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How is Cryptocurrency Taxed in the US: Brackets Explained

How-is-Cryptocurrency-Taxed-in-the-US-Brackets-Explained-1
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Go through this quick roundup about crypto tax liabilities if you’re a United States citizen.

As per IRS, all cryptocurrency transactions resulting in a profit or loss are taxable events. This means cryptocurrencies are under the taxman’s scanner whenever you sell, mine, stake, exchange, etc.

So it’s your duty to report any profit and loss and file an income tax report accordingly.

Before moving further, let’s kick things off with this crucial…

Disclaimer: We aren’t tax experts, and this isn’t tax advice. Refer to the IRS or certified tax professionals for crypto tax reporting.

With that out of the way, let’s start with the main course.

How-is-Cryptocurrency-Taxed-1

It was way back on 9th January 2009 when Satoshi Nakamoto gifted us Bitcoin. Like any new thing, people were skeptical of this computer currency and made fun of it and its believers.

The first ever crypto purchase with this new currency was two pizzas for a whooping 10,000 Bitcoins on May 22, 2010. This rejoiced the crypto-verse, and since then, enthusiasts have observed May 22 as Bitcoin Pizza Day, marking the entry of computer coins into the present-day financial system.

We are a decade ahead, and crypto is an old story now.

Despite its volatility and the scams that routinely rock the crypto world, its adoption is reaching unprecedented heights, with over 420 million crypto users, as of 2023.

As a side effect, the taxman is interested in collecting its ‘fair’ share.🙄

So, we’ll see how crypto gains are taxed, along with a few examples to simplify it.

Shall we begin?

Crypto Tax

Crypto-Tax-1

As we have already stated, you are expected to report all crypto transactions, irrespective of the profit or loss incurred.

To make things clear, IRS has divided this into two well-known categories:

  • Short Terms Capital Gains: If crypto assets are disposed of within a year or less. This is treated as typical income and taxed as per the federal income tax brackets.
  • Long-Term Capital Gains: If you hold onto crypto for more than one year. This comes under the capital gains territory.

And based on this, your crypto income is subjected to different tax slabs, as given below.

#1. Short Term Capital Gains

As mentioned above, whatever one makes out of crypto transactions within one year adds to the overall income and gets taxed as per the given IRS tax slabs:

Tax RateSingle FilersMarried Filing Jointly or qualifying surviving spouseMarried Filing Separately Households Heads
10%$0 to $11,000$0 to $22,000$0 to $11,000$0 to $15,700
12%$11,001 to $44,725$22,001 to $89,450$11,001 to $44,725$15,701 to $59,850
22%$44,726 to $95,375$89,451 to $190,750$44,726 to $95,375$59,851 to $95,350
24%$95,376 to $182,100$190,751 to $364,200$95,376 to $182,100$95,351 to $182,100
32%$182,101 to $231,250$364,201 to $462,500$182,101 to $231,250$182,101 to $231,250
35%$231,251 to $578,125$462,501 to $693,750$231,251 to $346,875$231,251 to $578,100
37%$578,126 or more$693,751 or more$346,876 or more$578,101 or more
Source: IRS Income Tax Brackets

Now let’s see a few examples.

For simplicity, we’ll consider only the federal taxes and assume the taxpayer (aged under 65) is a single filer with crypto gains as the only earning source. Besides, we won’t consider any exceptions, deductions, transaction fees, etc.

Example 1: John bought 100 GTH at $1600 and sold them all when the price bumped to $1850 after a few months.

Solution: This is an extremely simple instance involving a single asset and a single taxable event.

Let’s start with calculating total taxable income.

Taxable income = ($1850-$1600)*100
=$25,000

Total Tax = 10% of $11,000 + 12% of (25,000-11,000)
=$1,100 + $1,680
=$2,780

So, this was the simplest case, with the taxpayer investing in an asset and selling it within the same year. It’s important to take note of every transaction and associated costs you pay or receive for the calculations later on.

