If you missed Part 1, we outlined the basics of cryptocurrency tax, when you owe taxes on different types of trade (including when you receive crypto as a gift), calculating your cryptocurrency capital gain or loss, understanding different accounting methods when it comes to calculating this, and how to keep track of everything.
This article will go through how much tax you’ll have to pay on your short term capital gains versus long term capital gains, and how to report cryptocurrency taxes. We’ll also delve into the different types of cryptocurrency transactions, including decentralized finance (DeFi) taxes and Non-fungible tokens (NFT), and their tax implications.
How much tax do you pay on crypto?
In Part 1, we learned how to calculate our gains. Now that we have these figures, let’s delve into exactly how much you’ll owe. This will depend on the type of gain as seen below:
Short term capital gains
Short term capital gains are any gains realized using a holding period 365 days or less. If this is the case for your crypto gains, you will be subject to ordinary income tax rates.
The 2021 short term tax rates were released by the IRS:
| Tax Bracket / Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 – $9,950 | $0 – $19,900 | $0 – $14,200 |
| 12% | $9,951 – $40,525 | $19,901 – $81,050 | $14,201 – $54,200 |
| 22% | $40,526 – $86,375 | $81,051 – $172,750 | $54,201 – $86,350 |
| 24% | $86,376 – $164,925 | $172,751 – $329,850 | $86,351 – $164,900 |
| 32% | $164,926 – $209,425 | $329,851 – $418,850 | $164,901 – $209,400 |
| 35% | $209,426 – $523,600 | $418,851 – $628,300 | $209,401 – $523,600 |
| 37% | $523,601+ | $628,301+ | $523,601+ |
The 2022 short term tax rates are slightly different, as seen below:
| Tax Bracket / Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $10,275 | $0 – $20,550 | $0 – $10,275 | $0 – $14,650 |
| 12% | $10,276 – $41,775 | $20,551 – $83,550 | $10,276 – $41,775 | $14,651 – $55,900 |
| 22% | $41,776 – $89,075 | $83,551 – $178,150 | $41,776 – $89,075 | $55,901 – $89,050 |
| 24% | $89,076 – $170,050 | $178,151 – $340-100 | $89,076 – $170,050 | $89,051 – $170,050 |
| 32% | $170,051 – $215,950 | $340-101 – $431,900 | $170,051 – $215,950 | $170,051 – $215,950 |
| 35% | $215,951 – $539,900 | $431,901 – $647,850 | $215,951 – $323,925 | $215,951 – $539,900 |
| 37% | $539,901+ | $647,851+ | $323,926+ | $539,901+ |
Long term capital gains
Long-term capital gains are any gains realized after 366 days or more of holding the asset. These gains are taxed from 0-20% depending on the tax bracket you are in based on your ordinary income tax, as seen below:
2021 Long Term Capital Gains Tax Brackets
| Tax Bracket / Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 – $40,400 | $0 – $80,800 | $0 – $54,100 |
| 15% | $40,400 – $445,850 | $80,801 – $501,600 | $54,101 – $473,750 |
| 20% | $445,851+ | $501,601+ | $473,751+ |
2022 rates are slightly different, as seen below:
2022 Capital Gains Tax Rate Thresholds
| Tax Bracket / Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
|---|---|---|---|---|
| 0% | $0 – $41,675 | $0 – $83,350 | $0 – $41,675 | $0 – $55,800 |
| 15% | $41,675 – $459,750 | $83,350 – $517,200 | $41,675 – $258,600 | $55,800 – $488-500 |
| 20% | $459,750+ | $517,200+ | $258,600+ | $488-500+ |
Crypto income tax events
Crypto income tax events include; earning interest from decentralized finance, receiving cryptocurrency via airdrop or for carrying out a task, and earning crypto mining income from transaction fees and block rewards.
A crypto airdrop is a promotional event for a new blockchain-based service. In an airdrop, participants are given free crypto coins or tokens by a new service.
If any of these apply to you, the income you receive will be treated as ordinary income, just like the short-term capital gains, and the amount of tax you pay depends on your total income in the year across all sources of revenue.
How to report cryptocurrency on your taxes?
Now that we’ve calculated the amount of tax you will have to pay, let us take a look at how we can actually report this to the government.
Cryptocurrency capital gains are reported on IRS form 8949: Sales and Other Dispositions of Capital Assets, alongside any other capital gains/losses you have realized through stocks or shares.
