How is crypto taxed in the United States
When cryptocurrency was in its infancy, there were very few rules around how it should be taxed or whether it should be taxed at all. The concept of cryptocurrency taxes didn’t really exist at the beginning. Indeed, there were a number of investors and traders who started trading for this very reason. Now, however, as the number of crypto coins continues to grow, each country is forming its own tax policy for these types of assets.
This part will explain how crypto assets are taxed in the United States and how the IRS (Internal Revenue Service) treats profit from Cryptocurrency and other crypto assets.
So how is cryptocurrency taxed? Much like stocks and other tradable assets, cryptocurrency is “property” and any transaction made relating to a digital asset like Bitcoin or Ethereum is a taxable event. Included in this are the purchase of cryptocurrency, buying NFTs and NFAs, any trading activity and (although this still isn’t possible in many instances) the purchase of goods or services with digital assets.
How much is Cryptocurrency taxed?
While tax on cryptocurrency and any asset depends on a number of factors, the rates for crypto start at 15% for long-term capital gains and 10% for short-term. This goes up to a maximum of 37% for short-term holdings (those held less than one year) and 20% for long-term holdings.
However, the rate of tax depends on how you file, your level of income and whether you are the head of household or not. For example, those filing short-term gains on their own pay 10% on anything over $3,000 but below $10,275. For married couples who file jointly, they would pay the same rate of tax for anything up to $20,550. This accounts for two incomes rather than one, hence the almost doubling of the threshold at which you pay tax.
Exactly how much is cryptocurrency taxed then? There are then different brackets of long-term capital gains, relating to different rates of tax. Two different tables of these can be found below.
|Rate||Single filers earning||Married couples filing jointly earning||Head of household earning|
|0%||Up to $41,674||Up to $20,550||Up to $14,650|
|15%||$41,675 to $459,749||$83,350 to $517,199||$55,800 to $488,499|
|20%||$459,750 or over||$459,750 or over||$488,500 or over|
Essentially, crypto activity is taxed much the same as capital gains on more traditional assets, such as stocks. However, this is something that may be subject to change, given the rapidly changing world of blockchain and the potential for more regulation.
The rates for short-term capital gains, however, are more complicated than the three tax rates for long-term gains. These are detailed below:
|Rate||Single filers earning||Married couples filing jointly earning||Head of Household earning|
|10%||Up to $10,274||Up to $20,549||Up to $14,649|
|12%||£10,275 to $41,774||$20,550 to $83,549||$14,650 to $55,899|
|22%||$41,775 to $89,074||$83,550 to $178,149||$55,900 to $89,049|
|24%||$89,075 – $170,049||$178,150 to $340,099||$89,050 to $170,049|
|32%||$170,050 – $215,949||$340,100 to $431,899||$170,050 to $215,949|
|35%||$215,950– $539,899||$431,900 to $647,849||$215,950 to $539,899|
|37%||$539,900 and over||$647,850 and over||$539,900 and over|
How is profit from Cryptocurrency taxed?
For cryptocurrency, as with some more traditional assets, investors are taxed on the profit they make, rather than for every transaction. Examples of taxable events include when you receive income in the form of interest if you have a crypto savings account and selling cryptocurrency you have bought at a profit (as would be the case when selling stock). How is profit from cryptocurrency taxed? The answer, just like many other investments, is it depends.
With different tax models for different types of capital gain, it can be confusing. For long-term gains, like other income of any sort, there is a tax-free allowance which, for long-term capital gains from investments, is currently $41,675 for an individual, $55,800 for a Head of household and $83,350 for married couples who file jointly.
This means that for income or gains up to this amount, there is 0% tax; a great bonus for small cryptocurrency investors and traders. Whether you have chosen to have a small portfolio or are just starting out, this is a great advantage to keep on top of your crypto finances.
When cryptocurrency was introduced, little was known about it and it was an asset that many believed may be useful to evade taxes that have been in place for traditional assets for many years. However, as Blockchain technology and crypto have evolved, there has been a sustained effort to stop assets like this from being used in this way. As cryptocurrency evolves, governments have developed their own policies on the taxation of crypto assets. While the majority of countries, including the US, have chosen to tax them much the same as a stock portfolio, it is important to keep up to date with information such as is detailed in this article.
So here’s the bottom line…
Cryptocurrency in the US is largely taxed as any stock portfolio would be; as income or gains, depending on your activity. If you are a HODLer (Hold on for dear life) who keeps their cryptocurrency over a longer period of time, long-term capital gains tax will apply and there are fewer tax brackets, starting at 15%, rather than 10%. This makes your cryptocurrency taxes rather simple (lucky you).
Active trading, however, works a little differently. Paying short-term capital gains on day trading gains, you will be subject to a 10% tax for those in the lowest tax bracket (as stated above) and then the relevant tax brackets if your income is higher.
There are, however, benefits to holding long term. While there is the risk of high volatility, the tax brackets are fewer and simpler, plus anything below $40k is tax-free. Using this information, you have everything you need to plan your crypto tax strategy for the long term.