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Anyone who is seriously involved in the cryptocurrency market needs to be aware of the tax ramifications because they have a big impact on overall strategy. The US IRS views cryptocurrency as either capital gains or income, depending on the type of taxable event that produced the profits.
Numerous factors, which we will discuss in this article, will determine your crypto tax rate. Generally speaking, Bitcoin, Ethereum, and other altcoins are all subject to the same tax treatment by the IRS.
Navigating the world of cryptocurrency taxes can be complex, especially with ever-changing regulations and tax rates. This comprehensive guide will delve into the intricacies of capital gains tax on cryptocurrency in the US, providing you with the knowledge and tools to accurately calculate and report your crypto taxes.
Key Takeaways:
- Capital gains tax applies to profits made from selling, trading, or spending cryptocurrency.
- The tax rate depends on the length of time you held the asset and your taxable income.
- Short-term capital gains (assets held less than a year) are taxed at your ordinary income tax rate.
- Long-term capital gains (assets held more than a year) are taxed at lower rates, ranging from 0% to 20% depending on your income.
- NFTs deemed collectibles may be taxed at a higher rate of 28%.
- Utilize cost basis methods like FIFO, LIFO, or HIFO to optimize your tax liability.
- Explore tax-saving strategies like tax loss harvesting and gifting under the annual gift tax exclusion.
Understanding Capital Gains Tax on Crypto
When you dispose of cryptocurrency (selling trading, or spending), you may incur capital gains tax on any profit you made. The tax rate depends on two factors:
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Holding Period:
- Short-term: Assets held for less than a year are taxed at your ordinary income tax rate.
- Long-term: Assets held for more than a year are taxed at lower rates:
- 0% for income below $44,625 (2023) or $47,026 (2024)
- 15% for income between $44,626 and $492,300 (2023) or $47,026 and $518,900 (2024)
- 20% for income above $492,300 (2023) or $518,900 (2024)
- NFTs as Collectibles: NFTs deemed collectibles may be taxed at a higher rate of 28%.
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Taxable Income: Your overall taxable income influences the capital gains tax rate you pay.
Calculating Capital Gains Tax:
To calculate your capital gains tax, follow these steps:
- Determine your cost basis: This includes the purchase price and any associated fees. If the crypto was a gift, use its fair market value in USD on the day you received it.
- Subtract the cost basis from the sale price to find your gain or loss.
- If you have a gain, you’ll pay capital gains tax on that gain.
- If you have a loss, you can use it to offset gains or reduce your taxable income.
Cost Basis Methods:
The cost basis method you choose can significantly impact your tax bill. Here are the common methods:
- First In First Out (FIFO): The first asset you bought is the first asset you sold.
- Last In First Out (LIFO): The last asset you bought is the first asset you sold.
- Highest In First Out (HIFO): The most expensive asset you bought is sold first.
- Specific Identification (Spec ID): Pick the asset you sold, provided you can identify it with records.
Tax-Saving Strategies:
- Tax Loss Harvesting: Use capital losses to offset gains and reduce your tax bill.
- Gifting under Annual Gift Tax Exclusion: Gift up to $17,000 in crypto per person tax-free.
- Long-Term Capital Gains Rate: Hold your crypto for over a year to qualify for lower tax rates.
Reporting Crypto Income:
Crypto income is taxed at your ordinary income tax rate and is reported on Form Schedule 1 (1040) or Form Schedule C (1040). This includes:
- Getting paid in crypto.
- Mining crypto (on a hobby level).
- Receiving an airdrop.
- Receiving new coins from a hard fork.
- Staking rewards.
- Referral bonuses.
- Earning interest through lending protocols.
- Earning new liquidity pool tokens, governance, or reward tokens on DeFi protocols.
Filing Your Crypto Taxes:
File your crypto taxes with your annual tax return using Form Schedule D (1040) and Form 8949 for capital gains and losses, and a crypto tax app like Koinly to generate accurate reports.
Understanding capital gains tax on cryptocurrency is crucial for ensuring compliance and optimizing your tax liability. Utilize the information and strategies in this guide to navigate the complex world of crypto taxation and file your taxes accurately.
Crypto taxes for moving crypto between wallets
Transferring cryptocurrency between wallets does not result in a taxable event as long as you just move the tokens and do not exchange them for another cryptocurrency or convert them to fiat money while transferring the asset.
Crypto taxes for adding/removing liquidity from DeFi protocols
Participating in a DeFi liquidity pool may result in tax ramifications. Under some circumstances, exchanging your cryptocurrency for a liquidity pool token that represents your share of the pool could result in a taxable event that is subject to standard capital gains regulations. On the other hand, taxation happens when you claim rewards tokens after locking your coins in the pool.
When one leaves a liquidity pool and realizes gains or losses, there’s a chance of another taxable event. Uncertainty has resulted from the absence of explicit IRS guidelines on liquidity mining. It’s possible that the IRS will treat liquidity mining rewards similarly to how they treat coins from airdrops and forks, treating them as income rather than capital gains.
Crypto Taxes Explained For Beginners | Cryptocurrency Taxes
Do you have to pay capital gains tax on crypto?
You’ll need to report the amount on your income tax return and pay ordinary income taxes on the amount received. Here’s the good thing about crypto and taxes: If you’re required to pay capital gain taxes, the tax rate will be smaller than your ordinary income tax rate. For the 2023 tax year, the capital gains tax rates are 0%, 15%, and 20%.
How are cryptocurrency profits taxed?
If you owned the cryptocurrency for one year or less before spending or selling it, any profits are typically short-term capital gains, which are taxed at your ordinary income rate. If you held the cryptocurrency for more than one year, any profits are typically long-term capital gains, subject to long-term capital gains tax rates.
How much tax do you pay if you sell cryptocurrency?
However, if you sell your cryptocurrency at a gain but have held it for only a year or less, you’ll be taxed at your ordinary income tax rate, which is determined by your income and filing status. For 2023, ordinary tax rates could be as high as 37%. How Much Do I Owe in Crypto Taxes?
How are crypto assets taxed?
Short-term capital gains: Profits from a crypto asset held less than a year are taxed at the same rate as whichever income tax bracket you’re in. Any losses can be used to offset income tax by a maximum of $3,000. Any further losses can be carried forward.