If, however, you receive cryptocurrency income events (as a reminder, this includes income you receive from mining, staking, interest, or crypto you have received in return for a job or task), it is a little bit more tricky and depends on the situation.
Schedule C – This will need to be filled out should you earn crypto like a business, so receiving crypto in exchange for a job or task, or running a cryptocurrency mining operation. This is often seen as self-employment income.
Schedule B- This will need to be filled out should you earn crypto through staking income or interest rewards from lending.
Schedule 1- This will need to be filled out should you earn crypto through airdrops, forks, or other crypto wages and hobby income. This is often seen as “other income” and is subject to personal income tax.
What are the different types of Cryptocurrency transactions?
There are two main types of cryptocurrencies; coins and tokens. Coins are built on blockchains and intended as a form of currency. An example of a coin is Ether (ETH), which is a coin on the Ethereum blockchain.
Tokens, on the other hand, are usually created and given out through an ICO (Initial Coin Offering), very much like our traditional IPO. They can be value tokens, security tokens, or utility tokens.
- Value tokens are things like BitCoin.
- Security tokens are similar to stocks on the traditional stock exchange.
- Utility tokens are designated for specific uses.
Just like an American dollar bill, the token itself doesn’t exactly have value, like the paper dollar value may not be worth $1, however they can be used in transactions for other things.
It is different from a coin as it is constructed within an existing blockchain like Bitcoin or Ethereum.
There are many different ways that both coins and tokens can be used in transactions across the industry. We’ve outlined the main ones below and how they work when it comes to your taxes.
DeFi taxes and how they work
DeFi services, (or decentralized finance) such as Uniswap, Maker, and Compound have soared in popularity. They allow you to receive interest income from crypto lending activities or liquidity pools. This is considered a taxable income and must be reported on your taxes, similarly to mining and staking rewards.
The income you receive can take one of two forms:
- Ordinary income
- Capital gains income
To determine which your income falls into, you need to look at a couple of factors.
Your DeFi taxes are seen as ordinary income if you lend out and receive in the same currency. For example, if you lend bitcoin, you must receive your interest payments in bitcoin too.
If, however, you are issued an LPT (Liquidity Pool Token), you may then recognize the income as capital gains rather than ordinary. This is because you have essentially traded one asset for another asset.
Centralized exchange taxes and how they work
Whilst cryptocurrency was founded upon the feature of decentralization, there are also many centralized exchanges. In fact, most transactions go through centralized exchanges. You may prefer to trade via a centralized exchange as they are held to more customer rules, and there is higher degree of reliability. Examples of centralized exchanges include Binance, Coinbase, Kraken, etc.
Just like the DeFi taxes, your gains from trading crypto on a centralized exchange are taxed as ordinary income.
NFT taxes and how they work
Non-fungible tokens, or NFT’s, are treated as property similar to cryptocurrency. When you buy an NFT and sell it later on, you incur a capital gain/loss that you can then report on form 8949 as mentioned above.
DAOs and how they work
DAOs, or Decentralized Autonomous Organizations are organizations that rely on blockchain technology to create a product or service in a transparent way. There are generally members around the globe that have to collectively grant authority for any of the money to be spent in any capacity. There is no CEO or CFO who is “in charge”; it is more of a community.
There are plenty of examples of DAOs, Aragon being a big one in the virtual, subreddit world. Some DAOs you can invest in, or buy into. Depending on the nature of the DAO, you may receive a return on your investment. These investments are subject to short-term or long-term capital gains taxes, depending on the length of time that you held the asset.
Cryptocurrency for buying goods and services
The initial reason for BitCoin, was to create a decentralized stable currency that you could buy and sell goods and services using. Whilst this has changed over time, it is still possible to buy and sell using cryptocurrencies.
If you earn money from selling a good or service using crypto, it works the same as if you were to make “fiat” currency or USD. You have to declare this amount on your tax return as income earned.
This style of earning and using cryptocurrency has mostly vanished, though, as prices of each coin remain extremely volatile.
It is important to note that governments around the world are focusing more and more on cryptocurrency (specifically the rules and regulations around taxation) as it becomes a more popular source of revenue for people around the globe. This is why it is so important that you declare your cryptocurrency taxes in the appropriate manner, to avoid fines and penalties in the future.
Do you need help with your specific cryptocurrency situation and would like to talk to a professional? Contact the team at Cerebral Tax Advisors. We are here to help!