How to Understand Crypto Tax Rates: Crypto Tax Guide

crypto tax rate

Many people are making money hand over fist with cryptocurrency. As more crypto projects are launched, the chances that at least a handful of them will appreciate in value ten times, 20 times, or even 100 times go up. 

Correctly filing your cryptocurrency taxes on your tax return is important to make sure you don't owe the IRS.

It is not a surprise that a lot of investors and speculators have gotten into the crypto game because of the high yields of return given the very short time windows. 

For example, many investors will snap up the coin if a new exchange with its own native coin is launched. They know full well that the coin will blow up if the exchange experiences a decent level of success. 

That's exactly what happened with Uniswap, PancakeSwap and Binance, and other platforms. Crypto is hot when it comes to turning your initial investment into a whole lot of money. Of course, there is tremendous risk involved, but the upside potential is there. 

Given how lucrative crypto investing and trading have become, many are asking what the crypto tax rate is. According to the US tax code, if you're an American citizen, a green card holder, or a US resident, you must pay US taxes. 

Fair enough. But here's the complication, it doesn't matter whether you physically live in the US or not. If you live in Southeast Asia, Costa Rica, or Portugal, you are still duty-bound to file taxes annually for your cryptocurrency investments.

Of course, whether you pay taxes or not depends on the taxable income you generate every tax year. The United States is almost alone in how it chooses to tax its citizens and residents. The only country that has these global residency standards is the African nation of Eritrea. 

You have to keep this in mind because many crypto traders believe that crypto tax rates are somehow different since they're dealing with assets that are decentralized and can be hard to trace. No, it's not different.  

Luckily, many cryptocurrency exchanges make it easy by providing your transactions that you need to fill out on your own form 1040.

If you need help with filing cryptocurrency taxes, you can always use the help of a tax software like TurboTax, but thats not always helpful if you have tons of crypto gains. If you need help finding out your tax bracket.

You can contact CoinTracker.IO if you need help determing your gains tax rate. They help you track EVERY capital gain on your crypto transactions and make it easy to determine tax brackets at the end of the tax year. I HIGHLY recommend CoinTracker.io.

Plus, if you sign up using my affiliate link, you can get a $10 credit on any of your future purchases.

Bitcoin.tax provides tax preparation services and partner with CPA's and tax attorneys.

Tax on virtual currency and capital assets can be a bit confusing so finding some experts to help is always a good idea.

Standard Federal Taxation for Cryptocurrency Trading Activities

The crypto tax rate is the same as the capital gains tax rate for any other kind of speculation when it comes to federal taxes. The law treats crypto earnings the same as capital gains. Two methods can be used to determine crypto-asset profits to apply the capital gains tax rate.

You have to pay attention to the income you've gained and the length of time you've owned the coin. The holding period is important. 

If you are a frequent crypto trader and enter and exit crypto positions within a short fixed period, the IRS views your income as short-term profits. This means it is taxed as regular income. Presently, the tax rate for regular income is from a low of 10% to 37%.

The specific tax you will pay depends on how much money you made from your crypto holdings. On the other hand, if you bought your crypto assets and held them for more than a year before selling them, the law considers them long-term gains. 

In this scenario, the capital gains tax rate will be applied to your earnings. Capital gains taxes are lower than regular income tax rates. Capital gains can range from 0% to 20%. This may change soon depending on the US Congress. 

But as of this writing, your maximum tax liability is 20% of your earnings if your long-term capital gains is classified as regular capital gains. On the other hand, you may be charged a higher capital gains tax rate of 28% if your crypto asset qualifies as a collectible. 

This is important to keep in mind because NFTs or non-fungible tokens are becoming popular, making many people a lot of money. But since they are viewed as collectibles and not cryptocurrencies, you may be on the hook for a 28% long term capital gains tax rate on your earnings from NFTs.

Short Vs Long Term Capital Gains Tax

If you have held your coins for a period of 365 days or less, they are subject to short term capital gains, meaning they are taxed as ordinary income. If you have held your coins for longer than a holding period of 365+ days, then that means they are subject to long term cpaital gains tax. These rates are from 0 - 20% depending on your ordinary income tax rate. The capital gains tax rates are only applicable if you held the asset for at least a year before disposing of it.

How Do You Calculate Your Crypto Taxes?

There are many crypto tax calculators online, and they operate in the same way. They collect your data and use built-in accounting formulas. You can use the first in, first out, or last in, first out to automatically correlate your cost basis when you sell your crypto assets. 

Depending on which method you use, this might impact your earnings or come up with a loss. The great thing about crypto tax calculators online is that you can use them to create tax reports based on the information you feed them. 

For instance, you buy one BTC at a price of a thousand dollars, and then you buy the same amount of BTC at twelve thousand dollars in your second year, and then you sell one BTC at the price of ten thousand dollars in 2020.

After three years, what is your crypto tax rate? In this case, the cost basis will determine what your tax is. If you use the FIFO, you will base the price on your previous purchase of BTC, which is one thousand dollars. 

On the other hand, if you use the LIFO, you will base it on your last purchase, which is twelve thousand dollars. If you use FIFO, you have made a 9,000-dollar profit after three years. If you use LIFO, you lose 2,000 dollars. 

Do You Owe Taxes for Converting One Crypto to Another? 

This is uncharted territory, but some accountants and tax attorneys argue that it is more of a like-kind transfer when you convert one crypto asset to another. The Internal Revenue Service (IRS) permits you to defer income tax on like-kind transfer transactions. 

Many crypto traders used this approach during the earlier days of crypto trading to delay showing an income from their bitcoin trades. 

Will You Be Liable for Taxes On Your Crypto Losses?

Cryptocurrency losses are tax-deductible. You can deduct up to 3,000 a year from your ordinary income if you don't have any capital gains to offset your cryptocurrency losses. This is a great asset to have if you make money through other activities and have an established annual income.

What Are the Special Considerations for Crypto Taxes?

What makes crypto taxes hard to calculate is the often volatile fluctuation of bitcoin and other cryptocurrency prices. You have to have a clear accounting system to consistently apply to ensure that your crypto taxes are properly paid. 

If you're sloppy with your accounting standards, you might have a problem in your hands. Depending on whether you use LIFO, FIFO, or HIFO, your calculation can determine whether you made money or ended up with a loss with your crypto trading. 

Please keep in mind that the IRS has only approved a few instances of accounting standards for crypto trading. It's important that you get in touch with a qualified accountant or tax attorney to ensure that your valuation model for your crypto tax rate is not too aggressive. 

Cryptocurrency tax can be little complicated so if you need help calculating your crpyto capital gains, contact Bitcoin.tax.

About Crypto Ryan 72 Articles
Hi, I'm Ryan. I started investing in cryptocurrency in early 2014. Naturally, I want everyone to have the chance to learn about the crypto world so I created this blog! I hope my articles help you understand blockchain and cryptocurrency. Cheers!