Crypto Taxes and Accounting

Everything You Need To Know About Cryptocurrency Tax Rates

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October 21, 2021
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    Have cryptocurrency tax rates got your head spinning? Don’t worry, we’ve got you covered. 

    The rise of cryptocurrencies and the high profits that can come with them have driven governments to rethink and, in many cases, tighten their taxation policies to regulate crypto-based profits. 

    Yet the value of cryptocurrencies is ever-changing and fast-moving, and therefore so is what an investor potentially earns when they buy and sell digital currencies. It’s much like securities growth investing, where securities are often bought and sold in quick turnarounds. In both cases,  keeping track of all digital currency transactions takes some effort. To boot, there’s currently no global, standardized framework for current regulatory taxation frameworks. 

    It’s worth pausing for a minute to get your bearings. Like any other asset class, you will pay tax if you sell for a profit. Check out our comprehensive list of the hows and whys that will get you through this tax season (and the next!) with dollars in your pocket. 

    The Basics: Tax Rates For Cryptocurrency

    Before we start with the cryptocurrency tax rates, let’s brush up on the basics of cryptocurrency tax rates.

    Taxability Of Cryptocurrency

    According to the Internal Revenue Service (IRS), cryptocurrency is considered as property and is taxed similarly to stocks, real estate, and other similar assets and not currency. The Notice 2014-21 of the Internal Revenue Service states the various provisions related to crypto tax rates and the various cryptocurrency-related events that are taxable. 

    Tax Rates On Cryptocurrency

    Cryptocurrency tax rates are all about short-term capital gains vs. long-term capital gains tax. Let’s break it down.

    A capital gain occurs if an asset’s value increases between the time it’s purchased and the time it’s sold. If you buy a stock for $10 and sell it for $20, you’ve experienced a capital gain. On the flip side, if you sell it for less than you paid for it you’ve experienced a capital loss.

    The IRS is, no surprise, interested in your capital gains. It uses its own calculation, called an adjusted basis, to find out whether or not there’s been one. Typically, the adjusted basis of an asset, any asset, is what you paid for it. If you paid less than its market value or received it as a gift, that capital gain (aka the adjusted basis) is derived from the item’s fair market value at the time you were given the item. 

    After an adjusted basis, the next differentiator is whether you will pay short-term or long-term capital gains tax on cryptocurrency. The keyword here is duration. How long you hold the asset impacts the tax rate.  

    Long-Term Vs. Short-Term Capital Gains

    Your holding period also dictates the tax rate on cryptocurrency: whether you pay income tax rates or capital gains tax rates depend on how long you hold. You will pay short-term capital gains tax if you hold an asset for less than a year and long-term capital gains tax if you hold it for more than a year.

    Here’s an example of how capital gains are calculated: Imagine you buy 60 shares of stock valued at $100 each. Six months later, you sell those 60 shares for $120 each, a total of $7200. Your capital gain is the purchase price, $6000, subtracted from the final sale price, $7200. You will realize a short-term capital gain of $1200. 

    Note that if the stocks had been held for six years, instead of six months, you would have paid long-term capital gains tax. 

    What Is The Tax Rate On Cryptocurrency Gains? 

    Cryptocurrency gains are taxed exactly the same as any other asset. It’s quick math. The purchase price is subtracted from the purchase price to determine the adjusted basis, and then consideration of how long you held the asset.

    See below for 2021’s federal income tax brackets.

    Short term capital gains tax (crypto and other assets owned for less than 1 year) brackets are:

    Tax rate Single filer Married filing jointly Married filing separately Head of household
    10% $0 to $9,950 $0 to $19,900 $0 to $9,950 $0 to $14,200
    12% $9,951 to $40,525 $19,901 to $81,050 $9,951 to $40,525 $14,201 to $54,200
    22% $40,526 to $86,375 $81,051 to $172,750 $40,526 to $86,375 $54,201 to $86,350
    24% $86,376 to $164,925 $172,751 to $329,850 $86,376 to $164,925 $86,351 to $164,900
    32% $164,926 to $209,425 $329,851 to $418,850 $164,926 to $209,425 $164,901 to $209,400
    35% $209,426 to $523,600 $418,851 to $628,300 $209,426 to $314,150 $209,401 to $523,600
    37% $523,601 and up $628,301 and up $314,151 and up $523,601 and up

    Long term capital gains tax (crypto and other assets held for more than 1 year) brackets are:

    Tax rate Single filer Married filing jointly Married filing separately Head of household
    0% $0 to $40,400 $0 to $80,800 $0 to $40,400 $0 to $54,100
    15% $40,401 to $445,850 $80,801 to $501,600 $40,401 to $250,800 $54,101 to $473,750
    20% $445,851 or more $501,601 or more $250,801 or more $473,751 or more

    Tax Events: Capital Gains Tax Events & Income Tax Events

    Now that we know the various tax rates for long-term and short-term capital gains, it is essential to understand whether they are capital gains or income taxes because they are taxed differently.

