Those who bought certain cryptocurrencies in the past might be sitting on some hefty gains. If they decide to cash out and convert to fiat, they will have to pay taxes on crypto gains.
But other than converting directly to fiat, what other actions might be considered taxable events? How much tax might an investor owe? And how might someone minimize their tax liabilities when it comes to crypto transactions?
Here are a few things to keep in mind when trying to answer the question “how are crypto gains taxed?”
Capital Gains Tax Events
There are many crypto-related actions users might take that result in having to pay taxes on crypto gains.
Basically, anything that results in realized gains or losses counts as a taxable event. This includes things like:
- Selling crypto for fiat
- Using crypto to pay for goods or services
- Depositing crypto onto a crypto-backed pre-paid debit card
- Exchanging one cryptocurrency for another
There are also crypto-related events that could be classified as income tax events. Some of these include:
- Receiving crypto via hard forks or airdrops
- Earning crypto from staking, liquidity pools, or interest from DeFi
- Earning crypto from mining activities
- Being paid in crypto for goods or services
It can be a good idea to keep track of any transaction that falls into one of the above categories. Of course, if you have good crypto tax software, those details will be taken care of for you.
How much tax do you pay on crypto gains?
Taxes on crypto gains are generally the same as other investments like property, stocks, or bonds. These gains are called capital gains and are subject to certain tax rates that vary based on variables such as:
- An investor’s current tax bracket
- How long the asset was held before being sold
If an investor holds an asset for less than or equal to 365 days before selling, that sale will be subject to short-term capital gains tax rates. Investments held for more than one year can be categorized as long-term and subject to different tax rates. Long-term rates are generally lower than short-term ones.
Short-term capital gains rates tend to be higher and fall into one of seven tax brackets ranging from 10% to 37%.
Long-term capital gains rates are often lower and fall into one of three tax brackets – either 0%, 15%, or 20%, depending on an investor’s income.
In some cases, it’s possible that an investor might not owe any taxes on their crypto gains at all. If an individual falls into the lowest tax bracket possible and holds assets for more than one year, their capital gains rate could be 0%. In almost all other scenarios, individuals will at least owe some taxes on crypto gains.
There can be ways to reduce related tax liabilities, though.
How to Minimize Crypto Taxes
One way to reduce taxes on crypto gains is to employ a common strategy among investors known as tax-loss harvesting. This involves selling some investments at a loss to offset the capital gains incurred by investments that were sold at a gain. Note that the selling has to be done during the same tax year that the gains were realized.
This can work because an investor’s capital gains or losses are calculated based on the total return of their asset sales for a given year.
Say you made $1,000 in gains from selling a certain coin. But you’re also holding a different coin that you bought for $500 and is now down 50%, trading at $250. If you sell the coin that is down, in this example, you would realize a capital loss of $250. This loss could then be subtracted from the previous capital gain of $1,000. The result would be that an investor only owes taxes on $750 in gains (1,000 - 250) rather than $1,000.
Another way to potentially reduce taxes on crypto gains would be to hold assets for more than 365 days. As mentioned in the previous section, doing so would make proceeds from related sales subject to long-term capital gains tax rates, which will almost always be lower.
How to Potentially Avoid Capital Gains Tax on Crypto
You may be wondering: How do I avoid capital gains tax on crypto?
In most cases, you can’t. But there are a few special circumstances that could result in investors not having any tax liability.
One option would be to never sell. This would include not buying anything with crypto, which is also a taxable event. An investor would also have to be careful not to exchange one cryptocurrency for another, send any crypto to another individual, or take any of the other actions mentioned previously.
Of course, there’s no way to take advantage of potential gains if you never sell. Or is there?
Going this route would require someone to take out a loan against their crypto if they wanted to access liquidity. Doing so isn’t for everyone but might be suitable for some users.
Some things worth considering for those looking to take out a loan against their crypto include:
- The loan-to-value (LTV) ratio
- The interest rate
- The repayment terms of the loan
- The volatility of the underlying asset
Because cryptocurrencies can be so volatile, there are risks associated with taking out a loan collateralized with crypto. If the price drops far enough, borrowers could receive a margin call, requiring them to deposit more crypto or pay back the loan sooner than expected. For this reason, the lower the LTV ratio, the better.
Crypto Tax Software Can Help with Taxes on Crypto Gains
In the end, there’s often no way to avoid paying taxes on crypto gains. The question then becomes: how do you ensure accurate calculations of the taxes you owe?
One way would be to use state-of-the-art crypto tax software like Cointelli.
Cointelli tracks, records, and calculates all the information needed for crypto tax preparation. Cointelli can quickly figure out what is taxable, what taxes are due, and at what rates. Capital gains are calculated with an unrivaled degree of accuracy, saving users both time and money.
Among other useful features, Cointelli offers users:
- A user-friendly interface
- Accurate, reliable reporting
- A simple, step-by-step process
- A guide that provides help along the way
- Customer service from real tax professionals
- Easy-to-read reports that can be sent straight to an accountant or tax service
If you’re having trouble calculating your crypto taxes, take a close look at what Cointelli has to offer today.
Got any crypto tax questions? Ask us on Twitter! Our co-founder & crypto tax expert Daniel @Cointelli_Dan will answer you directly!