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If you have sold or disposed of your crypto over the past year, you may be subject to capital gains taxes. It is important to understand how different capital gains taxes work to file your crypto taxes correctly and minimize the bill.
In this article, we discuss all the basics you need to know about capital gains and a detailed guide to long-term vs. short-term capital gains taxes for your crypto.
What is Capital Gains Tax on Cryptocurrency?
The profit that you earn anytime you dispose of your crypto is your capital gains. Since crypto is viewed as a form of capital asset, you need to pay capital gains taxes on the profits you have made from disposing of your asset.For instance, if you buy BTC for 1000$ and sell it at 1500$, the profit of 500$ is your capital gains. However, if you buy BTC for 2000$ but later sell it for 1200$, the difference of 800$ is considered a capital loss and can be used to offset your taxes.
There are three disposals of crypto where you earn capital gains:
- Selling cryptocurrency for fiat
- Trading one crypto for another crypto
- Using crypto to purchase goods or services
Understanding Long-Term vs. Short-Term Capital Gains Tax on Crypto
As per IRS, you are taxed differently on your crypto assets based on how long you have held them. If you sell your crypto in less than a year, your capital gains taxes are considered short-term. In case you hold your crypto for more than twelve months, your taxes fall under the long-term capital gains taxes. Both of these types of capital gains taxes have different tax rates depending on the period of Holding, filing status, and your income bracket for the year.
Taxable Events for Your Crypto
As discussed above, there are three ways to dispose of your crypto assets that trigger capital gains taxes. Let’s look at them in detail.
- Selling Crypto- You are taxed on your capital gains when you sell your crypto for fiat currency. For instance, if you buy BTC for $1000 and then after eight months sell it for $1200, a short-term capital gains tax is applicable on your profit of $200. The same applies even if the transaction falls under the long-term capital gains category.
- Trading One Crypto For Another- This event is triggered when you exchange one crypto for another crypto asset. For example, if you buy BTC for $1000 and when it reaches $1200, you exchange it for ETH, the capital gains of $200 on your BTC is taxable.
- Spending Crypto To Buy Goods And Services- As per IRS, using cryptocurrency for purchasing goods or services is taxable. Let’s say you buy Bitcoin worth $500 and after 5 years the value of the same reaches $10,000. If you now use this crypto to buy a house, you incur taxable long-term capital gains of $9500.
Crypto Capital Gains Tax Exceptions
Non-fungible tokens (NFTs) are an exception in the capital gains category as they are subject to a fixed 28% tax rate regardless of the holding period. This must be kept in mind as you may need to pay higher taxes while buying or selling NFTs.The Net Investment Income Tax (NIIT) also adds a 3.8% tax surcharge to individuals with a modified adjusted gross income of more than $200,000 and $250,000 for married couples filing jointly. Your state may also have separate tax rates from the federal depending on your location.
Crypto Capital Gains Tax Rate for 2023
There isn’t any fixed capital gains tax rate for your crypto assets. Depending on whether your assets fall under the long-term or short-term capital gains category and your income for the year, the tax rate may vary.
Here’s a breakdown of the crypto tax rates for the financial years 2022 and 2023 respectively.
Short-Term Capital Gains Tax Rate
Your short-term capital gains tax on crypto are based on the Federal Income Tax rates and are the same as the rates on your taxable income. It ranges from 10-37% tax rate depending on your income and filing status.
For the year 2022, the tax rates are:
Here are the tax rates for the financial year 2023 (taxes due in April 2024):
Long-Term Capital Gains Tax Rate
If you hold your crypto assets for more than a year, you are taxed under long-term crypto tax rate which is lower for most investors. If your income is less than $41,676 including your crypto, you don’t have to pay any long-term capital gains tax.If you earn more than the mentioned income, you are subject to a tax rate of 15% or 20% depending on your taxable income and filing status.
Here’s the long-term capital gains tax rate for the 2022 financial year.
For the financial year 2023, here’s the tax rate for long-term capital gains on crypto
Calculate Crypto Capital Gains Tax
Now that you understand the difference between long-term vs. short-term capital gains taxes, the next question arises - how do you calculate crypto capital gains?
To do this, you need to first find out your cost basis. This value is simply the amount you spent acquiring the crypto including any transaction fees. If you didn’t spend anything to acquire the crypto, in case it was gifted to you, consider its fair market value on the day you received it as your cost of acquisition.
Your capital gain or loss is the difference between the crypto disposal value and your cost basis.
Looking to calculate your crypto taxes in seconds and reduce your tax bill? Use crypto tax calculators like Kryptos to avoid manual calculations and prevent errors. Simply import all your transactions and leverage automated functions to save huge taxes on your crypto. Once done, you can generate free tax reports that comply with your local laws.
FAQs
1. What's the difference between long-term and short-term capital gains on crypto?
Long-term capital gains arise when you dispose of your crypto assets after holding them for more than twelve months. In contrast, short-term capital gains are applicable when you sell or trade your crypto within a year of acquisition. The tax rates for these two categories differ based on the holding period, your income bracket, and filing status.
2. How are long-term vs. short-term capital gains taxed for cryptocurrency transactions?
Short-term capital gains on crypto are taxed based on Federal Income Tax rates, which are the same as your regular taxable income rates, ranging from 10-37%. Long-term capital gains, on the other hand, enjoy more favorable tax rates, often lower for most investors, ranging from 0% to 20% based on your taxable income and filing status.
3. Which crypto transactions trigger long-term vs. short-term capital gains taxes?
Selling cryptocurrency for fiat, trading one crypto for another, and using crypto to purchase goods or services are the primary transactions that can trigger capital gains taxes. The classification as long-term or short-term depends on how long you've held the crypto before the disposal.
4.Are there any exceptions to the standard long-term vs. short-term capital gains tax rates for crypto?
Yes, Non-fungible tokens (NFTs) are an exception. They are taxed at a fixed 28% rate regardless of the holding period. Additionally, the Net Investment Income Tax (NIIT) may add a 3.8% tax surcharge for certain high-income individuals.
5. How can I calculate my long-term vs. short-term capital gains on crypto?
To calculate your capital gains, determine your cost basis, which is the amount you spent acquiring the crypto, including any transaction fees. Subtract this cost basis from the disposal value of the crypto to get your capital gain or loss. Tools like crypto tax calculators can automate this process and ensure accuracy.
All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!
