If you've sold your crypto for more than you bought it, you'll likely pay capital gains tax on the profit. If you lost money through trading, those losses could minimize your capital gains tax bill. So, What are the taxes on crypto gains? Let's see.
What Are The Taxes On Crypto Gains?
Under US tax law, most crypto transactions are taxable. Cryptocurrency is generally treated as 'property' NOT currency. This means it is treated similarly to stocks and will be subject to long-term or short-term capital gains tax. When crypto is paid as interest on an investment or in exchange for goods or services, it will also be taxed as income.
Crypto as a Capital Gain or Loss
Examples of taxable events that would be subject to treatment as capital gains/losses:
- converting one cryptocurrency into another or into an NFT
- converting cryptocurrency into fiat (fiat is a government-backed currency, like US Dollars or Mexican Pesos)
- buying products or services with your cryptocurrency
capital gains from cryptocurrencies in the short term
Let's use an example to highlight this. If you purchased Ethereum in June 2021 for $5,000 and sold it in October of the same year for $7,000, this would be considered a short-term capital gain of $2000 and would be subject to capital gains tax on that amount.
Long-term benefits from cryptocurrencies
The long-term capital tax rate, which is normally around half that of the short-term rate, applies if you hold your cryptocurrency for more than a year.
Along those lines, if you bought an NFT for the equivalent of $20,000 and sold it two years later for the equivalent of $30,000, that $10,000 gain would be assessed at the long-term gains rate.
Crypto capital losses
Although losses are handled the same way, there is one significant difference: tax loss harvesting. This will be covered in greater detail in a later post in this series. A quick summary follows. It is generally believed that selling your cryptocurrency and buying it back shortly after can lock in losses for the current tax year. That is a clear benefit of investing in cryptocurrencies.
Because stocks are governed by the Wash Sale Rule, you cannot lock in losses and purchase back the shares in fewer than 30 days. Since the price of cryptocurrency is currently far lower than it was a year ago, many crypto investors are able to benefit from tax loss harvesting for 2022.
Cryptocurrency Income
Crypto is also subject to income tax rules. Examples of taxable crypto events that may be treated in this way are:
- Block rewards from mining crypto
- Receiving staking rewards
- Payouts for participation in liquidity pools
- Interest payments from yield farming or DeFi lending
-Airdrops
- Payments for goods or services
For example, say you received rewards from providing liquidity to a crypto lending protocol – those would be counted toward your total income for that tax year. The way this amount would be taxed – and what level of tax it would be subject to – would depend on your overall income for that year across both crypto and fiat. In some cases, that income will be subject to self-employment tax withholding, estimated payments, or traditional withholdings if you're being paid crypto for your job.
In short, how your crypto is treated will depend on how you acquired it – from there, it will be subject to capital gains tax and income tax. Your evaluation will be based on a number of factors, such as how long you owned the assets and the amount of money you were earning from other sources of income.
"Crypto And Tax: What Are The Taxes On Crypto Gains?" I hope this article can provide you with a better understanding of the taxes on crypto gains.
