How Cryptocurrency is Taxed in the United States: Brackets Explained

If you are a US citizen, read this quick summary of your cryptocurrency tax obligations.

According to the IRS, all virtual currency transactions that result in a gain or loss are taxable. This means that cryptocurrencies are under the scrutiny of tax officials every time they are sold, mined, staked, exchanged, etc.

Therefore, it is your duty to report your profits and losses and file your income tax return accordingly.

Before we move on, let’s start with this important thing…

Disclaimer: We are not tax experts, so this is not tax advice. For virtual currency tax reporting, please contact the IRS or a certified tax professional.

That aside, let’s start with the main course.

Satoshi Nakamoto gifted us Bitcoin on January 9, 2009. Like anything new, people were skeptical of this computer currency and made fun of it and its followers.

The first ever cryptocurrency purchase using this new currency was on May 22, 2010, for a whopping 10,000 Bitcoins for two pizzas. This greatly delighted the crypto world, and enthusiasts have since designated May 22nd as Bitcoin Pizza Day to commemorate the arrival of the computer coin. It is embedded in the current financial system.

We are 10 years ahead and cryptocurrencies are now old news.

Despite the volatility and fraud that regularly rock the crypto world, its adoption has reached unprecedented heights, with over 420 million crypto users as of 2023 .

As a side effect, the tax office is interested in collecting its “fair” share. 🙄

So, let’s take a look at how virtual currency profits are taxed, along with some examples to simplify it.

Shall we begin?

virtual currency tax

As already mentioned, you are expected to report all cryptocurrency transactions, regardless of the profits or losses incurred.

To make things clear, the IRS has broken this down into two well-known categories.

• Short-term capital gain: If the crypto asset is disposed of within one year. This is treated as ordinary income and is taxed according to your federal income tax bracket.
• Long-term capital gains: If you hold a cryptocurrency for more than one year. This falls into the realm of capital gains.

And based on this, your crypto income will be subject to various taxes as shown below.

#1. Short-term capital gain

As mentioned above, anything you earn from cryptocurrency trading within a year will be added to your overall income and taxed according to the prescribed IRS tax schedule.

Now let’s look at some examples.

For simplicity, We only consider federal taxes and assume that the taxpayer (under 65 years of age) is a single filer with cryptocurrency profits as the sole source of income. Additionally, exceptions, deductions, transaction fees, etc. are not taken into account.

Example 1: John bought 100 GTH for $1600 and sold it all a few months later when the price rose to $1850.

Solution: This is a very simple example involving a single asset and a single tax event.

First, let’s calculate the total taxable income.

Taxable income = ($1850-$1600)*100
=$25,000

Total tax = 10% of $11,000 + 12% of (25,000-11,000)
=$1,100 + $1,680
=$2,780

So this was the simplest case, where the taxpayer invested in an asset and sold it within the same year. It is important to note all transactions and associated costs paid or received for later calculation.

Example 2: Melissa purchased 100 GTH for $1600 each. She then exchanged 50 GTH worth $1,800 each, earning a total of 360 VNB at $250 per coin. Finally, she cashed out all her coins when GTH was at $1900 and VNB was at $235.

Solution: First, understand what a taxable event is.

First: GTH-VNB exchange. Melissa acquired GTH for $1,600 and exchanged it when GTH jumped to $1,800 to obtain VNB at a fair market value of $250 per coin.

Notably, the IRS considers an exchange to be an act of buying followed by a sale. Therefore, while purchases are tax-free, selling GTH for virtual or fiat currency incurs tax and is counted as a taxable event.

2nd: Sell the remaining 50 GTH for $1900 each.

3rd: Sell 360 VNB for $235 each.

That’s a total of three taxable events.

Taxable Income = ($1800-$1600)*50 + ($1900-$1600)*50 + [($235-$250)*360 or $3,000, whichever is less]
=$10,000 + $15,000 – $3,000
=$22,000

**Actual loss was $5,400, but you cannot claim more than $3,000 in a tax year. However, the remainder ($2,400) could be used to offset next year’s profits.

Total tax = 10% of $11,000 + 12% of ($22,000-$11,000)
=$1,100 + $1,320
=$2,420

I’ve seen Melissa trade half of her GTH to VNB and then sell everything. The final transaction had mixed results for her, as she was able to sell GTH for a profit while incurring a loss on VNB.

Notably, this also reduced her tax liability by $5,400.

I hope you understand about short-term capital gains. Report everything and treat it like standard income. Then you’re ready.

However, if you understand the volatility of virtual currencies, you can increase your tax savings by aiming for long-term investment.

#2.Long -term capital gain

More than a year – this is our belief in long-term benefits. Therefore, the tax classification is also different.

You see, you can easily save on taxes just by holding it for more than a year. But still, please be aware that some cryptocurrency investments can be reduced to ashes in a year, as we have already frequently seen them plummet overnight.

Let’s take a look at some more cases, considering the confusing nature of cryptocurrency mining income. In the following example, Another assumption is that short-term and capital gains tax slabs do not change over time. .

Example 3: Kyle mined 6 Chitcoins (CTC) worth $19,000 each. He immediately exchanged 1 CTC for 3,800 Kordabot (KOT). Two years later, when CTC was at $22,000 and KOT was at $6, Kyle liquidated his entire portfolio.

