How Does Cryptocurrency Affect Taxes for Individuals?

Cryptocurrency seems to become more popular by the day. Its rise in popularity is largely driven by the potential to make a profit, decreasing transaction fees, and its overall security that strengthens as decentralization of the network increases. Whether you’ve purchased cryptocurrency once or countless times, it’s essential that you consider how cryptocurrency affects your taxes.

At a high level, Bitcoin and other cryptocurrencies that you buy or sell are subject to a tax enforced by the IRS. On your tax filing, all transactions must be entered in U.S. dollars, requiring a conversion from cryptocurrency value into USD.

As the IRS continues to crack down on cryptocurrency tax compliance, it’s more important than ever that you have a sound grasp on cryptocurrency tax rates.

Determining Your Tax Rate

The cryptocurrency tax rate is equivalent to the capital gains tax rate, meaning the 2021 rates for crypto will be anywhere from 10-37% for short-term capital gains and 0-20% for long-term capital gains.

To determine how asset gains are calculated, the IRS looks at two factors:

Your income
The holding period, or how long you have owned the cryptocurrency

Cryptocurrency Short-Term Capital Gains

In short-term gains, investors will have held the asset for a period of 365 days or fewer. This means that if you hold onto your cryptocurrency asset for less than one year, any profit that you make is subject to a short-term capital gains tax rate.

This is the same percentage as your ordinary tax income rate meaning you can add your crypto earnings to your current income before adding on the appropriate tax percentage.

Cryptocurrency Long-Term Capital Gains

On the flip side, you may have held onto your cryptocurrency for longer than a year, meaning it is subject to a long-term capital gains tax rate. Long-term gains are taxed separately from your ordinary income and are taxed at 0%, 15%, or 20% depending on your annual income and filing status. Since these rates are lower than short-term capital gains rates, it’s ideal to hold onto your assets for longer than 12 months, if possible.

Factors to Consider

Not all crypto acquisitions result in the same tax outcome. Here are some scenarios to consider:

Did You Mine the Cryptocurrency?

If you mined cryptocurrency, it is considered taxable income based on the fair market value at the time of mining.

Did You Inherit It or Receive It as a Gift?

The IRS sees inherited, gifted, or donated cryptocurrency as generally tax free to the recipient. However, there are specific rules and requirements that you should speak to a crypto CPA about if this applies to you.

Did You Receive It for the Sale of Goods or Services?

If you accept cryptocurrency at your business, it is subject to income tax the same way payments in USD are.

Did You Trade or Exchange It for Another Digital Asset?

The tax on traded or exchanged cryptocurrency is dependent upon how long you held it. It will either be subject to a short-term or long-term capital gains tax.

How a Seasoned Crypto Tax CPA Can Help

If you’ve always wondered how cryptocurrency affects taxes, you may feel overwhelmed. Our expert crypto tax CPAs can help you navigate this unknown territory to ensure your taxes are filed properly! Take advantage of our free consultations to get started!

Post by Curt Mastio
Dec 1, 2023 2:21:32 PM

Curt Mastio started Founder’s CPA in 2017 and currently serves as the Managing Partner of the firm. After obtaining both his Bachelor’s and Master’s degrees in accounting from the University of Illinois in Urbana-Champaign Curt started his career in Big Four public accounting. Shortly thereafter Curt served as the Chief Financial Officer of Storage Squad began his stint as an Adjunct Instructor at Northwestern University’s Farley Center for Entrepreneurship and has been teaching Accounting & Finance to undergraduate students for 6+ years. In his current role Curt oversees strategy, operations, and business development at Founder’s CPA. Further, Curt has experience working directly with 200+ startups and small businesses providing accounting, tax, and outsourced CFO services. His industry expertise lies in the SaaS, Blockchain, Marketplace, and Fintech industries. He has served as a key advisor working directly with startups that range from pre-revenue to companies generating over $30 million dollars a year in revenue. Lastly, he serves a key role working directly with the firm’s clients that have collectively raised over $200 million in venture capital funding to date. Curt is also an active advisor, mentor, and investor in the startup ecosystem. He has facilitated numerous workshops, webinars, and presentations to incubators and other startup-centric organizations. He is also an active mentor for Techstars in both Chicago and Iowa. Outside of his daily professional duties Curt is actively involved with Beat the Streets Chicago and was a founding member of its Young Professionals Board. His efforts in both leadership and community involvement were recognized when he was awarded the Illinois CPA Society’s Outstanding Young Professional Leadership Award in 2020. He was also a panelist at their annual conference in 2022 where he spoke about his experiences starting and operating a public accounting firm. He maintains an active Certified Public Accountant designation that he obtained in 2014. Outside of work, Curt can be found spending time with his friends & family including his dog Rufus. His hobbies include golf, boating, cooking, reading, and attending sporting events & concerts.