Anyone who has sold an asset for more than they bought it for is familiar with capital gains tax. What you may not know is that crypto investors — whether trading, selling, mining, staking, or spending — may owe crypto capital gains tax as well.
In this article, we help you determine if you owe capital gains taxes on your cryptocurrency, differentiate between long- and short-term gains, and share ways you can lower how much you owe.
Paying Crypto Capital Gains Taxes
Knowing When You Owe
The first thing to know about crypto tax is that not every investor will owe when tax season arrives. To understand this better, let’s take a look at some examples.
Not Taxed
As a crypto investor, you are not taxed if your only cryptocurrency endeavor is purchasing a token and storing it with a crypto exchange earning zero interest. However, this would need to apply to every token you’ve purchased for you not to be taxed.
The following are a few more examples of when you would not owe crypto taxes:
- Transferring units of crypto between your accounts
- Giving up to $15,000 in crypto as a gift
- Donating crypto
In the majority of cases, however, your crypto is either reported as a capital gain or as income.
Taxed As Capital Gains
Cryptocurrency sold for a higher value than the amount it was initially purchased for is taxed at capital gains rates. This rate will largely depend on how long you’ve held the crypto.
Whether you have sold crypto for more than you bought it for, traded tokens, or used Bitcoin to purchase an item, your assets are classified as a capital gain.
Taxed As Income
Earning crypto as a form of income is another taxable scenario and is taxed differently than capital gains.
If you earned interest through a crypto exchange, like Vauld, as part of your salary or through mining or staking, then this is included in your total income for the year and will potentially move you into the next tax bracket.
Knowing What You Owe
Once you’ve determined if you owe, the next step is to calculate how much you’ll pay the IRS. The factors that will ultimately impact what you owe include:
- Increases in the value of your investments
- The length of time you’ve held your investments
- Your total income
It’s important to note that, as of now, crypto exchanges are not required to send forms for taxes owed. But not receiving a form from your exchange or employer does not mean that you won’t be taxed. The good news is that forms will be required for the 2023 tax season.
As we mentioned previously, the rate you are taxed depends on the length of time you’ve held your assets. Let’s take a look at long- versus short-term rates and how they would each impact your taxes.
Long-Term Crypto Capital Gains Tax Rates
Long-term capital gains have been known to give investors a more favorable outcome, whether these gains resulted from cryptocurrency or not. Assets that have been held for one year or longer are classified as long-term and filed separately from your income.
Single Tax Filers
The rate at which your capital gains are taxed also depends on whether you are filing as a single taxpayer, jointly with your spouse, or as the head of a household.
The rates for long-term gains do change from year to year, and they will remain the same for 2022 despite a proposed increase to 25% from the current 20% maximum.
With that in mind, let’s look at the current rates and how they might impact you if you’re filing single:
- Single tax filers in 2022 earning less than the $41,675 capital-gain threshold can expect a rate of 0%.
- If you report between $41,676 and $459,750, then you would pay a 15% capital gains rate.
- Anything more than $459,750 is taxed at a 20% long-term rate.
Married Couples
Marital status is another factor that determines which tax bracket you fall into, but the rates differ slightly if you file jointly or separately:
Here are the numbers when filing jointly:
- For married couples filing jointly, a combined income of $83,350 or less places you in the 0% tax bracket.
- Married couples filing jointly and earning between $83,351 and $517,200 are taxed at a capital gains rate of 15%.
- Married couples filing jointly and earning above $517,200 are taxed at 20%.
Here are the numbers when filing separately:
- If you are filing separately and earn less than $41,675, then you also fall into the 0% bracket.
- Married couples filing separately are taxed at a rate of 15% if they have earned between $41,676 and $258,600.
- Married couples filing separately are taxed at a rate of 20% if their individual long-term earnings are over $258,600.
Head Of Household
If you are filing as the head of household, then you must meet specific criteria, such as:
- Being financially responsible for more than 50% of all household expenses
- Being unmarried during the tax year
- Having a qualifying child or dependent
Filing as the head of household increases the threshold for the rates you would otherwise owe as a single filer. For example, the 0% rate increases from $41,675 or less (single tax filer) to $55,800 or less.
The rate changes to 15% if the total of your long-term capital gains is between $55,801 and $488,500 and again to 20% if it is $488,501 or more.
Short-term rates work a bit differently. Unlike long-term gains, earnings from activities such as day trading cryptocurrency increase your yearly income and possibly place you in a higher income tax bracket.
Short-Term Crypto Capital Gains Tax Rates
All assets held for under one year that have earned capital gains are considered short-term gains.
For example, if your taxable income for the year is $120,000 from salary earnings and you’ve earned $15,000 as a result of short-term investments, then you will be taxed on a total of $135,000 for your income.
The main advantage of long-term gains over short-term gains is that the latter do not benefit from the special tax rates listed in the section above. Instead, short-term capital gains are taxed like ordinary income.
This means, depending on how you file, short-term rates could vary between 10% and 37%. For 2022, a single filer would be taxed at a rate of 10% for up to $10,275 of short-term capital gains and 37% for over $539,900.
Capital Losses
Not every crypto endeavor will result in capital gains. If you purchased a single bitcoin for $35,000 and sold it for $30,000, then you have a capital loss.
In addition, long-term and short-term capital losses can only be used for their respective assets. What this means is that long-term losses can offset long-term gains but not any short-term gains (and vice versa).
Should you find yourself in a position where you have both short- and long-term capital gains, it is usually in your best interest to harvest any short-term losses since they have a higher tax rate. Investors with no gains at all can claim a deduction of up to $3,000.
Now, let’s take a look at a few other ways you can offset what you’ll owe in capital gains.
Offsetting Crypto Capital Gains Tax
HODL
When you HODL (hold on for dear life) your crypto assets, there are a few ways to offset what you might owe. The first is to simply store your crypto where it will not earn any interest. But the downside to this method is that you will not earn passive income on your assets.
Step-Up In Cost Basis
Holding onto your crypto for the long term might also benefit your heirs should you plan to pass down your assets. This is possible through a tax provision known as a step-up in cost basis.
Let’s say you purchased ten bitcoins at $10 a share and now have hundreds of thousands of dollars in crypto assets. Once you sell, you will be taxed accordingly – if you sell, that is.
If you don’t sell your crypto assets and you die, your heirs would be left with a step-up in cost basis. So, should they decide to immediately sell the inherited crypto, they would not owe a capital gains tax.
Tax-Loss Harvesting
Another way to offset capital gains is through tax-loss harvesting. This investment strategy helps you avoid unrealized losses.
For example, let’s say you have $10,000 in capital gains as well as bitcoins that are now worth $1,500 less than what you bought them for two years ago. Not selling your bitcoins means you would be liable for $10,000 in capital gains.
Tax-loss harvesting helps by allowing you to claim the $1,500 value decrease as a loss, reducing your capital gains and minimizing the tax liability of your crypto assets.
Earn More With Vauld
Knowing what you owe in crypto capital gains tax is an important part of your overall investment strategy. Whether you’re determining your rate for short-term capital gains or calculating your capital losses this year, trust Vauld to help you perfect your wealth-building strategy.
Along with a streamlined user interface, we also provide competitive rates on our many crypto options, quality customer support, and an arsenal of security features to protect your assets whether you’re trading, earning, or borrowing.
No matter where you are on your crypto journey, we are here to help you navigate it all. Sign up with Vauld today and explore all the ways we can help you earn more.