Example 2: Melissa has bought 100 GTH at $1600 per piece. Subsequently, she exchanged 50 GTH worth $1800 each to get a total of 360 VNB at $250 per coin. Finally, she cashed out all coins when GTH and VNB were $1900 and $235, respectively.

Solution: Let’s understand the taxable events first.

First: The GTH-VNB exchange. Melissa acquired GTH for $1600 and exchanged it when GTH jumped to $1800 to get VNB at the fair market value of $250 per coin.

Notably, the IRS considers an exchange as an act of selling followed by buying. So, while buying is tax-free, selling GTH for crypto or fiat incurs tax and counts as a taxable event.

Second: Selling the remaining 50 GTH for $1900 each.

Third: Selling 360 VNB for $235 each.

So, it’s a total of three taxable events.

Taxable income = ($1800-$1600)*50 + ($1900-$1600)*50 + [($235-$250)*360 or $3,000, whichever is less]
=$10,000 + $15,000 – $3,000
=$22,000

**Although the actual loss was $5,400, one can’t claim more than $3,000 in a tax year. However, the rest ($2,400) may be used to offset the gains in the following years.

Total Tax = 10% of $11,000 + 12% of ($22,000-$11,000)
=$1,100 + $1,320
=$2,420

We’ve seen Melissa exchange half of her GTH for VNB and later sell out everything. The final trade was a mixed bag for her, with a profitable sellout of GTH while incurring losses with VNB.

Notably, this also reduced her tax liabilities by $5,400.

I guess you got the idea of short-term capital gains. Report everything, treat it like your standard income, and you’re good to go.

However, you can become more tax effective by aiming for long-term investments, provided you have crypto volatility figured out.

#2. Long-Term Capital Gains

More than one year–this is the mantra of long-term gain. Consequently, the tax brackets also differ:

Tax RateSingle FilersMarried Filing Jointly or Surviving SpouseMarried Filing SeparatelyHouseholds Heads
0%0-$41,6750-$83,3500-$41,6750-$55,800
15%$41,676 to $459,750$83,351 to $517,200.$41,676 to $258,600.$55,801 to $488,500
20%$459,751 and more$517,201 and more$258,601 and more$488,501 and more
Source: IRS Capital Gains

See, just holding for over a year helps you save tax comfortably. But still, to remind you, some crypto investments can burn to ashes in a year, as we already see frequent overnight nosedives.

Let’s take a few more cases, this time taking into account the confusing crypto mining income. For the following examples, we’ll add one more assumption that short-term and capital gains tax slabs remain the same over time.

Example 3: Kyle mined six Chitcoins (CTC) valued at $19,000 each. He immediately exchanged one CTC for 3,800 Koldabots (KOT). After two years, Kyle liquidated his entire portfolio when CTC and KOT were $22,000 and $6, respectively.

Solution: Importantly, the crypto taxes will be paid in two components, owning to three taxable events.

Since the IRS treats Mining (and Staking rewards) as income, six CTC will directly add to Kyle’s income (short-term gains). In addition, we’ll calculate long-term taxes for his final sellout of five CTC and 3,800 KOT.

So, we’ll divide the tax calculations into two sections.

a) Short-term taxes to be paid the same year:

Taxable income: 6*$19,000 = $114,000

So, would you be paying taxes on $114,000?

No. Fortunately, it’ll be much less based on the deductions you’ll enjoy including for mining equipment, real estate, electricity, etc. In addition, your status as a hobbyist or a professional miner also brings in some clauses needed to track the final taxable income.

However, let’s go ahead since we are taking the examples as-is and without any deductions, exceptions, etc.

Total short-term tax = 10% of $11,000 + 12% of ($44,725-$11,000) + 22% of ($95,375-$44,725) + 24% of ($114,000-$95,375)

= $20,760

b) Long-term taxes to be paid after sellout:

This will be paid for the gains Kyle enjoyed on CTC and KOT since his purchase two years back.

