Part II: Calculating Your Crypto Taxes and Tax Rates
- HandyTax
- Oct 22, 2024
- 8 min read
3. Crypto Tax Calculation: Understanding Your Tax Liability
How to Calculate Capital Gains:
Step-by-step guide to calculating capital gains or losses from crypto sales or trades.
Crypto Income Tax Calculation:
How to determine the fair market value of income received through crypto.
Special Cases: NFTs, Margin Trading, and Staking:
Unique transactions like NFTs or decentralized finance (DeFi) activities and their tax treatment.
4. How Much Are You Taxed on Crypto?
Capital Gains Tax Rates:
Short-term vs long-term gains explained.
Federal Income Tax Rates:
The progressive tax system and where your crypto income fits.
NFTs and Collectibles Tax Rate:
Special higher tax rate for NFTs deemed collectibles.
3. Crypto Tax Calculation: Understanding Your Tax Liability
Accurately calculating your crypto taxes is essential for ensuring you report your transactions correctly to the IRS and avoid penalties. This section will guide you through calculating capital gains, determining the fair market value of income received through crypto, and understanding special cases like NFTs, margin trading, and staking.
How to Calculate Capital Gains: A Step-by-Step Guide
When you sell, trade, or dispose of cryptocurrency, you trigger a capital gain or capital loss. Here's a step-by-step process to calculate your gain or loss:
Determine the Cost Basis:
The cost basis is the original value of the cryptocurrency when you acquired it, plus any associated fees (such as trading fees or transfer costs).
Example: If you bought 1 Bitcoin for $30,000 and paid a $500 fee, your cost basis is $30,500.
Determine the Sale Price or Fair Market Value:
When you sell or trade your cryptocurrency, you need to know its fair market value at the time of the transaction. This is the price for which you sold the asset, or in the case of a trade, the fair market value of the cryptocurrency you received in return.
Example: If you sold the 1 Bitcoin for $50,000, the sale price is $50,000.
Calculate the Capital Gain or Loss:
Subtract the cost basis from the sale price. If the result is positive, you have a capital gain. If the result is negative, you have a capital loss.
Example: Sale price of $50,000 - cost basis of $30,500 = a capital gain of $19,500.
Determine Holding Period:
Short-term capital gains apply if you held the asset for less than a year, and these gains are taxed at the same rate as your ordinary income.
Long-term capital gains apply if you held the asset for more than a year, and these gains are taxed at lower rates (between 0% and 20% depending on your income).
Report Your Capital Gains or Losses:
You’ll need to report these gains or losses on Form 8949 and Schedule D when filing your tax return. Ensure you categorize them as short-term or long-term based on your holding period.
Crypto Income Tax Calculation: Determining Fair Market Value
When you receive cryptocurrency as income—whether from mining, staking, payment, or an airdrop—it is treated as ordinary income and taxed based on its fair market value at the time of receipt.
Here’s how to calculate the taxable income from cryptocurrency:
Identify the Date of Receipt:
The day you receive the cryptocurrency is the point at which you need to determine its fair market value.
Find the Fair Market Value (FMV):
Check the price of the cryptocurrency in USD on the date you received it. You can use reliable crypto pricing services or the exchange rate from the platform where the transaction occurred.
Calculate the Taxable Income:
Multiply the number of coins or tokens received by their FMV to find the total taxable income.
Example: If you receive 0.5 Ethereum as payment for services on a day when 1 ETH is worth $3,000, your taxable income is 0.5 ETH x $3,000 = $1,500.
Include the Income in Your Tax Return:
Report this income on your tax return under ordinary income (e.g., Schedule 1 or Schedule C if self-employed). You’ll be taxed based on your federal and state income tax brackets.
Special Cases: NFTs, Margin Trading, and Staking
Some crypto transactions are unique and may require additional considerations. Here’s a breakdown of how NFTs, margin trading, and staking are taxed.
NFTs (Non-Fungible Tokens):
Buying NFTs: If you purchase an NFT with cryptocurrency, the IRS treats this as a taxable event. The cryptocurrency you used to buy the NFT is considered "disposed of," so you'll need to calculate capital gains or losses based on the cost basis of that crypto and its value at the time of the purchase.
Selling NFTs: When you sell an NFT, you may owe capital gains tax on any profit made. The gain is calculated based on the difference between your purchase price (cost basis) and the selling price. If the NFT is considered a collectible, it may be subject to a higher 28% tax rate on long-term gains.
Minting and Selling Your Own NFTs: If you create and sell NFTs, the IRS may treat your earnings as ordinary income, which will be taxed at your regular income tax rate.
Margin Trading and Leverage:
Opening a Margin Position: There’s generally no tax event when you open a margin position or use leverage to trade. Taxes apply when you close the position.
Closing a Margin Position: When you close a margin trade, you realize a capital gain or loss, depending on whether you made a profit or not. This is treated like a sale or trade, and the same capital gains tax rules apply.
Liquidation of Collateral: If your margin position is liquidated and collateral is sold to cover your losses, this is considered a disposal, and you may have a taxable event if there is a capital gain from the liquidation.
