How Much Tax Do You Pay on Cryptocurrency?

Learn about cryptocurrency taxes in the US: what types of taxes apply to crypto transactions and how much do they cost? Read our guide to find out.

How Much Tax Do You Pay on Cryptocurrency?

The Internal Revenue Service (IRS) generally treats cryptocurrency gains in the same way as any other type of capital gain. How much is cryptocurrency taxed? Tax rates on cryptocurrency capital gains depend on your income level and how long you hold the cryptocurrency. TokenTax content follows strict guidelines for editorial accuracy and integrity. Gains on assets held for less than one year are considered short-term capital gains and are taxed at a person's income tax rate.

Gains on assets held for a year or more are considered long-term capital gains and receive lower rates. In the United States, profits from crypto trading, sales, and swaps are taxed as capital gains, and the exact rate depends on the length of time the asset was held and the owner's overall income. Income from mining, gambling, lending, or paying for goods or services is considered ordinary income and receives the tax rate that corresponds to an investor's gross income. The length of time a trader has held an asset determines whether their gains will be taxed as short-term capital gains or long-term capital gains.

The IRS encourages long-term trading by taxing long-term gains at lower rates. According to the IRS cryptocurrency tax FAQ, the holding period starts the day after receiving an asset. The cost base of the asset will be its purchase price, plus any applicable fees. It is important to note that these rates are the same as your regular income tax.

If you want to avoid higher taxes, you should prioritize long-term cryptocurrency trading whenever possible. This can often result in lower crypto capital gains on tax returns, although sometimes a person's federal and state tax rates can cause short-term gains to be more beneficial. To learn more about the basics of crypto taxation, visit our Crypto Tax Guide. See our plans and pricing to find out which solution best fits your needs.

Yes, your bitcoins, ethereums and other cryptocurrencies are taxable. The IRS considers cryptocurrency holdings to be “property for tax purposes”, meaning that your virtual currency is taxed in the same way as any other asset you own, such as stocks or gold. If you have disposed of cryptocurrencies after less than 12 months of holding them OR have earned income from cryptocurrencies, you will have to pay ordinary income tax. Long-term capital gains tax rates have different rates than short-term capital gains, ranging from 0% to 20%, based on your total income.

If you get rid of your cryptocurrency after more than 12 months of holding, you will be taxed at the long-term capital gain rate. Having looked at the two types of capital gains you may face and the importance of understanding the timing of the sale of cryptocurrencies, let's see what events can trigger a capital gains tax. If you're just getting into trading bitcoin or another cryptocurrency, and you only have a few transactions (with accurate cost base reporting), you may be able to easily report your cryptocurrency earnings using your typical tax software. Most art-based NFTs are classified as collectible for tax purposes, taxing them on capital gains like other common cryptocurrencies.

Even if you're not doing complex crypto activities and only have questions about your specific tax liability or if you're not sure you're reporting correctly, consider working with a tax professional who has experience interpreting tax codes related to virtual currencies. You can also owe taxes on cryptocurrencies if you earn them by mining cryptocurrencies or if you receive them in exchange for goods and services. Selling price — bid price (last bitcoin purchased) — bid price (first bitcoin purchased) %3D taxable profit. Even though cryptocurrencies were designed to be decentralized and free from government oversight, Uncle Sam still expects his fair share to come tax season.

Cornelius Hullum
Cornelius Hullum

Award-winning food specialist. Award-winning tv buff. Total tv maven. Infuriatingly humble coffee enthusiast. Certified travel trailblazer. Passionate pop culture evangelist.

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