Whether or not you will be paying taxes on your cryptocurrency investment depends on how you use it. Long-term capital gains are taxed at a lower crypto tax rate than short-term trades. Learn about the various ways you can reduce your crypto tax burden. Read on to find out the best way to invest in crypto and minimize your tax liability. Here are a few examples of how you can use cryptocurrency to reduce your tax burden.
Long-term capital gains are taxed at a lower crypto tax rate
If you hold onto cryptocurrency for more than one year, you’ll be subject to long-term capital gains tax. This rate is lower than short-term capital gains, which are taxed at a regular income tax rate. Generally, you’ll be taxed 15% or 20%, depending on your income. If you hold on to cryptocurrency for less than a year, you’ll only be subject to short-term capital gains tax, which is treated as ordinary income.
The best way to determine your crypto tax rate is to use the official IRS capital gain table. The IRS has outlined the different capital gain tax brackets. For example, if you hold $1,000 worth of crypto and sell it for $1,500, you’ll be taxed on $500 of the profit. For long-term capital gains, you’ll be taxed at a lower rate of 15%, if you hold onto it for longer than one year.
Capital gains from hard forks are taxed at a lower crypto tax rate
If you own a cryptocurrency that has undergone a hard fork (diversion from a legacy distributed ledger), you may be interested in whether the capital gain from that new coin is taxable. Cryptocurrency hard forks are considered taxable events if the new cryptocurrency is sold for a price higher than its cost basis. Some platforms, such as Gemini and BlockFi, offer interest rewards for holding certain cryptocurrencies. Some DeFi protocols, such as Compound, also reward staking crypto. These rewards are also taxable.
A cryptocurrency hard fork is like a lottery winning for crypto investors. If the new coin is taxable, the capital gain would be treated as a windfall under the test set out by Commissioner v. Glenshaw Glass. The test for determining whether a crypto windfall is taxable was established in Commissioner v. Glenshaw Glass, and ruled that if the recipient had complete control over the new cryptocurrency, it would be treated as ordinary income without a deduction for the return of capital.
Capital gains from short-term trades are taxed at a higher crypto tax rate
As with other assets, capital gains on cryptocurrencies are taxed at different rates. For example, in the US, capital gains on short-term trades are taxed at a higher rate than those on long-term trades. The best way to determine which cryptocurrency investment strategy suits you best is to use a cryptocurrency tax calculator to estimate how much money you will save in taxes.
The holding period is the time period between the sale and transfer of a cryptocurrency asset. This time period determines whether or not the capital gain is long-term or short-term. If the sale is within one year, short-term capital gains are generally taxed at the 15% rate, or 20% if you’re earning more than $80,000 a year.
How to reduce your tax burden for crypto investments
Cryptocurrency investment can be taxed as a capital gain for federal income tax purposes. The rate at which you are taxed depends on how long you hold the cryptocurrency. The longer you hold a cryptocurrency, the lower the capital gain tax rate will be. The IRS permits individuals to gift up to $15,000 worth of cryptocurrency per year. The recipient of the gift may have a low income level and be exempt from paying capital gains taxes on the cryptocurrency, making a gift an ideal way to reduce your tax burden.
Cryptocurrency has an advantage over many other asset classes when it comes to tax-loss harvesting. While stocks have a ‘wash sale rule’ which prevents investors from claiming capital losses on the same stock 30 days before or after the sale, cryptocurrency does not have this rule. This allows investors to sell cryptocurrencies such as Bitcoin, claim a capital loss, and then buy the tokens back later. Another important way to reduce your tax burden for crypto investments is to wait until the assets have reached the long-term property status. Holding crypto assets for more than 12 months will also reduce your capital gains tax.