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Crypto Capital Gains Tax 2023: A Complete Guide

Crypto Capital Gains Tax 2023: A Complete Guide

Crypto capital gains tax is a topic of significant importance for cryptocurrency investors. Understanding the tax implications is crucial with the volatility and fluctuations in the crypto market. This article will delve into the intricacies of crypto capital gains tax, exploring how it affects individuals and institutions alike. Additionally, we will provide an overview of the current taxation landscape for all types of crypto assets. Stay informed and navigate the world of crypto investments with clarity regarding the tax obligations involved.

What Is a Crypto Capital Gains Tax

A capital gain is a profit from selling a property or an investment. A crypto capital gain, therefore, is a gain realized on the sale of crypto or a non-fungible token (NFT) for more than the initial investment. This gain is considered taxable and triggers a taxable event. The tax imposed on it is the crypto capital gains tax.

Taxable Events

The following are events that trigger a capital gain tax.

Trading Crypto For Fiat:

The most common capital gain taxable event is crypto trading for fiat currency. For instance, if you purchase 2 ETH for $1,000 and sell it for $2,000 after six months, a short-term capital gain of $1,000 is realized, and a tax is imposed on that amount. The same applies to a long-term capital gain if the crypto is held for more than 12 months.

Using Crypto To Purchase Goods and Services:

Using cryptocurrency to purchase goods or services attracts a capital gain tax. For example, if you buy a bitcoin for $100 in 2013 and with a current worth of $60,000, you use it to purchase a new car for $60,000, you will have a long-term capital gain of $59,900 – the difference between the cost of the vehicle and the value of the bitcoin at purchase.

Trading One Crypto For Another: 

The exchange of one crypto for another is considered a taxable event, whether traded directly one-to-one on Uniswap or in an exchange. Capital gain is the difference between the value of crypto at acquisition and the value of your entire crypto holding at the time of the trade. This is also applicable when an NFTis used to purchase crypto.

Special cases

Crypto donations: 

Crypto donations are regarded as similar to cash donations and are thus tax deductible. The limits for deductions vary from 20% to 60% of adjusted gross income. However, you can apply to increase your limit up to 100%, meaning all crypto gains are deductible, thus no payment on capital gains tax. However, if the crypto is sold and the after-tax cash is donated to a charity, the capital gain could be short-term or long-term, depending on the holding period.

Crypto Gifts:

Crypto gifts below $15,000 do not attract a gift tax. Beyond that, Form 709 is filed, and a tax is payable. However, the sale of a crypto gift has a similar cost basis to that of a gift donor and attracts a capital gains tax.

Inherited crypto assets: 

Inherited crypto assets are subject to similar estate regulations as any other class of assets.

How To Determine Crypto Capital Gains Tax

According to the IRS, the time of hodling the crypto question affects the amount of capital gains tax one is liable to pay. Holding periods begin the day the crypto asset is purchased and ends when ownership of the asset is transferred, creating the distinction between long-term and short-term capital gains. It’s therefore essential to know the crypto asset receipt date, applicable tax rates and rules, and the date of disposal.

Cryptocurrencies held for 12 months or less attract short-term capital gains tax, while those held for more than 12 months are subject to long-term capital gains tax.

Short-term Gains

These are gains realized at the disposal of a crypto asset after holding it for less than a year. Short-term gains are folded into the regular income, and taxes are paid at the ordinary income tax rate. However, incomes above a specified threshold attract a separate net investment income tax (or NII).

Short-term gains are treated just as ordinary income and taxed, ranging from 10% – 37% depending on the income level.

Short-Term Capital Gains Tax Rates for 2022
RateSingle filersMarried couples filing jointlyHead of household
10%Up to $10,275Up to $20,550Up to $14,650
12%$10,275 – $41,775$20,550 – $83,550$14,650 – $55,900
22%$41,775 – $89,075$83,550 – $178,150$55,900 – $89,050
24%$89,075 – $170,050$178,150 – $340,100$89,050 – $170,050
32%$170,050 – $215,950$340,100 – $431,900$170,050 – $215,950
35%$215,950– $539,900$431,900 – $647,850$215,950– $539,900
37%$539,900+$647,850+$539,900+

Long-term Gains 

This comes into effect when an asset is disposed of after holding it for more than a year. These gains are taxed at rates ranging from 0% to 20%, depending on total income (plus the NII for higher incomes). The long-term gains tax rate is almost always lower than the short-term gains rate and encourages longer-term investments. A majority pays less than 15%, and if the annual taxable income is less than $80,000, the pay may be zero. Below is a table showcasing the long-term capital gain tax rates, as per recent reports:

FILING STATUS0% RATE15% RATE20% RATE
SingleUp to $41,675$41,676 – $459,750Over $459,750
Married filing jointlyUp to $83,350$83,351 – $517,200Over $517,200
Married filing separatelyUp to $41,675$41,676 – $258,600Over $258,600
Head of householdUp to $55,800$55,801 – $488,500Over $488,500

Capital Gains Tax Strategies

Income levels and filing status determine tax brackets. It is, however, possible to minimize capital gains tax liability. Some options to consider are:

Hold Investments Longer 

It is simply holding on to investments longer than a year. However, this depends on whether one is an active day trader or prefers a buy-and-hold approach to portfolio building.

Harvest Losses 

Tax-loss harvesting enables capital gains to be offset by taking planned loss-sale on your investments. This strategy is applicable inside a taxable brokerage account. 

Asset Location

Asset allocation is essential in portfolio diversification. Capital gains tax applies only to investments held in taxable brokerage accounts. Placing assets in tax-advantaged accounts, such as a 401(k) or IRA, is quite advantageous.

Reinvest Dividends

Reinvesting dividends enables purchasing additional assets without investing extra money. Dividend-paying assets bolster a portfolio and discourage selling off winners. 

Bottom Line

Tax payment is surely one of the most sensitive topics among financial regulators. Just to give you an insight into how dire tax evasion is, you can walk yourself into a £6K fine or a 6-month jail term for evading tax in the UK. So it would be well within your best interest to keep your remittances up-to-date, and in this guide, we have shown you how the rates apply.

Payment of capital gains tax is unavoidable, but there are strategies to minimize what you’ll pay for short-term gains. Creating an investment strategy similar to a tax-diversified investment strategy will help retain more gains over time.