Trading coins, like Bitcoin and Ethereum, is all fun and games until April 15th comes around and you realize you haven’t prepared for cryptocurrency taxes. You could find yourself owing money to the IRS and walking away with less overall crypto capital gains, or profit, than you initially anticipated.
So, do you pay capital gains on crypto? The answer is yes. You’ll have to pay what’s known as capital gains taxes on any earnings you make from buying and selling crypto coins.
To help you be more prepared during tax season, we’re breaking down cryptocurrency taxes and everything you need to know about them in this guide!
What are capital gains taxes and how do they work?
Capital gains taxes are levied on the profit of an investment after it has been sold. In other words, you don’t have to pay capital gains taxes on unsold investments that you’re holding in your portfolio or investments that you sell for less than you purchased them for.
Capital gains taxes are applied to a variety of investment assets, including stocks, bonds, jewelry, real estate, and cryptocurrencies. So, if you make any money by buying and selling cryptocurrencies, you’re going to owe the IRS a portion of your profits.
How are cryptocurrencies taxed?
The IRS requires U.S. taxpayers to report all cryptocurrency transactions for tax purposes. This means that if you’ve engaged in buying, selling, mining, gifting, donating, or inheriting cryptocurrencies, you’re going to have to report it when filing your year-end taxes.
The rate of cryptocurrency taxes can vary significantly depending on the type of transaction, your annual income, how long you’ve held the coins for, and your accounting method for calculating gains. Even so, the federal rate for cryptocurrency taxes on capital gains ranges from 0% to 37% in general.
Cryptocurrency taxes are complicated. You’ll need to speak with an accountant or use an accounting software to be absolutely sure of how much you’ll be required to pay in taxes on your crypto capital gains. In the meantime, take a look at answers to some of the most frequently asked questions regarding cryptocurrency taxes.
Are crypto-to-fiat exchanges taxed differently?
Yes, they are taxed differently because typical fiat currency transactions aren’t subjected to capital gains taxes. However, cryptocurrency users will have to pay both capital gains on their profits and sales taxes for any point-of-sale transactions.
IRS rules for tracking capital gains on crypto sales
The IRS requires U.S. taxpayers to report all cryptocurrency transactions on their taxes. This includes the buying, selling, mining, gifting, donating, or inheriting of point-of-sale crypto transactions.
Do I have to pay taxes on my mining profits?
Yes, you have to pay taxes on your mining profits. Cryptocurrency taxes are levied on mining profits. However, you may be able to deduct the cost of mining, including equipment fees and electricity bills, if you own a cryptocurrency mining business.
Short-term capital gains vs long-term capital gains
There are two types of capital gains taxes: short-term and long-term. Short-term capital gains taxes are levied on investments that are held for one year or less before being sold. Long-term capital gains taxes are applied to investments that are held for more than one year.
Short-term capital gains taxes are more expensive than long-term capital gains taxes. The former is taxed the same way as ordinary income, while the latter is taxed between 0% to 20% of your total, depending on your tax bracket.
2021 Tax Year Short-term Capital Gains Tax Rates
| Filing Status | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
| Single | Up to $9,950 | $9,951 to $40,525 | $40,526 to $86,375 | $86,376 to $164,925 | $164,926 to $209,425 | $209,426 to $523,600 | $523,600 + |
| Married filing jointly | Up to $19,900 | $19,901 to $81,050 | $81,051 to $172,750 | $172,751 to $329,850 | $329,851 to $418,850 | $418,851 to $628,300 | $628,300 + |
| Married filing separately | Up to $9,950 | $9,951 to $40,525 | $40,526 to $86,375 | $86,376 to $164,925 | $164,926 to $209,425 | $209,426 to $314,150 | $314,150 + |
| Head of household | Up to $14,200 | $14,201 to $54,200 | $54,201 to $86,350 | $86,351 to $164,900 | $164,901 to $209,400 | $209,401 to $523,600 | $523,600+ |
2021 Tax Year Long-term Capital Gains Tax Rates
| Filing Status | 0% | 15% | 20% |
| Single | Up to $40,400 | $40,401 – $445,850 | $445,850 + |
| Married filing jointly | Up to $80,800 | $80,801 – $501,600 | $501,600 + |
| Married filing separately | Up to $40,400 | $40,401 – $250,800 | $250,800 + |
| Head of household | Up to $54,100 | $54,101 – $473,750 | $473,750 + |
How to claim crypto as a deduction on your tax return
In some cases, you may be able to claim deductions to lower your cryptocurrency taxes and your overall tax bill. Here’s how!
Report your gains
First and foremost, you need to report your cryptocurrency transactions. Calculate all of the cryptocurrencies that you’ve sold, bought, mined, earned, inherited, donated, or gifted.
Make charitable contribution deductions
Charitable contributions typically count as tax deductions. Making charitable contributions in the form of cryptocurrencies can also help offset your tax bill when April rolls around.
Deduct your losses
If you’ve footed any costs in order to gain cryptocurrency, like expenses associated with mining crypto, then you can report these losses when you file your taxes. If you’ve sold any crypto at a loss, you may be able to offset your tax bill even furthermore.
Fill out Form 1040
This IRS tax form is used to report personal income for tax purposes. Your overall crypto gains should be reported in the Schedule 1 and Schedule C sections of Form 1040.
Don’t forget to submit Form 8949
This IRS tax form is what you should use to report all of your cryptocurrency sales, as well as any other investment assets that you’ve sold or exchanged in the past year. You can use this form to subtract your losses from your profits in order to calculate your capital gains.
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Understand your cryptocurrency taxes
If you’ve made any money on crypto in the past year, you’re going to have to pay taxes, meaning that you’ll need to set aside money from whatever profit you generate through cryptocurrency to pay the IRS. Overspending can put you in a difficult position come tax time, so it’s best to consult with a trusted tax advisor to receive estimates on how much you’ll owe.
It’s also important to remember that holding investments for the long-term, or over for more than one year, can lighten your tax burden overall. Cryptocurrencies that are part of a diverse stock portfolio can make for a great long-term investment.
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Learn more about MoneyLion investment accounts here.
