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Long-term vs. Short-term Capital Gains in Crypto

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August 9, 2021
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    Did you buy, sell, or exchange cryptocurrency over the past year? If so, you may owe capital gains tax. The exact amount of tax you owe depends on many factors, including the amount of time you held the cryptocurrency. Understanding the capital gains tax rate is essential to minimize the amount of tax you pay each year.

    Let's take a look at long-term versus short-term capital gains and how you can minimize your crypto tax bill.

    What is a Capital Gain On Crypto?

    Before we get to understanding the differences between long-term vs short-term capital gain on crypto, let’s first understand what is a capital gain. Capital gains are profits that you make from selling a cryptocurrency—or any other asset for that matter. When you sell a digital asset like crypto for more than you paid to buy it, you must report that capital gain to the IRS on your income taxes. The amount of capital gains tax you owe depends on the holding period (as we'll see) and your income tax bracket.

    Capital gains taxes apply to all kinds of cryptocurrency transactions. For example, an investor that lends USDC on BlockFi and earns 8.6% interest must pay capital gains tax on the accumulated interest. Similarly, a crypto miner that mines one Bitcoin per year must pay income tax on the Bitcoin and capital gains tax if they sell the Bitcoin for U.S. dollars.

    At the end of each year, the IRS allows you to match your capital gains and losses to determine your net capital gain or loss. You can use up to $3,000 in net capital losses to offset your other taxable income, and any additional losses can be carried forward into future years to offset either capital gains or up to $3,000 per year in ordinary income.

    Note: There are no capital gains or losses in retirement accounts, such as IRAs or 401(k)s. As a result, you cannot use losses in these accounts to offset gains or other income. 

    Understanding Long-Term vs Short-Term Capital Gains for Crypto Taxation

    1. Short-Term Capital Gains Tax on Cryptocurrency

    Short-term gains occur when you buy, sell, or exchange crypto assets within one year. The holding period begins from the day you acquire the cryptocurrency and lasts up to (and includes) the day you sell it.

    So, how much is the short-term capital gains tax on cryptocurrency? The specific amount depends on your marginal tax rate, which changes each year.

    The 2021 marginal tax rates are:

    Rate Single Filers Married Filing Jointly
    10% Up to $9,950 Up to $19,900
    12% $9,951 to $40,525 $19,901 to $81,050
    22% $40,526 to $86,375 $81,051 to $172,750
    24% $86,376 to $164,925 $172,751 to $329,850
    32% $164,926 to $209,425 $329,851 to $418,850
    35% $209,426 to $523,600 $418,851 to $628,300
    37% $523,601 or more $628,301 or more

    Source: Taxfoundation

    Tax-deferred retirement accounts typically pay short-term capital gains tax rates upon withdrawal. For example, if you buy cryptocurrencies in a traditional IRA, you receive an immediate tax deduction and don't have to pay any tax until withdrawing the money. However, you typically pay short-term capital gains tax on these withdrawals.

    2. Long-term Capital Gains Gains Tax on Cryptocurrency

    Long-term capital gains occur when you buy, sell, or exchange crypto assets after one year. Again, the holding period begins the day you acquire the asset and ends the day you sell it.

    So, how much is the long-term capital gains tax on cryptocurrency? The specific amount depends on your income tax bracket, but low earners could pay nothing while high earners could save as much as 17% off their ordinary tax rate.

    The 2021 long-term capital gains tax rates are:

    Rate Single Filers Married Filing Jointly
    0% $0 $0
    15% $40,400+ $80,800+
    20% $445,850+ $501,600+

    Source: Taxfoundation

    What Are The Capital Gains Tax Exemptions on Cryptocurrency?

    Capital gains taxes apply to most asset sales, but there are a couple of exceptions to the rules—including one that applies to a popular class of cryptocurrencies!

    Collectible assets, such as collector cars and fine wines, are subject to a 28% collectibles tax rate regardless of the holding period. Unfortunately, non-fungible tokens (NFTs) tend to fall into this category. Therefore, Crypto traders and investors should keep these higher tax rates in mind when buying and selling NFTs in their portfolios.

    The Net Investment Income Tax (NIIT) adds a 3.8% surcharge to certain investments held by individuals, estates, and trusts. These taxes apply to individuals with a modified adjusted gross income of more than $200,000 for individuals or $250,000 for married couples filing jointly. The tax is calculated, reported, and filed on Form 8960.

    Of course, states may also have capital gains tax rates separate from the federal rates. For example, New York's long-term capital gains tax rates can reach up to 31.5%, consisting of a 20% national and 11.5% state rate.

    Handy Checklist of Crypto Tax Saving Strategies

    You can use several strategies to minimize your tax exposure, ranging from simply holding assets longer to implementing complex strategies.

    The most widespread strategies include:

    • Hold cryptocurrencies for more than one year. You can pay long-term capital gains tax rates by keeping cryptocurrencies for more than a year before selling them.
    • Invest in tax-free or tax-deferred accounts. You could avoid capital gains taxes altogether or delay them by investing in Roth IRAs, 401(k)s, and other tax-advantaged accounts.
    • Harvest your tax losses throughout the year. Tax-loss harvesting involves selling losing positions to realize a capital loss in the current year and then replacing them in your portfolio.
    • Choose the proper accounting methods. The IRS lets you use FIFO, LIFO, and Minimization methods to adjust the holding periods for tax lots. Choosing the correct technique can help you save.
    Crypto Tax Software
    ZenLedger Dashboard

    ZenLedger helps aggregate transactions across multiple wallets and exchanges and automatically computes your capital gains and losses. In addition, the platform makes it easy to implement strategies like tax-loss harvesting to minimize your taxes each year.

    Try ZenLedger for free!

    The Bottom Line

    Crypto traders and investors should always keep in mind long-term versus short-term capital gains taxes. Using the strategies we've covered and a platform like ZenLedger, you can minimize your tax bill each year and avoid any problems with the IRS.

    Get Started Now

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