Crypto Tax Rates USA: What Every American Investor Should Know [IRS Rules 2024]

<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Starting January 1, 2024, the Infrastructure Investment and Jobs Act requires reporting 10,000$+ crypto transactions to the IRS. Yet, the Treasury and IRS deferred digital asset reporting until new regulations are set, promising future guidance and public input on these rules. Stay informed: IRS</p></div></div></div>

The IRS defines cryptocurrencies as "virtual currencies" or "digital assets," classifying them as property. This means that cryptocurrency transactions can lead to capital gains or losses, akin to those from stocks. Given the IRS's increasing focus on cryptocurrency, understanding US tax implications is essential for compliance and managing financial outcomes.

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Defining Cryptocurrency According to the IRS

Transactions with cryptocurrencies—be it selling, spending, or trading—are considered property exchanges by the IRS, leading to potential capital gains or losses based on the transaction's nature and the holding period. This stance emphasizes the importance of diligent record-keeping and understanding tax laws relevant to digital currencies.

Short-Term vs. Long-Term Capital Gains

In U.S. taxation, the duration for which you hold an asset, including cryptocurrency, significantly affects your tax liability. Assets held for less than a year before being sold or transacted result in short-term capital gains, which are taxed at your ordinary income tax rate. On the other hand, assets held for more than a year qualify for long-term capital gains, which often benefit from reduced tax rates. The distinction between short-term and long-term rates underscores the potential tax advantages of holding cryptocurrency for longer durations, thus, it's essential for investors to be mindful of their holding periods.

Tax Rates for Short-Term Capital Gains

Short-term capital gains on assets held for under a year are taxed at your ordinary income rate within the U.S.'s progressive tax system, where rates increase with income.

Your taxable income places you in specific tax brackets, affecting the tax due on short-term gains, with higher earners paying more proportionately. It's vital to know your tax bracket and how it impacts the taxes on your short-term crypto gains to accurately estimate your tax liability.

Tax Rates for Long-Term Capital Gains

Long-term capital gains on assets held for more than a year are taxed at lower rates in the U.S., designed to encourage long-term investment.

These rates vary with income, but are always below those for short-term gains or ordinary income. For instance, the highest long-term gain rate is 20%, considerably less than the top 37% rate for short-term gains. This significant rate disparity underscores the tax benefits of retaining cryptocurrency investments for over a year, emphasizing the importance of understanding these details for strategic financial planning.

How do crypto tax brackets work?

Crypto tax brackets in the U.S. function similarly to tax brackets for other types of income, particularly regarding capital gains from selling assets like cryptocurrencies. The amount of tax you owe depends on the duration you held the crypto and your taxable income level.

For short-term capital gains, the rate you'll pay is equivalent to your ordinary income tax rate. This rate varies based on your annual income and can range from 10% to 37%.

For long-term capital gains, preferential rates apply. Most taxpayers will pay 0%, 15%, or 20%, although there are exceptions for certain high-income taxpayers.

Example of a total tax bill calculation:

Suppose you have a taxable income of $50,000 and realized short-term crypto gains of $5,000 and long-term crypto gains of $10,000.

1. The short-term gains would be taxed at your regular income tax rate. If your rate is, for example, 22%, you'd owe $1,100 (22% of $5,000).
2. The long-term gains would be taxed at the reduced rate. If you fall into the 15% bracket for long-term gains, you'd owe $1,500 (15% of $10,000).
3. Combine the two amounts, and your total crypto tax bill would be $2,600.

Remember, tax situations can be more complex, and other factors might influence your final tax liability. It's recommended to use a specialized crypto tax tool like Blockpit to get an accurate estimate.