Cryptocurrency is a digital and electronic form of money. The capital gains from these investments can be taxed similarly to traditional investments. However, there are also other ways in which your crypto investments can be taxed and classified.
While the crypto tax rate can certainly be a draw for some, there are plenty of additional reasons people are investing in these currencies.
For the success of your investment portfolio, it helps to understand the tax implications of owning crypto. From here, explore how crypto is taxed, its tax rate, and its tax forms.
Tax Implications of Owning Cryptocurrency
Your financial situation and investment portfolio will be subject to different taxes, depending on a host of factors unique to you. Cryptocurrencies are no different. From buying crypto to exchanging it for goods and services, these are the tax events that can result.
Cryptocurrencies aren’t subject to sales tax like items you’d purchase at the supermarket in some locales. Nor does holding onto crypto necessitate taxation.
Instead, cryptocurrencies are treated in the U.S. as digital assets. Like with traditional capital assets such as stocks or bonds, taxes are due based on the amount gained from the investment.
Classification of tax rates is then determined by how much you acquired your crypto for, the percentage you made on capital gains, and how long you’ve held the investment.
Selling cryptocurrency is a taxable event. If you make money on a crypto investment, you’re required to record and pay taxes on those capital gains.
This is also the case in just about every circumstance in which you would transfer or trade one type of cryptocurrency for a different form of currency — even another cryptocurrency. For example, liquidating crypto assets for cash triggers a taxable event. Similarly, exchanging one crypto for another (e.g., Bitcoin to Etherium) will require you to pay taxes on your gains.
This means that crypto day traders have to consider certain strategies for maximizing investment value against tax rates.
Gifting crypto, or receiving it as a gift, can be one way to avoid taxes on these digital currencies altogether. Gifts typically are not taxable below a certain threshold. For 2022, the tax exclusion for gifts is $16,000.
This means that transfers of crypto to another account holder (except in exchange for goods and services) will likely be tax-free. Similarly, if you receive crypto as a gift, you won’t have to pay taxes unless:
- The crypto is a payment for work, goods, or services.
- The crypto is given to you as part of a promotion or incentive.
- The crypto is airdropped to you.
In these cases, your digital currencies will be classified as income rather than gifts and subject to tax.
Exchanging Crypto for Property
When exchanging crypto for property, taxes will almost always be due for the tax year in which the transaction is made.
The tax rate on such an exchange depends on the amount initially invested in the crypto or property and the capital gains made from the transaction. The specific rate you’ll pay, however, will depend on whether your capital gains can be considered short- or long-term gains.
Exchanging Crypto for Goods or Services
When exchanging crypto for goods and services, taxation works as you might expect.
First, the owner of the cryptocurrency (in essence, the one selling it) must recognize their capital gains on the investment as they depart with it. This works the same way as exchanging crypto for liquid cash.
Next, the crypto recipient must note the value of the cryptocurrency they are receiving in U.S. dollars, which is the fair market value of the good or service they sold. When they sell this crypto, they will have to pay the capital gains tax on the profit they make from this asset.
When Is Cryptocurrency Taxed as Income?
To make the most of your cryptocurrency investments, take note of all the instances in which these digital assets will be counted as income by the Internal Revenue Service (IRS):
- You accept payment in cryptocurrency. Payments for labor, goods, or services all amount to income, even if paid in digital assets.
- You mine cryptocurrencies. Using a crypto mining rig to produce cryptocurrencies also is viewed by the IRS as a source of income. You’ll have to pay business income tax on the fair market value for any coins mined.
- You engage in staking and receive rewards. Staking is the process of reserving a portion of your crypto holdings for a consensus mechanism known as “Proof of Stake.” Through it, you can earn rewards over time. These rewards are taxable income.
- You accept any kind of market incentive in crypto. The crypto rewards and incentives offered by crypto wallets or any other company for doing business with them count as income. That free crypto won’t take you as far as you might think, since you’ll have to pay taxes on it.
- You receive a crypto airdrop. Even the event of a cryptocurrency airdrop — whether as a marketing effort, hard fork, or giveaway — results in a taxable event related to income.
In short, just about every situation in which crypto is given to you as anything other than a gift is an event subject to income tax.
However, there are some ways around this. For example, crypto Roth IRAs are retirement investment accounts in which you can invest your cryptocurrency with no capital gains tax. Your digital currencies can appreciate without your amount due also rising.
Tax Rate on Crypto
Crypto as taxable income counts towards your income tax bracket. Assess the tax brackets and rates for 2022 to determine what you might pay on earned crypto.
Then, determining capital gains due may be more or less complicated depending on your situation. Three factors are the most prominent determiners of this rate: the amount gained, your filing status, and the length of time you’ve held the investment.
Assets held for a year or less fall under short-term gains and are taxed accordingly. Anything held longer than that is a long-term gain.
For the 2022 tax year, the following rates will help you understand what percentage you’ll have to pay in crypto taxes per the amount of capital you gain:
Short-Term Capital Gains Tax Rates (Single Filer)
- 0% under $10,276;
- 12% under $41,776;
- 22% under $89,076;
- 24% under $170,051;
- 32% under $215,951.
Long-Term Capital Gains Tax Rates (Single Filer)
- 0% under $41,675;
- 15% under $459,751;
- 20% over $459,750.
It helps to have the proper tax forms on hand to streamline the tracking process.
Tax Forms for Crypto
Tracking your crypto portfolio is an important part of understanding your tax burden. As part of the process, assemble useful tax forms.
These are some of the forms you’ll need to document your gains and income:
- 1099-B: This form should be provided to you by your broker, documenting transactions and crypto history for the tax year.
- 1099-MISC: For business cryptocurrency payments, you’ll need this form to document income, staking, rewards, and promotional incentives.
- 1099-NEC: This form is necessary for crypto miners to document non-employee income of over $600 per year.
Additional forms you might find useful include:
- Form 1040 for filing income taxes;
- Schedule D for reporting capital gains and loses;
- Form 8949 for reporting additional sale and exchange information;
- Schedules C and SE for non-employee income.
From here, consult tax professionals to make the most of your situation and maximize the value of your crypto.