    So what exactly is a taxable event? Any event that results in the realization or triggering of profits, is referred to as a taxable event. Here’s a list of all crypto events categorized as capital gain events and income tax events:

    Capital Gains Tax Events

    The following events qualify as capital gains tax events:

    • Buying goods and services
    • Selling crypto in exchange for fiat currency
    • Swapping one crypto for another

    Income Tax Events

    • Earnings from DeFi
    • Bounty bonuses
    • Receiving crypto via airdrop
    • Earning crypto from staking and liquidity pool
    • Crypto mining rewards

    Is Cryptocurrency Taxed In The Same Way That Stocks Are?

    Simply put, cryptocurrencies are taxed similar to stocks. The tax rate for cryptocurrency is based on an IRS judgment, issued in Notice 2014-21, that said that all cryptocurrencies should be regarded as stocks or bonds (also known as capital assets) rather than fiat money (like US dollars, Euro or Yen).

    When you sell your capital assets for a profit, you must pay taxes. As a result, if you buy goods or services using digital currency and the quantity of crypto you spend has grown in value above what you bought for it, you will be subject to capital gains tax.

    Let’s take a look at an example. 

    Suppose you bought Ethereum for $6,000 and sold it for $8,000. Your taxable capital gain would thus be $2,000. However, if you sold it for $5,000 instead, you wouldn't owe any taxes because you made a loss of $1,000.

    Capital losses on bitcoin trades might potentially help you save money on taxes. You can sell your bitcoin assets when they are in a loss position to offset any capital gains using a method known as tax-loss harvesting.

    The Takeaways

    And that’s all you need to know about cryptocurrency tax rates.

    One caveat: Keep track of your transactions as you make them throughout the fiscal year. That way, you won’t be surprised by the tax rates on your cryptocurrency holdings, and you’ll be prepared when tax time inevitably rolls around. You may find yourself making a strategic sale to minimize short-term capital gains, or -- who knows? -- earn a tax refund. After all, success is 90% preparation, 10% perspiration.

    ZenLedger easily calculates your crypto taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!

    We’ve put together a few articles in this series to help you learn and explore all the dimensions of tax on cryptocurrencies:

    Cryptocurrency Tax Rates FAQs

    1. What are capital gains taxes?

    A capital gain occurs if an asset’s value increases between the time it’s purchased and the time it’s sold. If you buy a stock for $10 and sell it for $20, you’ve experienced a capital gain. On the flip side, if you sell it for less than you paid for it you’ve experienced a capital loss.

    2. What are the tax implications of gifting or inheriting cryptocurrencies?

    You can gift crypto below $15,000, above which you’ll have to pay gift tax. If you want to sell the gift that you’d received, you’ll qualify for a crypto capital gains tax and the cost basis will be the same as the gift donor. Inheriting crypto assets will qualify for the same regulation as that of other assets.

    3. What happens if you don't report tax on cryptocurrencies?

    The Internal Revenue Service (IRS) considers cryptocurrency as ‘property’ and considers their taxes in a similar way. In case you do not report your taxes, you can face a tax audit.

    In case you haven’t paid your taxes, the IRS is most likely to send you a deficiency notice. This is when you must pay the debt or contest the notification, or else, you’ll be at risk of paying a 20% understated penalty. However, if the IRS discovers that you purposefully underreported your earnings the penalty could be up to 75% of the underpayment.

    4. Do I have to report crypto on taxes if I don't sell?

    The IRS compels you to record your crypto profits and losses even if you don't get any tax forms. Any event that results in the realization or triggering of profits, is referred to as a taxable event. If you incur any taxable event, that can result in capital gains tax rate on your Bitcoin profits or an event that results in income taxes. You must report these to the IRS on the relevant tax forms.

    5. What is the tax rate on cryptocurrency gains?

    A capital gain occurs if an asset’s value increases between the time it’s purchased and the time it’s sold. If you buy a stock for $10 and sell it for $20, you’ve experienced a capital gain. On the flip side, if you sell it for less than you paid for it you’ve experienced a capital loss. As of 2021, the short-term capital gains tax on cryptocurrency ranges from 10% to 37%, and the long-term capital gains tax on cryptocurrency ranges from 0% to 20%.

    6. Do I have to pay taxes if I am a Bitcoin miner?

    In the guidelines issued by the Internal Revenue Service (IRS), Bitcoin mining is a taxable event. For calculating the tax rate on cryptocurrency mining, the fair market value (FMV) at the time of mining is used to calculate the revenue that the miner has earned.

    A Bitcoin miner can also deduct some of the expenses of mining, such as equipment and resources charges as business expenses. However, these deductions depend on whether you are mining for personal benefit or for business purposes. If you are mining as a hobby, you will not be eligible for deductions. But if you are running your own mining business, you can easily claim business deductions.

    7. What are the IRS penalties for undeclared Bitcoin?

    The IRS considers not reporting your tax on Bitcoin profits to be tax evasion. Over the last several years, the department has taken a number of rigorous steps to eliminate any ambiguity regarding how crypto capital gains are taxed. A slight oversight can cause hefty losses and can cost you an arm and a leg.

    Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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