It's not the most exciting part of crypto investing, but if you do invest, you need to know how taxes on crypto work. Although cryptocurrencies are still new, the IRS is working hard to enforce crypto tax compliance.
There are quite a few ways that you can end up owing taxes on crypto, and even trading one cryptocurrency for another is a taxable event. If you don't keep accurate records, it can be hard to piece together your gains and losses at tax time. And, if you don't pay your crypto taxes, even if it's an honest mistake, you could end up suffering costly penalties.
This guide will explain everything you need to know about taxes on crypto trading and income. You'll learn about how to file crypto taxes, crypto tax rates, and other important details about this complex subject.
Do you pay taxes on crypto in the USA?
You're required to pay taxes on crypto. The IRS classifies cryptocurrency as property, and cryptocurrency transactions are taxable by law just like transactions related to any other property.
Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain. For example, if you buy $1,000 of crypto and sell it later for $1,500, you would need to report and pay taxes on the profit of $500. If you dispose of cryptocurrency and recognize a loss, you can deduct that on your taxes.
Buying crypto on its own isn't a taxable event. You can buy and hold cryptocurrency without any taxes, even if the value increases. There needs to be a taxable event first such as selling the cryptocurrency.
The IRS has been taking steps to ensure that crypto investors pay their taxes. Tax filers must answer a question on Form 1040 asking if they had any type of transaction related to a virtual currency during the year. Crypto exchanges are required to file a 1099-K for clients who have more than 200 transactions and more than $20,000 in trading during the year.
Crypto tax rates for 2021
Cryptocurrency tax rates depend on your income, tax filing status, and the length of time you owned your crypto before selling it. If you owned it for 365 days or less, then you pay short-term gains taxes, which are equal to income taxes. If you owned it for longer, then you pay long-term gains taxes.
Here are the cryptocurrency tax rates on long-term gains for the 2021 tax year:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0-$40,400 | $0-$80,800 | $0-$54,100 |
| 15% | $40,401-$445,850 | $80,801-$501,600 | $54,101-$473,750 |
| 20% | >$445,850 | >$501,600 | >$473,750 |
Data source: IRS.
Short-term gains are taxed as ordinary income. Here are the crypto tax brackets for the 2021 tax year on these short-term gains:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0-$9,950 | $0-$19,900 | $0-$14,200 |
| 12% | $9,951-$40,525 | $19,901-$81,050 | $14,201-$54,200 |
| 22% | $40,526-$86,375 | $81,051-$172,750 | $54,201-$86,350 |
| 24% | $86,376-$164,925 | $172,751-$329,850 | $86,351-$164,900 |
| 32% | $164,926-$209,425 | $329,851-$418,850 | $164,901-$209,400 |
| 35% | $209,426-$523,600 | $418,851-$628,300 | $209,401-$523,600 |
| 37% | >$523,600 | >$628,300 | >$523,600 |
Data source: IRS.
You can choose to sell older coins first to pay the lower long-term gains tax rates. Imagine you've been buying Bitcoin (CRYPTO:BTC) regularly for the past two years and now you've decided to sell some. By selling Bitcoin you've had for more than a year, it will be considered a long-term gain and you'll pay a lower crypto tax rate on it.
Crypto tax rates for 2022
The IRS adjusted the tax brackets for 2022 to follow inflation. Here are the long-term cryptocurrency tax rates that will apply when you file your 2022 tax return next year:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0-$41,675 | $0-$83,350 | $0-$55,800 |
| 15% | $40,676-$459,750 | $83,351-$517,200 | $55,801-$488,500 |
| 20% | >$459,750 | >$517,200 | >$488,500 |
Data source: IRS.
As previously noted, the IRS taxes short-term crypto gains as ordinary income. Here are the 2022 income tax rates that will apply to gains on crypto you held for 365 days or less:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0-$10,275 | $0-$20,550 | $0-$14,650 |
| 12% | $10,276-$41,775 | $20,551-$83,550 | $14,651-$55,900 |
| 22% | $41,776-$89,075 | $83,551-$178,150 | $55,901-$89,050 |
| 24% | $89,076-$170,050 | $178,151-$340,100 | $89,051-$170,050 |
| 32% | $170,051-$215,950 | $340,101-$431,900 | $170,051-$215,950 |
| 35% | $215,951-$539,900 | $431,901-$647,850 | $215,951-$539,900 |
| 37% | >$539,900 | >$647,850 | >$539,900 |
Data source: IRS.
How to determine if you owe crypto taxes
You owe crypto taxes if you spend your crypto and it has increased in value from when you first bought it. Here are the different types of taxable events for cryptocurrency transactions:
- Selling cryptocurrency for a fiat currency
- Using cryptocurrency to purchase goods or services
- Trading different types of cryptocurrency
These are only taxable events if the value of your crypto has gone up. To determine if you owe crypto taxes, you need the cost basis, which is the total amount you paid to acquire your crypto. Then you compare that to the sales price or proceeds when you used the crypto.
Let's say you previously bought one Bitcoin for $20,000. Here are examples of taxable events:
- If you sell one Bitcoin for $50,000, you'd report $30,000 in gains.
- If you use one Bitcoin to purchase a $45,000 car, you'd report $25,000 in gains.
- If you trade one Bitcoin for $60,000 of another cryptocurrency, you'd report $40,000 in gains.
Trades between coins are where crypto taxes get complicated. A crypto trade is a taxable event. If you trade one cryptocurrency for another, you're required to report any gains in U.S. dollars on your tax return.
Every time you trade cryptocurrencies, you need to keep track of how much you gained or lost in U.S. dollars. That way, you can accurately report your crypto gains or losses. If you'd rather keep it simple, cryptocurrency stocks could make it easier to track gains and losses compared to buying and selling specific coins.
How to report crypto on taxes
Crypto gains and losses are reported on Form 8949. To fill out this form, provide the following information about your crypto trades:
- Name of the cryptocurrency
- Date you acquired it
- Date you sold, traded, or otherwise disposed of it
- Proceeds or sales price
- Cost basis
- Total gain or loss
Repeat this process with every taxable crypto event you had for the year.
How is crypto income taxed?
Crypto income is taxed as ordinary income at its fair market value on the date the taxpayer receives it. Here are the most common examples of what is considered crypto income:
- Receiving crypto as payment for providing a service
- Mining crypto and earning rewards
- Staking crypto and earning rewards
- Lending crypto and receiving interest payments
Do you pay capital gains on crypto?
Crypto is taxed like stocks and other types of property. When you realize a gain after selling or disposing of crypto, you're required to pay taxes on the amount of the gain. The tax rates for crypto gains are the same as capital gains taxes for stocks.
Part of investing in crypto is recording your gains and losses, accurately reporting them, and paying your taxes. Like every investor, you want to keep this tax burden to a minimum.
In closing, let's look at a few effective ways to minimize crypto taxes:
- Hold successful crypto investments for more than one year before selling or using them. Tax rates on these long-term gains are lower than rates on short-term gains.
- Use tax loss harvesting. If you've had gains and losses on different types of cryptocurrency, you can sell both and use the losers to offset your gains.
- Consider opening a crypto IRA. Like other IRAs, this type of account lets you make tax-deductible contributions and only pay taxes when you withdraw funds.
