For investors new and old, cryptocurrency tax codes remain an area of confusion. The reporting rules seem to change every year, leaving many crypto investors to wonder: are we supposed to report our crypto transactions (short answer: yes, we are), and how? If you own Bitcoin, Ethereum, or another virtual currency, it’s important to educate yourself on the current tax rates and how to file crypto taxes properly. We’ll also share a few easy ways you could actually reduce the tax you owe on your crypto investments and activities. Questions we’ll answer in this article:
- How Is Cryptocurrency Taxed?
- What Is the Current Crypto Tax Rate?
- How Much Do I Owe in Cryptocurrency Taxes?
- How Do I Report Crypto Holdings on My Tax Returns?
- How Do I Minimize My Crypto Tax Burden?
Note: This article does not purport to offer tax advice. Consult with a professional tax advisor about your unique financial and/or tax circumstances.
How is cryptocurrency taxed?
Bitcoin is accepted by a growing list of merchants, but it’s not considered cash by the people in charge of the tax codes. The same goes for Dogecoin, Litecoin, and every other cryptocurrency and stablecoin available on exchanges. But while crypto is not the same as cash, every cryptocurrency transaction (such as a sale or exchange) has a tax implication. Current IRS guidelines classify virtual currency as property for federal tax purposes. This means that any tax principles that apply to property transactions will also apply to cryptocurrencies. Want to access the tax code literature? Read the complete IRS guidelines on virtual currency.
What is the current crypto tax rate?
Because cryptocurrency transactions are classified as property transactions, they are subject to taxes that result from capital gains and losses incurred. Selling a capital asset–like a stock, physical property, or cryptocurrency–for more than its purchase value results in a “capital gain.” How the IRS calculates your tax burden will depend on how long you have held each particular crypto investment. If you purchased cryptocurrency in 2021 (or earlier) and hold it beyond December 31, 2021, you will not be subject to paying capital gains taxes on it this year. If you trade or sell your position this year, you will be responsible for paying taxes on any net capital gains you have incurred.
Short term capital gains
Any gains on cryptocurrency that was held for less than a year is considered “short term.” Short term gains are considered regular taxable income, and are calculated based on your individual income tax bracket. So what is the crypto tax rate? Generally, the tax rate ranges from 10-37% for short-term capital gains.
|Rate||Single||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 or more||$628,301 or more||$314,151 or more||$523,601 or more|
Source: Internal Revenue Service
|Rate||Single||Married filing jointly||Married filing separately||Head of household|
|0%||Up to $40,400||Up to $80,800||Up to $40,400||Up 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%||Over $445,850||Over $501,600||Over $250,800||Over $473,750|
Source: Internal Revenue Service
Long term capital gains
Gains from cryptocurrency holdings kept for more than a year are considered “long term,” and are subject to different tax rates than short term capital gains. These rates are nearly always lower than rates on short term assets. What about the federal tax rate for long-term capital gains? The IRS has set the top federal long-term capital gains tax rate at 23.8%. Keep in mind that this is only the federal rate and depending on which state you live in, you’ll also likely owe additional taxes. For high income earners, this can mean paying 30-40% in taxes on your crypto.
How much do I owe in cryptocurrency taxes?
Assuming that you have made a net gain from your crypto transactions this year, chances are you will owe some tax on your capital gains events. We’ve broken down some factors that will help you determine how much you may owe in taxes this year. Keep in mind that:
- No two individuals will ever have identical incomes and assets, so general guidance can never replace direct advice from a qualified tax advisor that is unique to your own finances.
- With many ways to acquire or exchange virtual assets like cryptocurrency, it’s essential to research and determine which guidelines apply to your particular situation.
Will I be taxed if I purchase and hold crypto?
If you purchased cryptocurrency with a currency (like US dollars) and don’t sell or exchange it this year, you are not subject to taxes on the transaction, even if the cryptocurrency appreciates in value. You may be subject to capital gains taxes once you sell or exchange it.
If you trade a portion or all of a crypto holding for another crypto (e.g. exchanging bitcoins for ether), that is considered a taxable event. These transactions are considered “swaps” by the IRS, which are subject to taxation on gains of the originally-held asset. The IRS explains that, in this situation, “[y]our gain or loss is the difference between the fair market value of the property you received and your adjusted basis in the virtual currency exchanged.”
Fair market value: The price that a property would sell for on the open market. (Learn the most important crypto terms in our cryptocurrency glossary.)
Are crypto miners treated differently?
