The tax rate you pay on your crypto gains depends on your income level as well as how long you held your cryptocurrency. These numbers will be different for everyone.
If you held your crypto for less than one year, the associated gains will be considered Short Term Capital Gains.
On the other hand, if you held your crypto for more than one year, your gains will be considered Long Term Capital Gains.
Because the government wants to incentivize individuals to invest for long periods of time, tax rates for Long Term Capital Gains are lower than those for Short Term Capital Gains.
Short term capital gains rates are the same as income tax rates. So to figure out your cryptocurrency tax rate for your short term gains, you simply need to look at the federal income tax brackets.
Long term capital gains are treated more favorably from a tax perspective. The chart below depicts the long term capital gains rates—you’ll see that your rate fluctuates based on your total income level.
John works as a software engineer making $120,000 per year in wages. During the year, he invested $10,000 in bitcoin. After holding it for six months, the price of his bitcoin had doubled, so John sold it for $20,000 and realized a $10,000 capital gain.
In this example, John has $130,000 of total taxable income for the year—$120,000 from his job and $10,000 from his short term capital gain.
This puts John in the 24% Federal Income tax bracket, and thus the rate he pays on his $10,000 short term capital gain from his cryptocurrency investment is 24% (or $2,400).
Let’s say in the above example that John’s holding period was actually two years instead of six months.
In this case, John’s capital gain is actually a long term capital gain. Given John’s $120,000 income from his job, he falls into the 15% long term capital gains tax bracket. The $10,000 he made from his bitcoin investment will be subject to a 15% tax rate (or $1,500).
For everything else you need to know about cryptocurrency and taxes, checkout our Complete Crypto Tax Guide.
If you're looking for an easy way to get your crypto tax reporting done for the year, you can use cryptocurrency tax software like CryptoTrader.Tax to automatically calculate your crypto taxes and generate your necessary tax forms.
You can take these forms to your accountant or import them directly into TurboTax or TaxAct.
Learn more about how cryptocurrency tax software works here!