Buying and selling cryptocurrencies is taxable in the United States as the Internal Revenue Service (IRS) identifies digital assets as property rather than currency following a ruling in 2014. The crypto tax rate for federal taxes is the same as the capital gains tax rate, ranging from 0 to 37% depending on several factors. Capital gain taxes occur whenever a profit has been made through the sale of an asset.
Investors should note that the cryptocurrency tax rates vary in different jurisdictions.
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Do crypto gains get taxed and how much?
In addition to crypto trading and investment profits, interest earned from staking cryptocurrencies, mining and airdrops would also be taxed as ordinary income under the tax brackets accordingly.
For cryptocurrency miners, income generated in exchange for this work would also be taxed based on the entire value of the digital assets obtained by mining.
If you have received payment for goods and services in digital currencies, the payment also counts as taxable income. If you have converted or swapped cryptocurrencies, for example, Ethereum to Bitcoin, you would also be taxed on the gains you made in the transaction. Your Bitcoin tax rate would depend on multiple factors, which will be discussed in more detail in this article.
Activities including transferring digital assets between exchanges, buying cryptocurrencies, gifting digital currencies and donating virtual assets are not considered taxable events.
How is cryptocurrency taxed?
Good news for those who HODL cryptocurrencies – investors who hold their digital assets long term without selling – are not taxed. Specific tax rates on the new asset class depend on three main factors in the United States.
- The method which is used for calculating gains.
- How long the coins were held before selling.
- Overall annual income excluding cryptocurrencies and your tax filing status.
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There are two methods for accounting for capital gains for cryptocurrencies that could yield very different results. After figuring out the profits under the chosen accounting method, they would be classified as either long-term or short-term capital gains depending on the period in which the digital assets were held. Short-term gains would be added to your regular income and subject to your ordinary income bracket.
In contrast, if you had made losses when you sold or spent your cryptocurrencies, you would not owe anything in taxes.
How to calculate how much you owe in taxes
The IRS states that investors can identify the coins they are selling as long as there are detailed records. According to the highest cost basis method, also known as Highest-in-First-out (HIFO) accounting, you could be subject to lower taxes as calculated with least amount of gains.
If you do not have a detailed trading history, the accounting method would automatically default to First-in-First-out (FIFO), where it would be assumed that you are selling the earliest purchased unit of crypto asset regardless of price.
After recording the gains under the preferred accounting method, the gains are categorized as either short-term or long-term capital gains depending on the duration of which the coins were held.
Short-term gains are calculated when you have held the cryptocurrencies for less than 12 months. These capital gains also count toward cryptocurrency tax and are then added to your regular income and it would be subject to your ordinary income tax bracket.
Your capital gains would be considered as long-term if you sell your tokens after holding them for over 12 months. These gains would be subject to taxes on crypto that range from the 0% to 20% tax brackets.
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For an individual that has made capital gains of $40,000 or less during the fiscal year, the investor would be subject to a 0% tax rate. However, individuals who have made over $40,000 during this period would be subject to a tax rate of 15%.
How to minimize taxes when trading crypto
To put it into perspective, in order to minimize taxes when trading crypto, investors should use the HIFO method to account for the capital gains. For example, if an investor purchased two Bitcoins – one at $3,000 and one for $10,000 – in 2020 and sold both BTCs in early 2021 at $40,000, the FIFO method would result in gains of $37,000, while the HIFO method would rack up capital gains of $30,000.
This means that your Bitcoin taxes would depend on whether you use the HIFO or FIFO accounting method.
Should you encounter any losses when trading cryptocurrencies, you could also use them to offset capital gains. However, investors should note that there are still certain limitations in offsetting capital gains set by the IRS.
Other credits, exemptions and deductions could also lower your overall taxable income.
How to report your crypto taxes
For inventors that have interacted with cryptocurrencies, it would most likely result in a taxable event. When filling out tax forms, the IRS has placed a question at the top of Form 1040 asking whether you have received, sold, exchanged or acquired a financial interest in virtual assets. This means that investors can no longer claim that they were not aware that it is required to report crypto capital gains.
- To report digital asset capital gains for your tax return, you would need to gather a list of all your exchanges and transactions, including any 1099 forms the crypto exchanges sent to you.
- Then, use the aforementioned accounting methods to calculate your capital gains and losses.
- You would also need to fill out IRS Form 8949 for all events that are considered taxable as property.
- Then transfer totals from the 8949 form to Form 1040 Schedule D.
- Finally, you would also need to fill out any outstanding cryptocurrency income on Form 1040.
Failure to report income, including that earned from the sale of digital assets, could result in the IRS levying penalties. Therefore, investors should take note of taxes on cryptocurrencies. It would be wise to consult with a tax planning professional regarding cryptocurrency taxes and individual reporting obligations.
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