Taxable income= ($22,000-$19,000)*5 + ($6-$5)*3800
=$18,800

Since this comes under the base slab (<$41,675), and there isn’t any long-term capital gains tax for the returns.

See, this is the beauty of long-term investments.

Conclusively, Kyle will pay $20,760 the same year of mining CTC as short-term tax and is free from any long-term tax liability.

Note: We could have observed another taxable event with the exchange of one CTC for 3,800 KOT. But since the exchange was immediate after mining, this generated zero gains.

You do not have a headache, do you? Because manual tax calculations are tedious and risk errors for someone with many trades per month.

For instance, how will you calculate short or long-term tax if you sell two out of three BTC, all purchased with different cost basis (buying price)? Here the accounting methods–LIFO, FIFO, HIFO, or Specific ID–come into play.

Besides the normal transactions, IRS also treats airdrops, and crypto received from hard forks as income which everyone must report. And there are a ton of clauses that one can miss, leading to miscalculations and improper reporting.

Crypto Tax Calculators

Consequently, we suggest using the below-mentioned crypto tax calculators for pro-traders.

#1. CoinLedger

coinledger

CoinLedger is a premium crypto tax calculator with features that help you do crypto easily.

Features:

  • Portfolio tracking
  • 10,000+ Cryptocurrencies support
  • Unlimited exchange sync
  • DeFi support
  • FIFO, LIFO, & HIFO
  • Tax loss harvesting

One can sign up with CoinLedger, import all transactions, view capital gains or losses, and track portfolios for free. Only the downloading and checking of full tax reports need a subscription.

Besides, CoinLedger nicely integrates with tax software such as TurboTax Online, TurboTax Desktop, TaxACT, etc. Additionally, you will have access to tax reports, including IRS Form 8949, capital gains, end-of-year positions, etc.

Finally, you can try premium CoinLedger plans risk-free, as all come with a 14-day money-back guarantee.

#2. Accointing

accointing

The best thing about Accointing is a free version for up to 25 transactions. This is similarly powerful, with a current limitation of reporting no more than 50,000 transactions per portfolio.

Features:

  • Portfolio tracking
  • 20,000+ cryptocurrencies supported
  • Custom price alerts
  • Portfolio segmentation
  • Social sharing
  • FIFO, LIFO, & HIFO
  • NFT support

Besides these standard goodies, one also benefits from the Accointing crypto market sentiment analysis tool. Moreover, one can choose a preferable fiat currency to better gauge the current portfolio size.

Accointing also supports popular tax filing software and manual altering of any crypto’s pricing details. And it’s compatible with ICOs, airdrops, mining, staking, etc., to become a one-stop crypto tax software.

Overall, Accointing does the job for beginners, and even the pro-traders have a generous 30-day money-back to test the waters in depth.

#3. TokenTax

TokenTax-1

In addition to being a crypto tax tool, TokenTax doubles as a full-service tax accounting service for its VIP plan users.

Features:

  • Portfolio tracking
  • DeFi & NFT support
  • Margin and futures trading compatibility
  • Tax loss harvesting
  • Excellent reporting
  • Tax preview

Besides, TurboTax auto-generates the tax forms you’ll need while filing with them or anywhere else.

Another highlight feature of TurboTax is error reconciliation, which is about accurately finding missing data and reporting. In addition, this works globally, irrespective of your location.

It separately reports about Ethereum gas fees, mining and staking income, etc., which gives you much-needed insight to strategize crypto investments.

Lastly, the only downside I could see is the absence of a free version, a trial, or even any sort of cash-back policy.

Crypto Taxes Made Easy!

Crypto is still new in terms of tax, and it’s only normal to miss on certain aspects, which can save you some bucks or have you report inaccurately.

In such a case of countless clauses and complexities, crypto tax tools like Accointing are a life savior. While we have listed only a few, there are a few more crypto tax software one can check for more options.

Have a good day!

PS: Here are a few IRS guides you might want to take a look at:

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