What Is Capital Gains Tax and How Much Is It for Crypto?
What Is Capital Gains Tax?
Capital gains tax is a tax on the profit you make when you sell something you own, like property or stocks, for more than you paid for it.
Almost everything you own is a capital asset. This includes cars, homes, furniture, investments, and even crypto. In the U.S., the IRS classifies cryptocurrency as property, not currency. It means that if you want to stay within the law, you must pay taxes on any profit you make from selling your coins.
The so-called “taxable events” occur only when you sell your crypto for cash, convert it to another coin, or use it to pay for goods and services. If you just hold Bitcoin or other crypto, you don’t have to pay anything.
The amount of tax you owe in the U.S. depends on various factors. Let’s explore some of them and ways to reduce your crypto taxes.
Capital Gains Tax Rates in 2023 and 2024
The amount of tax you’ll pay on crypto depends on your income and how long you hold it. If you keep it for more than a year, your gain is considered long-term and might be taxed at a lower rate. If you sell it within a year, it’s short-term and taxed as regular income.
Generally, long-term gains are taxed at a lower rate than short-term gains. Long-term capital gains tax rates range from 0% to 20%. The exact rate depends on your total income and other factors, which we will explore later.
In 2024, Presidential candidate Kamala Harris proposed raising the top rate for long-term capital gains from 20% to 28% for individuals earning more than $1 million annually. But this change has not yet happened.
See the table of current rates if you sold crypto in 2023 and 2024.
Short-term capital gains taxes range from 0% to 37%. Such gains are taxed at your regular income tax rate, which is usually higher than the rate for long-term gains. These short-term gains might also be taxed by your state or local government at their income tax rates, and they don’t get the special tax benefits that long-term gains do.
Reporting Crypto Taxes
You don’t need to report crypto or pay capital gains tax if:
- You didn’t own any digital assets.
- You only held digital assets in a wallet or account but didn’t make any transactions.
- You bought digital assets but didn’t sell them.
- You transferred digital assets between your own wallets or accounts as long as you didn’t pay any fees with them.
If you had digital asset transactions, here’s what you need to track to calculate the capital gain or loss, according to the IRS:
- Type of digital asset
- Date and time of transaction
- Number of units
- Fair market value at the time of transaction (in U.S. dollars)
- Basis of the digital asset sold or disposed of.
How to Reduce Capital Gains Tax for Crypto
The good news is that you can significantly reduce the amount of tax you pay on crypto. To do it legally in the U.S., you can use techniques like:
- Tax-loss harvesting: Sell coins that have lost value to balance out gains from other investments, which can lower your taxable income. In many cases, you can deduct up to $3,000 in realized losses from ordinary income each year. Any losses beyond these limits can be carried over to future years in $3,000 increments.
- Hold crypto longer: Keep investments for over a year to qualify for lower long-term capital gains tax rates.
- Use tax-advantaged accounts: Investments in accounts like IRAs or 401(k)s may grow tax-deferred or even tax-free. This means you won’t pay capital gains taxes on your crypto profits while the money is in the account. Instead, taxes are usually applied when you withdraw funds. Other tax-advantaged accounts include 529 plans and Health Savings Accounts (HSAs).
Conclusion
Understanding and managing capital gains tax on crypto can seem complex, but it boils down to a few key points. You’re taxed on the profit from selling crypto, with the rate depending on how long you’ve held it. Long-term gains typically have lower rates than short-term ones. It’s important to keep records of all transactions for accurate reporting, as well as utilizing tools such as crypto tax calculator throughout the year to understand where you might land by the end of the year.
If you haven’t sold or used your crypto, you don’t need to worry about paying taxes. To potentially lower your tax bill, you can use strategies like tax-loss harvesting, holding investments longer, or using tax-advantaged accounts.
FAQs
What is the capital gains tax on crypto?
Capital gains tax is the tax you pay on the profit made from selling crypto. This means if you sell your crypto for more than you bought it, you need to pay tax on that profit. In the U.S., you only owe tax if you sell, exchange, or use your crypto, not just for holding it.
How much is capital gains tax on crypto?
The tax rate on crypto profits depends on how long you hold the asset. In the U.S., long-term gains (from assets held over a year) are taxed between 0% and 20%, and short-term gains (from assets held for a year or less) are taxed like regular income, ranging from 0% to 37%. Your total income and tax laws determine the exact rate.
How to avoid capital gains tax on crypto?
You don’t need to pay capital gains tax if you haven’t sold or used your crypto. To potentially lower your tax bill, use strategies like tax-loss harvesting (selling assets that have lost value) or holding crypto longer to benefit from lower long-term tax rates. Additionally, investing through tax-advantaged accounts like IRAs or 401(k)s can help defer or eliminate taxes.
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