Selling mined cryptocurrency is subject to capital gains taxes, as is the sale of any other virtual currency. Crypto mining itself also constitutes a taxable event, but crypto acquired through mining is treated differently depending on whether you mine as a hobby or professionally. In general, hobbyists should report mined virtual currency on Form 1040 Schedule 1 as “Other Income,” while the professionals will report their earnings on Schedule C.
How is a crypto gift or inheritance treated?
If you receive crypto as a gift, you are not likely be taxed on the value of the holding until you sell or exchange that virtual currency. If and when you sell or exchange it, you must account for the holding period of the property, which includes the time that it was held by the person from whom you received it. Cryptocurrency inherited (from a relative, for example) is valued as of the testator’s date of death. It is subject to tax on any capital gains incurred from that date forward.
Forks, airdrops, and splits
If you hold a cryptocurrency that went through a hard fork and you received more of that token through an airdrop as a result, you are expected to report the fair value of this additional crypto as taxable income in the year that you received it. If a cryptocurrency undergoes a chain-split, and you receive additional coins as a result, taxable income is realized when you claim the coins. The income is equal to the value of the chain-split coins at the time of the claim.
Crypto as earned income
If you are an employee who receives payment in the form of Bitcoin or another cryptocurrency, the crypto you receive as wages is considered ordinary taxable income. To determine the taxable income, you must keep a record of the fair market value of the cryptocurrency on the date of each payment.
What if I use crypto to make purchases?
It is increasingly common to make purchases using cryptocurrency. If you pay for goods or services in virtual currency, you are subject to capital gains taxes. The gain or loss is determined by calculating the difference between the fair market value of the service received and the adjusted basis in the virtual currency that you used to make the payment.
Do crypto tax calculators work?
Cryptocurrency tax calculators are one of many tools that can assist you in determining your net gains and losses. We suggest looking into professional services or products that can help you accurately report your income on tax returns. Many online tools are affordable, secure, and user-friendly.
How do I report cryptocurrency holdings on my tax returns?
Few people enjoy filing their taxes, but you can make the process more painless by preparing ahead of time.
1. Track your transactions
Whether you purchased a few dollars worth of Dogecoin or you get paid weekly in Bitcoin, the easiest way to reduce the stress of tax season is to track all of your transactions in a spreadsheet. Include the following details:
- Date of Transaction
- Summary of the Transaction (e.g. I received 0.25 BTC for one month’s work)
- Fair Market Value of the Token on that Date (e.g. 1 BTC = $30,000 USD)
2. Fill out your tax forms on time
Forms for 2021 US Tax Returns are due by April 15, 2022. You may be required to complete one or more of the following forms:
Use this form to report on “Sales and Other Dispositions of Capital Assets.”
Form 1040 Schedule 1
Use this form to report “Additional Income and Adjustments to Income.”
Form 1040 Schedule C
Use this form to report “Profit or Loss from Business.”
Form 1040 Schedule D
Use this form to report “Capital Gains and Losses.”
3. Consider hiring a professional
If you find taxes confusing in general, you may want to seek assistance from a qualified professional. Tax advisors stay up to date on the latest IRS rules and regulations. Hiring one to work with you could be a wise decision, especially if you made a high number of trades or think you might have incurred significant capital gains this year.
How do I minimize my crypto tax burden?
1. Hold long-term
Many people get into crypto to make huge gains from quick trades. But if the short-term capital gains tax rates seem high, consider holding your crypto assets for at least a year.
2. Invest through a retirement plan
Crypto-backed retirement portfolios are a growing trend, especially among Millennials who see cryptocurrency as a more savvy long-term investment than stocks. Like traditional IRAs, cryptocurrency retirement portfolios allow account holders to trade without triggering taxable events.
3. Donate to charity
Crypto donations are not subject to capital gains tax and are also tax-deductible, similar to donations of appreciated stock. In essence, giving away some of your crypto to a nonprofit can help offset the capital gains you have incurred during the year.
How do I save on taxes by donating crypto?
For example, let’s say Joe buys 1 BTC when it is worth $1,000. Several years later, the value has doubled ($2,000) and he wants to sell it. As a result, Joe could have a capital gains of $1,000, which would then be subject to long-term capital gains taxes. But if Joe decides to donate the $1,000 in gains from his 1 BTC to a registered nonprofit organization, he might not need to pay any capital gains tax on what he earned from holding the BTC. Furthermore, Joe can write-off the $1,000 in itemized charitable deductions.
This case is only an oversimplified example, of course. But when crypto users look over annual gains towards the end of a calendar year, many choose to consider donating crypto to charity as a way to offset some of their captial gains. Our take? It’s hands-down one of the best ways to responsibly manage your taxes while demonstrating support for causes you care about deeply.