Figuring out cryptocurrency tax regulations can be challenging even for the most dedicated crypto investors. Here’s a quick rundown of what you need to know.
You might be wondering how to sell bitcoin without paying taxes. The first thing to know is that Uncle Sam treats those numbers on the screen like any stock gain, and the IRS expects you to report it. You can’t legally sell cryptocurrency for profit and completely avoid paying taxes. However, there are ways to strategically reduce your tax burden and optimize your timing.
Factors in Determining Crypto Tax
Crypto gains are treated as property by the IRS, which means they are subject to federal and state capital gains taxes. You will owe a percentage of your proceeds when you sell your crypto. However, you do not owe any taxes until you actually realize gains and sell your assets to make a profit.
What counts as realizing gains? Any action you take to benefit from your gains is considered a capital gains tax action. For example, selling your appreciated bitcoin, swapping your BTC for ETH, or using USDT to buy a new Tesla are all examples of actions that would require you to pay taxes on your crypto assets.
So, what factors are considered when determining your cryptocurrency tax rate?
How Long You’ve Owned the Crypto
Taxes on crypto gains are subject to short-term and long-term capital gains rates, depending on how long you’ve held the asset. The federal government wants to encourage long-term investments, so it taxes assets held for over a year at a lower rate than assets you buy and sell within the same year.
Your Total Taxable Income
Tax rates for income tax and capital gains taxes in the United States are different rates depending on your total taxable income for that year. The higher your taxable income, the higher your tax rate will be.
State Tax Rates
On top of the federal capital gains tax, most states will also levy a tax on your cryptocurrency profits. These additional capital gains taxes range between 2.9% and 13.3% for investors in California.
Short vs. Long-Term Capital Gains
Short-Term Capital Gains Rates
If you buy and sell bitcoin within the same year, you’ll be subject to short-term capital gains tax rates. These gains are taxed the same as your income. You will add your crypto gains to your total taxable income for the year and pay taxes at the applicable tax rate. Federal income tax rates range from 10% to 37%, depending on your taxable income for the year.
Long-Term Capital Gains Rates
Long-term capital gains are taxed at a lower rate, but you’ll still use your taxable income to determine which tax bracket applies. Federal tax rates on long-term cryptocurrency gains range from 0% to 20%.
What if You Sell Cryptocurrency for a Loss?
Selling your bitcoin for less than you bought it for can be a savvy financial decision. You can use your losses on your crypto sale to offset other investment gains in other places (including gains from stock or other assets). If your crypto losses are greater than your gains, you can use them to reduce your taxable income. It can also “carry over” to reduce gains in future years.
Other Considerations
Are Staking or Mining Rewards Taxed?
Crypto awards, such as those for staking or mining, are treated as income and are taxed accordingly.
Do I Pay Taxes if I Trade Cryptocurrency for Another Asset?
Yes, the IRS requires that your report all of the following transactions:
- Receiving crypto as trade for goods or services
- Buying goods, property, or services with cryptocurrency
- Trading one form of crypto for another (for example, trading USDT for BNB)
- Receiving an airdrop
Do I Owe Taxes on Crypto I Transfer to Another Wallet?
No, transferring crypto from one wallet to another is not considered selling, and it is not taxed.
Why is Calculating Crypto Capital Gains so Complicated?
Theoretically, calculating the capital gains earned from selling crypto is simple. You just subtract your cost basis (the original purchase price of your crypto asset) from the price you sold it at (proceeds). For example, if you bought Ether for $500,000 and then sold it for $1.5 million, your capital gains would be $1 million. However, for most crypto investors, calculating capital gains and the associated taxes is quite a bit more complicated. Here are some top reasons these calculations get complicated.
- Buying and Selling Multiple Times – Most serious investors don’t just buy and sell once. An investor might buy bitcoin when it is $1,000 then again when it is $5,000 and then again when it is $20,000. Later, that investor sells a fraction of their shares–which cost basis do you use to calculate your capital gains?
- Using multiple exchanges – With so many crypto exchanges, it is likely that you have used more than one. Maybe you have bought and sold using Solana, Ripple, and Cardano. Keeping track of all of the exchanges and assembling them in one spreadsheet is a complicated puzzle.
- Earning cryptocurrency as a reward – If you receive an airdrop or earn crypto by mining or staking these are taxed at a separate rate and with their own cost basis.
- Trading crypto for other cryptocurrencies – Using bitcoin to buy SOL is not just swapping crypto. It is treated as selling crypto and then buying again, which means you are subject to capital gains taxes on the sale.
How to Avoid Capital Gains Taxes on Bitcoin
You can’t completely avoid paying taxes on your crypto unless you never sell or trade it for a profit. However, there are ways to reduce your tax burden and maximize your gains.
Hold Long Term
If you hold onto your crypto assets for at least a year, you’ll pay the lower long-term capital gains rate rather than that higher income tax rate.
Donate Cryptocurrency
If you donate your cryptocurrency you’ll not only earn some good karma, but you will not pay capital gains tax on your donation. You can even deduct your charitable donation to help offset other gains.
Harvest Losses
If you are holding NFTs or cryptocurrencies that have lost value, you can sell those to offset gains in other areas. If your losses exceed your gains you have the option of carrying those losses forward to future years. You also have the option of buying back your asset after 24 hours.
Use Tax Deferral Strategies for Optimal Timing
A Deferred Sales Trust is a capital gains tax strategy that allows you to transfer your crypto to a third-party trust who will dispose of your asset and then pay you the proceeds in installments over time. This allows you to reinvest your crypto in other assets without paying taxes. You can choose when you realize your gains to give you the greatest tax benefit.