Cryptocurrencies are not treated the same way fiat currencies are. Regardless, if you make an income from crypto, you’re going to have to pay taxes at some point. So let’s go over where the world of the IRS and the world of crypto and what crypto taxes are.
How is Cryptocurrency Taxed?
Cryptocurrency income and gains are not taxed as such. However, when you sell cryptocurrencies for fiat currency, you have triggered a taxable event. There are two ways in which your crypto activities can incur tax obligations:
- Income taxes
- Capital gains taxes
The kind of tax you incur depends on the circumstances of your income-producing activity. Essentially, it’s the holding period that makes the difference.
If you hold onto Bitcoin or any other crypto asset for less than one full tax year, you will have tax liabilities in the form of income taxes. That’s because short-term gains are taxed in the same way as regular income. Right now, income taxes are considerably higher than capital gains taxes, the reason why you may want to hold on to your investment assets for longer than a year, so they qualify as capital gains and are taxed at the lower rate.
When you hold onto your cryptos for more than one tax year, they will be treated as an investment, assuming they produced a profit. At this point, selling your crypto would be a taxable event categorized as a long-term capital gain. Capital gains taxes are charged for most investments that are held for a profit for periods of more than one year. There are exceptions, such as collectibles, which cryptos don’t normally qualify as.
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What is Your Cryptocurrency Tax Rate?
Your cryptocurrency tax rate depends on a couple of factors:
- The time you held your cryptos for and thus the type of income produced (income vs. capital gains)
- The amount of profit produced
Let’s break these two factors down.
Income Tax Rate
The marginal US income tax rates for the 2021 tax year range from 10% to 37%. The higher your income, the higher your overall tax rate. The highest tax bracket (37%) is on earnings over $523,600 for taxpayers filing as individuals. The lowest rate is for the first $9,950 for those filing as individuals.
Here are all the income tax brackets, as provided by the IRS, for the 2021 tax year:
- 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
- The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
With cryptocurrency as a part of your USD income, you need to consider the tax bracket you will be in when you include your proceeds from crypto. Income taxes in the US, especially when filing as a single, are significantly higher than capital gains taxes.
Capital Gains Tax Rate
Capital gains taxes are charged for capital gains on investments held for over one tax year. Most taxpayers paying capital gains taxes will not pay more than 15%. However, the maximum capital gains tax bracket is 20%. On the other end of the spectrum, people whose gains don’t meet the minimum threshold may pay nothing towards capital gains taxes.
If you are single, the capital gains tax rate is 15% when your taxable income is $80,000 or more, but less than $441,450. When filing as a couple, that maximum is raised to $496,600. For balances over those amounts, you will need to pay 20%.
For the average cryptocurrency investor, no more than 15% will need to be paid for capital gains. In contrast, net capital gains from collectables are taxed to a maximum of 28%.
Any short-term capital gains (produced in less than one tax year) will be taxed according to the above “Income Tax Rate”
Invest In Crypto for Retirement
5 Ways to Reduce Cryptocurrency Taxes
Reducing your tax burden for your fiat income-producing crypto activities is reasonably simple. There are several easy ways to end up paying less.
1. Wait Until Your Short-Term Gains Turn into Long-Term Gains
The simplest way to significantly reduce your tax obligations is to hold onto your cryptos for longer. By holding onto them as an investment for more than one tax year, you are automatically lowering your obligation significantly.
If your total income is less than $80,000 (all USD income), you don’t need to pay capital gains taxes. That means what could have cost a minimum of 10% now costs you nothing.
Even if you earn a six-figure income, you save a significant portion of your crypto income by simply turning it from a regular income source to a source of long-term capital gains. You can refer to the above section. You don’t need to be any good at math to understand how significant your savings can be by simply waiting.
2. Sell in a Tax Year When Your Income is Lower
If you can foresee changes to your income year by year, you can take advantage of that. For example, if you plan on quitting your job anyway, why not wait until next year to sell your digital assets in the crypto exchanges? In that way, you save by producing less taxable income while also turning your crypto income into a capital gain.
If you’re going to sell your crypto, you will incur fewer taxes by selling when you know your total income will be lower.
3. Move to a State with Less or No Income Tax
Moving is a big decision with many consequences. However, saving money is a common cause of migration.
If the state you currently live in charges high state income taxes, you’re losing money to taxes just by living there. If moving wouldn’t disrupt your lifestyle or current income, it can make sense to move just to save on taxes. Depending on the differences in state taxes where you are now and your destination, the savings can be enormous.
4. Decrease Your Taxable Income
There are many ways to reduce your taxable income. You don’t need to quit your job or intentionally slow down your self-employed or other income sources. Referring to deductions enabled by the IRS, you can reduce your taxable income while still earning and saving for the future.
There are a lot of tax deductions available to Americans. However, retirement savings accounts offer one of the simplest paths to decreasing taxable income.
5. Invest in Crypto in an Individual Retirement Account (IRA)
Contributions to an Individual Retirement Account (IRA) are tax-deductible. That means that by contributing to a regular IRA (not a Roth IRA), you can reduce your taxable income. This enables you to save for the future (retirement) while reducing your immediate tax burden.
iTrustCapital offers a crypto IRA account specifically for those who want to use crypto to save for retirement while sheltering them from taxes. Crypto IRAs offer all the regular tax benefits of IRAs but are specifically designed for virtual currency.
How to Open a Crypto IRA with iTrustCapital
As a Crypto IRA provider, iTrustCapital provides a streamlined and easy way to get started with investing Bitcoin and other cryptocurrencies in your IRA account. Simply visit their website to get started, follow the verification process, and choose the IRA type you want to open to finalize your formal application. Once you have added funds, you can start purchasing the digital assets you want into your new Crypto IRA account.