Staking Rewards:
Receiving Staking Rewards: The IRS treats staking rewards as income when they are received. The fair market value of the staking rewards on the day they become available to you is taxable as income.
Disposing of Staked Coins: When you later sell or trade the staking rewards, you may owe capital gains tax on any profit made, just like with any other cryptocurrency transaction. The cost basis for these coins is their value at the time they were received as rewards.
4. How Much Are You Taxed on Crypto?
Understanding how much you’ll be taxed on your cryptocurrency transactions depends on several factors, including the type of transaction and how long you held your assets. In this section, we’ll explain the capital gains tax rates, the federal income tax rates, and special tax rules for NFTs and collectibles.
Capital Gains Tax Rates: Short-Term vs. Long-Term Gains
When you sell, trade, or spend cryptocurrency and realize a profit, you owe capital gains tax on the gain. The amount you’ll owe depends on how long you held the asset before selling it, as this determines whether your gain is classified as short-term or long-term.
1) Short-Term Capital Gains:
Applies: If you held the cryptocurrency for less than a year before selling it.
Tax Rate: Short-term capital gains are taxed at your ordinary income tax rate, which is based on your income bracket.
Example: If you bought 1 Ethereum for $2,000 and sold it after six months for $3,000, you have a $1,000 short-term capital gain. If you’re in the 24% income tax bracket, you’ll owe $240 in taxes on the gain.
2) Long-Term Capital Gains:
Applies: If you held the cryptocurrency for more than a year before selling it.
Tax Rate: Long-term capital gains are taxed at lower rates, which are typically more favorable than short-term rates. The rates are:
0% for individuals with taxable income up to $44,625 (for the 2024 tax year).
15% for individuals with income between $44,626 and $492,300.
20% for individuals with income above $492,301.
Example: If you bought 1 Bitcoin for $10,000 and sold it after two years for $40,000, you have a $30,000 long-term capital gain. If your taxable income places you in the 15% bracket, you would owe $4,500 in taxes on the gain.
Key Point: Holding your cryptocurrency for more than a year allows you to benefit from lower tax rates, making long-term capital gains more tax-efficient than short-term gains.
Federal Income Tax Rates: The Progressive Tax System and Crypto Income
If you receive cryptocurrency as income, whether through mining, staking, payment for goods or services, or airdrops, you’ll owe federal income tax on the value of the crypto at the time it was received. This income is taxed based on your federal income tax bracket.
The federal income tax system is progressive, meaning the rate you pay increases as your income increases. For the 2024 tax year, here are the federal income tax brackets:
Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
10% | $0 - $11,600 | $0 - $23,200 | $0 - $16,550 |
12% | $11,601 - $47,150 | $23,201 - $94,300 | $16,551 - $63,100 |
22% | $47,151 - $100,525 | $94,301 - $201,050 | $63,101 - $130,550 |
24% | $100,526 - $191,950 | $201,051 - $383,900 | $130,551 - $210,800 |
32% | $191,951 - $243,725 | $383,901 - $487,450 | $210,801 - $263,700 |
35% | $243,726 - $609,350 | $487,451 - $731,200 | $263,701 - $609,350 |
37% | Over $609,350 | Over $731,200 | Over $609,350 |
Example: You receive 0.5 Bitcoin as payment for freelance work when Bitcoin’s fair market value is $30,000. You must report $15,000 (0.5 BTC x $30,000) as ordinary income. If your total income for the year puts you in the 22% tax bracket, you’ll owe $3,300 in federal income tax on this crypto income.
In addition to federal income tax, depending on where you live, you may also owe state income tax on your cryptocurrency income.
NFTs and Collectibles Tax Rate: Special Rules for NFTs Deemed Collectibles
NFTs (non-fungible tokens) are treated similarly to other cryptocurrencies for tax purposes when it comes to capital gains. However, there is an important distinction: some NFTs may be classified as collectibles by the IRS.
Collectibles include items like art, antiques, and certain coins. If the IRS considers an NFT to fall under this category, it could be subject to a higher tax rate on long-term gains—up to 28%, which is higher than the typical 20% maximum for other long-term capital gains.
When NFTs are Deemed Collectibles:
The IRS uses a "look-through analysis" to determine whether an NFT should be taxed as a collectible. If the NFT represents ownership of a tangible collectible (like artwork or antiques), it may be taxed at the higher rate.
Tax Rates on NFTs as Collectibles:
If you hold an NFT deemed a collectible for more than one year and then sell it, the long-term capital gains tax rate can go as high as 28%, rather than the standard long-term capital gains rates (0%, 15%, or 20%).
Example: You buy an NFT artwork for $10,000 and sell it two years later for $50,000. If the IRS deems this NFT a collectible, you could owe up to 28% tax on the $40,000 gain, resulting in a tax bill of $11,200.
HandyTax: Your Solution for Crypto Taxes
At HandyTax, we simplify the complex world of crypto taxes, ensuring you stay compliant with IRS regulations.
Whether you're calculating capital gains from crypto sales, determining income from mining or staking, or dealing with special cases like NFTs and DeFi transactions, we provide expert guidance every step of the way.