If you've sold or disposed of cryptocurrency in the past year, you may owe capital gains taxes. Understanding the distinction between long-term and short-term capital gains is crucial for accurate tax filing and minimizing your tax liability.
This guide covers everything you need to know about crypto capital gains taxes, including rates, calculations, and key exceptions.
What Is Capital Gains Tax on Cryptocurrency?
Capital gains refer to the profit earned when you dispose of a cryptocurrency asset. The IRS classifies crypto as a capital asset, making these profits taxable. For example:
- Profit Scenario: Buy BTC for $1,000 → Sell for $1,500 = $500 capital gain (taxable).
- Loss Scenario: Buy BTC for $2,000 → Sell for $1,200 = $800 capital loss (can offset taxes).
Taxable Crypto Disposals Include:
- Selling crypto for fiat (e.g., BTC → USD).
- Trading crypto-to-crypto (e.g., BTC → ETH).
- Using crypto to purchase goods/services (e.g., buying a car with Bitcoin).
Long-Term vs. Short-Term Capital Gains: Key Differences
The IRS taxes crypto based on holding periods:
- Short-Term: Assets held <1 year → Taxed as ordinary income (10–37%).
- Long-Term: Assets held >1 year → Lower tax rates (0–20%).
Tax Rates for 2023
| Holding Period | Income Bracket | Tax Rate |
|---------------|----------------|----------|
| Short-Term | $0–$10,275 | 10% |
| | >$523,600 | 37% |
| Long-Term | $0–$41,675 | 0% |
| | >$459,750 | 20% |
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Crypto Tax Exceptions
- NFTs: Fixed 28% tax rate, regardless of holding period.
- Net Investment Income Tax (NIIT): Adds 3.8% surtax for high earners (>$200k individual/$250k joint).
- State Taxes: Varies by location (e.g., California has additional taxes).
How to Calculate Crypto Capital Gains
- Determine Cost Basis: Purchase price + fees.
- Calculate Gain/Loss: Disposal value − cost basis.
- Classify Holding Period: <1 year (short-term) or >1 year (long-term).
Pro Tip: Use crypto tax software like Kryptos to import transactions and generate IRS-compliant reports.
FAQ
1. What triggers short-term capital gains tax?
Selling or trading crypto within 12 months of purchase.
2. Are long-term gains always taxed at 0%?
No—only if your taxable income is below $41,675 (2023).
3. How are crypto-to-crypto trades taxed?
They’re taxable events. Example: Trading BTC for ETH triggers capital gains on the BTC disposal.
4. Do I pay taxes on lost or stolen crypto?
Yes, but you can claim a capital loss if properly documented.
5. Can I reduce my crypto tax bill?
Yes! Use tax-loss harvesting or hold assets long-term for lower rates.
👉 Learn advanced tax strategies to optimize your filings.
Final Thoughts
Navigating crypto taxes requires meticulous record-keeping and understanding of holding periods. Always consult a tax professional for complex situations, and leverage tools to streamline the process.
Disclaimer: This content is for informational purposes only and does not constitute tax advice.