an accountant to submit your tax reports with the IRS and the state.
How to Minimize Crypto Taxes?
As we’ve seen so far, your crypto tax rate can turn out quite significant and even create sizable disruptions in your portfolio. To help you prevent this, we came up with few simple yet powerful strategies.
Turn your short-term capital gains into long-term capital gains
Whenever possible, turn your short-term capital gains rate into a long-term one. All you need to achieve this is a bit of patience, not to realize your gains instantly. Sometimes it’s only a matter of days, and sometimes you’ll need to restrain from selling your cryptocurrency for a longer period.
Your Bitcoin tax rate can turn out so much cheaper that the wait will probably be worthwhile in the end. Still, this is not always the case. So you will need to rely on your or your advisor’s calculations and estimations.
Offset gains with losses
The second most effective strategy to reduce your tax on selling cryptocurrency is to offset the capital gains with capital losses. It’s worth mentioning that this works with any other type of capital gains, not only crypto gains.
For example, if you had bought your cryptocurrency for $3,000, and you have had to sell it for $1,000 subsequently, this is called a capital loss. It’s an unfortunate situation. But, at least, you can subtract this capital loss from taxable gains on cryptocurrencies and other investments. That way, you can achieve significant capital gains tax deductions.
Bear in mind, though, that this strategy has some limitations. You can only use up to $3,000 of capital loss on cryptocurrency to lower your ordinary income taxes each year. Still, you can transfer the remaining capital loss amount to the following year.
Invest in SDIRA
Investing in your future is always a good move, especially if it helps to reduce your taxes.
The Self-Directed Individual Retirement Account or SDIRA is one way to achieve this. This and similar retirement accounts enable you to invest tax-free or to defer your taxes until you’re retired, and your tax bracket for capital gains is more favorable.
Gift or donate some of your assets
Another way to avoid paying capital gains tax on crypto is by gifting or donating it.
According to the IRS, you can gift up to $15,000 a year to your family member without having to pay tax on it.
Similarly to this, you can donate some of your crypto fortunes to charity. Not only do you get to write off some of your capital gain taxes, but you could also become eligible for deductions from your regular taxable income.
Move to a state with lower income tax
If everything else fails, you can always move to another country.
All jokes aside, while crypto taxes in the USA don’t usually apply on the state level, there are other significant expenses to consider. For example, income and corporate taxes vary from state to state to a great extent. The difference can go up to 12%. This isn’t neglectable, especially when combined with the federal tax rate on capital gains.
From Texas with a 0% income tax rate to Iowa with 12%, the US is your oyster.
So to summarize:
Do you pay taxes on cryptocurrency?
Yes! You are in a legal obligation to pay tax on each of your Bitcoin capital gains.
How is cryptocurrency taxed?
Cryptocurrency is taxed as a regular capital asset, according to your capital gain tax bracket.
In line with that, you can reduce your cryptocurrency taxes by:
- turning your short-term capital gains into long-term ones,
- offsetting capital gains with losses,
- donating some of your assets,
- or investing in retirement programs such as SIDRA.
Luckily, today, there is numerous reliable tax software that can help you calculate Bitcoin taxes more precisely and avoid mistakes and overcharges. And for any additional questions and doubts you might have, you can always hire a professional tax advisor.
You don’t have to pay taxes on buying or holding crypto. However, each time you make a crypto transaction and make a profit, you have a legal obligation to settle your capital gains tax.
Cryptocurrency is taxed according to your ordinary federal capital gain tax bracket. In 2021, it ranges from 0% to 20% for long-term crypto capital gains and from 0% to 37% for short-term capital gains.
The easiest way to calculate your crypto tax is to refer to the official IRS capital gain table with different income tax brackets. Once you find your crypto tax rate according to your income tax bracket, all you need to do is multiply it with the gain you’ve achieved.
Yes, short-term capital gains are taxed as ordinary income. They follow the same tax brackets.