Cryptocurrency gains and losses must be reported on your federal income taxes and it’s no surprise that means you may need to have a greater understanding of how cryptocurrency tax rates work if you want to avoid nasty surprises when you have your tax returns processed by the Internal Revenue Service.
The most important thing you need to understand about the cryptocurrency tax rate is that Bitcoin and all other virtual currencies that meet the IRS definition are treated as property rather than money.
That makes a huge difference to the federal government even if the distinction is lost on some investors.
What follows is NOT tax advice, but rather should be used as a primer to get you ready to discuss your cryptocurrency tax issues with a tax professional. Tax laws are subject to change at any time through legislation, IRS policy modifications, and other factors–never assume last year’s rules are applicable in the current tax year unless you get that information from the IRS, its publications, or a trained tax professional.
The IRS On Cryptocurrency
The IRS tax forms for 2021 include a question about those who received, sold, or exchanged virtual currency. If you have “taxable events” related to crypto you may need to report them on your tax returns. What are taxable events? The previously mentioned buying, selling, or exchange of virtual currency.
But that is NOT all. According to CNBC, if you are paid in cryptocurrency, get rewards for mining, get free crypto via airdrops or hard fork situations, or even converting virtual currency to cash, you have experienced a “taxable event” related to your property.
According to multiple sources (including CNBC) the IRS is keen to close any loopholes with regard to crypto that could be used as a means of tax evasion. That is likely one reason for the added questions on your tax forms, where applicable.
Because the IRS views your coins and tokens as property, they may be taxed differently than your regular income is taxed.
The IRS states on its official site that everything you own which is used “for personal investment purposes” is viewed as a capital asset. Your house, stocks, bonds, and cryptocurrency are all grouped together under this umbrella.
When you sell any of these, trade them, or exchange them, you may realize a capital gain or a capital loss. If you sell crypto for “more than your adjusted basis” according to the IRS, you have a potentially taxable capital gain.
And what does the IRS mean by “basis”? Basis is defined at IRS.gov as being, “…generally the amount of your capital investment in property for tax purposes” and you will use this basis to calculate gain, loss, and other factors related to the investment.
In “most situations”, the IRS says the basis of an asset is how much it cost you to get–whether that is in cash, “debt obligations” and the cost of these things to the tax filer. The IRS warns that in some cases, “Your basis in some assets isn’t determined by the cost to you” especially where gifts and inheritances are concerned.
If you have either one of those issues at work in your current tax filing, consult a tax professional to get help navigating these issues.
The Cryptocurrency Tax Rate
Because your cryptocurrency is taxed under the IRS capital gains rules, it will be taxed on the basis of being a short-term or long-term gain/loss.
What defines a short-term loss or gain? Those who own the virtual currency for a year or less before selling, trading, or cashing in the crypto are said to have a short-term capital gain/loss. If you have held the crypto for a year or longer, you have a long-term capital gain or loss.
The period during which you held the virtual currency (known as the “holding period”) begins on the day after you acquired the virtual currency and ends on the day you sell or exchange the virtual currency. For more information on short-term and long-term capital gains and losses, see Publication 544, Sales and Other Dispositions of Assets.
In general, the IRS says most individual filers (with incomes below a certain amount, approximately $445,000 for single filers in 2021) will see a net capital gains tax rate no higher than 15%. In cases where the filer’s taxable income is below a certain amount ($40k for single filers in 2021) there may be a zero percent tax instead.
Some may be taxed higher–between 20% and 28% in cases where the tax filer’s income exceeds that tax year’s thresholds established for those who pay 15% capital gains taxes. Other factors may also apply.
For short-term capital gains taxation, the IRS says “Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.”
The IRS says to report capital gains and losses via Form 8949, Sales and Other Dispositions of Capital Assets, and you may also be required to “summarize capital gains and deductible capital losses” on IRS Schedule D (Form 1040), Capital Gains and Losses.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.