What is the Cryptocurrency Tax Rate?

Posted by in Crypto | Updated on August 23, 2022

The IRS is coming down heavily on crypto tax compliance. It is therefore important that you understand just how crypto is taxed. 

Any time a taxable event affects your cryptocurrency investments, you are obligated to report this on your taxes.

When it comes to cryptocurrency, there are two types of taxable events: capital gains tax events and income tax events. These two types of taxable events are charged at different tax rates.

Although there are some complications associated with cryptocurrency tax rates, in principle they are treated exactly like stocks or bonds, or income-generating events.

What is the Cryptocurrency Tax Rate?

There are two different ways in which you can be taxed on your cryptocurrency assets.

Firstly, if you buy or sell cryptocurrency, you will be subjected to capital gains tax. The cryptocurrency tax rate is based on the IRS ruling (2014) that dictated all crypto should be treated like stocks or bonds. This means the cryptocurrency tax rate is the same as the tax rates on capital assets, rather than a fiat currency (like Euros or dollars). You have to pay taxes whenever you sell your capital assets at a profit.

Secondly, if cryptocurrency is part of your income, then you need to pay income tax on it. Then the cryptocurrency tax rate will be the same as the tax rate that applies to the rest of your taxable income. 

Short-Term Gains

A capital gains tax is a tax on the growth in value of capital assets incurred when you sell those assets. In this case, your assets are your crypto coins. When you sell your crypto, the capital gains are referred to as having been “realized.”

The tax doesn’t apply to unsold assets or “unrealized capital gains”. So even if your crypto coins gain value each year, they will not incur capital gains taxes until they are sold, no matter how long you happen to hold them.

Short-term capital gain results from the sale of a crypto asset that you have owned for one year or less. Long-term capital gains are generally taxed at a more favorable rate than your salary or wages income. But gains that are classified as short-term do not benefit from any special cryptocurrency tax rates. They are subject to taxation as ordinary income.

In 2021, the cryptocurrency tax rate for federal taxes ranged from 10-37% for short-term capital gains.

Long-Term Gains

As we have seen, your cryptocurrency tax rate is calculated based on how long you have held the cryptocurrency. If you have owned coins for more than 366 days, this is considered a long-term investment. If you sell these coins now, they will be subject to long-term capital gains tax rates

The cryptocurrency tax rate on long-term gains is between 0-20%, based on what your ordinary income tax rate is.

Capital Gains Tax Events

For the long or short-term cryptocurrency tax rate to apply, you must first sell your asset. If you sell your asset at a profit, this is known as a capital gains tax event.

Sometimes, it is obvious that you have sold an asset, like when you sell your crypto and get fiat currency (like Euros or dollars) in return. 

But some capital gains taxes are more opaque.

For instance, say you bought bitcoin for $150 pre-2014 and it is now worth $56,000. Even if you now use this bitcoin to buy something new, you would need to pay capital gains tax on the profit you made on your bitcoin. It is a taxable event when you use a cryptocurrency to buy something.

Swapping or trading one crypto asset for another is also a taxable event. If you make a capital gain or loss on the exchange, you need to declare it on your tax report.

On the other hand, if you just transfer an asset from one exchange or wallet to another, this is not a taxable event. You still own the same assets as you did before – they are just being stored in a different place.

Income Tax Events

When you make income from a cryptocurrency, you also need to pay income tax.

Mining crypto is considered an income tax event. You are earning an asset, and this counts as income. This means you can get business tax deductions on the resources and equipment you used to mine your cryptocurrency. Income from cryptocurrency is treated the same way as any other income tax event.

If you are paid for a task in crypto, this is income and should be declared on your tax return.

If you earn interest on your crypto assets (whether this income is crypto interest or fiat interest) is an income tax event and should be declared on your tax return.

Airdrops and hard forks are also considered crypto income and will be taxed according to cryptocurrency income tax rates.

You can also make and receive donations using cryptocurrency. These are treated in the same way as cash donations and are tax-deductible.

Crypto gifts below $15,00 are not subject to gift taxes. If you receive a crypto gift and decide to sell that gift, you will be subject to capital gains tax.

Is Cryptocurrency Taxed Like Stocks?

Cryptocurrencies are taxed like capital assets. Stocks and bonds are other examples of capital assets. This is important, as it differentiates cryptocurrencies from fiat currencies like Euros or Dollars. Crypto transactions are capital asset transactions, not currency exchanges. 

Because cryptocurrency is taxed like stocks, you have to pay capital gains taxes on short-term gains and long-term gains.

Just like stocks, you only owe capital taxes on crypto if you sell or spend it and realize a profit. If you incur a loss, you don’t owe any taxes on that transaction, although you must still report these crypto losses when filing your tax report.

Capital losses on your cryptocurrency transactions can be beneficial for tax savings. By using a strategy called tax-loss harvesting, you can sell your cryptocurrency assets when in a loss position to offset other capital gains.

Read More

Conclusion

When it comes to cryptocurrency, there are two types of taxable events: capital gains tax events and income tax events. These two types of taxable events are charged at different tax rates.

Short-term capital gains result from the sale of a crypto asset that you have owned for one year or less. If you have owned coins for more than 366 days, this is considered a long-term investment.

Long-term capital gains are generally taxed at a more favorable rate than your salary or wages income. But gains that are classified as short-term do not benefit from any special cryptocurrency tax rates. They are subject to taxation as ordinary income.

When you make income from a cryptocurrency, you need to pay income tax.


Need a Loan? Get One in 3 Simple Steps

If you are considering applying for a personal loan, just follow these 3 simple steps.

Apply

Apply online for the loan amount you need. Submit the required documentation and provide your best possible application. Stronger applications get better loan offers.

Accept

If your application meets the eligibility criteria, the lender will contact you with regard to your application. Provide any additional information if required. Soon you’ll have your loan offer. Some lenders send a promissory note with your loan offer. Sign and return that note if you wish to accept the loan offer.

Repay

The loan then gets disbursed into your U.S. bank account within a reasonable number of days (some lenders will be as quick as 2-3 business days). Now you need to set up your repayment method. You can choose an autopay method online to help you pay on time every month.

CTA

About Stilt

Stilt provides loans to international students and working professionals in the U.S. (F-1, OPT, H-1B, O-1, L-1, TN visa holders) at rates lower than any other lender. Stilt is committed to helping immigrants build a better financial future.

We take a holistic underwriting approach to determine your interest rates and make sure you get the lowest rate possible. 

Learn what others are saying about us on Google, Yelp, and Facebook or visit us at https://www.stilt.com. If you have any questions, send us an email at [email protected]