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 ass
Are you feeling overwhelmed by the complexities of crypto tax rates? No need to worry because we’ve got you covered.
The emergence of cryptocurrencies and the potential for substantial profits have prompted governments to reconsider and, in many instances, tighten their taxation policies to regulate the gains made from crypto investments.
However, the value of cryptocurrencies is highly volatile and constantly changing, which means that investors’ potential earnings fluctuate when they buy and sell digital currencies. This situation is similar to the rapid buying and selling of securities in growth investing. Keeping track of all digital currency transactions requires considerable effort. Furthermore, there is currently no universally accepted and standardized framework for regulating taxation in the crypto space.
Similar to any other asset class, if you sell cryptocurrencies for a profit, you will be subject to taxation. To navigate through this tax season and beyond, we have compiled a comprehensive list of explanations and reasons that will help you keep more money in your pocket.
The Basics: Crypto Tax Rates
Before we start with crypto tax rates, let’s brush up on the basics of cryptocurrency tax rates.
Taxability Of Cryptocurrency
As per the Internal Revenue Service (IRS), cryptocurrency is categorized as property and subject to taxation in a manner similar to stocks, real estate, and comparable assets, rather than being treated as currency. The IRS Notice 2014-21 outlines the different regulations concerning cryptocurrency tax rates and identifies the taxable events associated with cryptocurrencies.
Crypto Tax Rates
Cryptocurrency tax rates revolve around short-term capital gains vs. long-term capital gains tax. Let’s dive into the details.
When the value of an asset increases between the time of its purchase and sale, it results in a capital gain. For example, if you buy a stock for $10 and sell it for $20, you have realized a capital gain. Conversely, if you sell it for less than your initial purchase price, it leads to a capital loss.
Unsurprisingly, the Internal Revenue Service (IRS) is interested in your capital gains. To determine whether a gain has occurred, the IRS employs its own calculation called the “adjusted basis.” Typically, the adjusted basis of any asset, including cryptocurrency, is the amount you paid for it. However, if you acquired the asset for less than its market value or received it as a gift, the adjusted basis is derived from the item’s fair market value at the time you acquired it.
Once the adjusted basis is determined, the next factor to consider is whether you will be subject to short-term or long-term capital gains tax on your cryptocurrency. The key factor here is the duration of asset holding, as it impacts the applicable tax rate.
Long-Term Vs. Short-Term Capital Gains
The duration of your holding period determines the tax rate on crypto gains. Whether you pay income tax rates or capital gains tax rates depend on how long you hold the asset. If you hold the asset for less than a year, you will be subject to short-term capital gains tax. On the other hand, if you hold the asset for more than a year, you will be subject to long-term capital gains tax.
To illustrate how capital gains are calculated, let’s consider an example: Suppose you purchase 60 shares of stock at a value of $100 each. After six months, you sell these 60 shares for $120 each, resulting in a total sale amount of $7,200. To calculate your capital gain, subtract the purchase price of $6,000 from the final sale price of $7,200. In this case, you would realize a short-term capital gain of $1,200.
It’s important to note that if the stocks had been held for six years instead of six months, you would have been subject to long-term capital gains tax.
What Is The Tax Rate On Crypto 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 2023’s federal income tax brackets.
Short term capital gains tax (crypto and other assets owned for less than 1 year) crypto tax 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) crypto tax 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, which 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 covers everything you need to know about cryptocurrency tax rates.
However, there is one important caveat: it’s crucial to diligently track your transactions throughout the fiscal year. By doing so, you’ll avoid any surprises when it comes to the tax rates applied to your cryptocurrency holdings, and you’ll be well-prepared when the inevitable tax season arrives. This level of preparation may even enable you to strategically minimize short-term capital gains or potentially earn a tax refund. Remember, success is often 90% preparation and 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: how is cryptocurrency taxed
- Ways to put a lid on hefty crypto taxes
- Crypto tax calculator
- How to report cryptocurrency on taxes
- Bitcoin tax calculator
Cryptocurrency Tax Rates FAQs
1. What are capital gains taxes?
2. What are the tax implications of gifting or inheriting cryptocurrencies?
3. What happens if you don’t report tax on cryptocurrencies?
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?
5. What is the tax rate on cryptocurrency gains?
6. Do I have to pay taxes if I am a Bitcoin miner?
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?
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.