Solution: Importantly, virtual currency taxes are paid in two components depending on three taxable events.

The IRS treats mining (and staking rewards) as income, so the 6 CTCs are added directly to Kyle’s income (short-term profits). Additionally, calculate the long-term tax on his final sale amount of 5 CTC and 3,800 KOT.

Therefore, we will explain the tax calculations in two sections.

a) Short-term tax payable in the same year:

Taxable income: 6 * $19,000 = $114,000

So will I pay taxes on the $114,000?

no. Fortunately, the amount is much lower when you factor in deductions such as mining equipment, real estate, electricity, etc. Furthermore, your status as a hobbyist or professional miner also adds provisions for tracking. Final taxable income.

However, let’s move on since we are taking the example as is, without applying any subtraction or exceptions, etc.

Total short-term tax = 10% of $11,000 + 12% of ($44,725-$11,000) + 22% of ($95,375-$44,725) + 24% of ($114,000-$95,375)

= $20,760

b) Long term tax payable after sale:

This will pay for the profits Kyle has enjoyed with CTC and KOT since his purchase two years ago.

Taxable income = ($22,000-$19,000)*5 + ($6-$5)*3800
=$18,800

Since this falls under the base slab (<$41,675), there is no long-term capital gains tax on the return.

See, this is the beauty of long-term investing.

Ultimately, Kyle ends up paying $20,760 in short-term taxes in the same year he mines the CTC, and his long-term tax liability is waived.

Note: Exchanging 1 CTC for 3,800 KOT may result in another taxable event. However, this exchange was immediately after mining, so the profit was zero.

Your head doesn’t hurt, right? This is because calculating taxes manually is tedious and carries the risk of mistakes for people who make many transactions per month.

For example, if you sell 2 out of 3 BTC that you purchased with all different cost bases (purchase prices), how do you calculate short-term or long-term taxes? Introducing an accounting method called ID.

In addition to regular transactions, the IRS also treats virtual currency received from airdrops and hard forks as income, which everyone must report. And there are tons of clauses that can be overlooked, leading to miscalculations and improper reporting.

Virtual currency tax calculation tool

Therefore, we recommend that professional traders use the crypto tax calculator below.

#1.Coin Leisure

CoinLedger is a premium cryptocurrency tax calculator with features that make cryptocurrency execution easy.

Features:

• Portfolio tracking
• Supports over 10,000 cryptocurrencies
• Unlimited exchange synchronization
• DeFi support
• FIFO, LIFO, HIFO
• Recovery of loss

Sign up for CoinLedger and import all your trades, view your capital gains or losses, and track your portfolio for free. A subscription is only required to download and review complete tax reports.

Additionally, CoinLedger integrates well with tax software such as TurboTax Online, TurboTax Desktop, and TaxACT. Additionally, you can access tax reports such as IRS Form 8949, capital gains, and year-end positions.

Finally, CoinLedger’s premium plan comes with a 14-day money-back guarantee, so you can try it risk-free.

#2. Attendant

The best part about Accointing is that you can get up to 25 transactions for free. This is just as powerful, but the current limit is reporting no more than 50,000 transactions per portfolio.

Features:

• Portfolio tracking
• Supports over 20,000 cryptocurrencies
• custom price alerts
• Portfolio segmentation
• social sharing
• FIFO, LIFO, HIFO
• NFT support

In addition to these standard benefits, you will also benefit from the Acointing cryptocurrency market sentiment analysis tool. Additionally, you can also choose your preferred fiat currency to more accurately measure the size of your current portfolio.

Accointing also supports manual changes to price details for popular tax filing software and cryptocurrencies. It is also compatible with ICOs, airdrops, mining, staking, and more, making it your one-stop cryptocurrency tax software.

Overall, Acointing does a good job for beginners, and even for professional traders, there is a generous 30-day money-back policy to test it thoroughly.

#3.Token tax

TokenTax is not only a cryptocurrency tax tool, but also a full-service tax accounting service for VIP plan users.

Features:

• Portfolio tracking
• DeFi and NFT support
• Compatibility of margin trading and futures trading
• Recovery of loss
• excellent report
• tax preview

Additionally, TurboTax automatically generates the tax forms you need when filing and elsewhere.

Another highlight feature of TurboTax is error reconciliation, which accurately locates and reports missing data. Additionally, this works globally, regardless of location.

Separate reporting on Ethereum gas fees, mining and staking income, and more gives you the insight you need to develop your cryptocurrency investment strategy.

Finally, the only drawback I found is the lack of a free version, trial version, or even a cashback policy.

Virtual currency tax made easy!

Cryptocurrency is still new in terms of taxes, so it’s natural to overlook certain aspects, which could save you money or require inaccurate reporting.

In cases like this, where there are myriad clauses and complexities, a crypto tax tool like Acointing comes to the rescue. Although we have listed only a few here, there are several more crypto tax softwares out there that you can check out for additional options.

have a nice day!

PS: Here are some IRS guides you may want to refer to.

• digital assets
• Frequently asked questions about virtual currencies
• Fundamentals of assets
• capital gains and losses