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 Taxes 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 Taxes 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 gain of $200 is applicable. 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 short-term or long-term category and your income for the year, the tax rate may vary.
Here’s a breakdown of the tax rates for the financial years 2022 and 2023 respectively.
Short-Term Capital Gains Tax Rate
Your short-term capital gains taxes 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:
If you are willing to plan ahead of time, 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 capital gains 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 crypto capital gains
Calculate Crypto Capital Gains
Now that you understand the difference between short-term vs long-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 Kryptoskatt 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 now generate free tax reports that comply with your local laws.