Did you know that one of the most significant tax breaks in the federal tax code is the long-term capital gains tax rate on property? 1
And for the record, cryptocurrencies are considered property.
So if you are a crypto owner, that probably got your attention.
Heading into 2021, you’ll be yearning for more transparent tax regulations to guide you through your crypto investments.
Well, I’ve got one for you.
Today, I will discuss the long and short-term effects of capital gains taxes for your virtual currency.
What Are Crypto Capital Gains Taxes?
When you sell property (cryptocurrencies), the price you sold it for minus the price you paid for it is called the gain. In contrast, it is called a loss when the gain is negative.
For tax calculations, all your gains and losses are added together to get the net gain.
The good news is that Congress rewards investors by taxing long-term gains at a much lower tax rate to encourage long-term investing.
So what are those anyway?
What Are Long-Term Crypto Capital Gains Taxes?
If you own property for over a year before you sell it, it becomes a long term investment. Property sold before the year is up is called short-term investments or gains.
How Are Short-Term Crypto Capital Gains Taxed?
All the short-term gains and losses are combined to get the net short-term gain. Short-term gains are taxed as ordinary income at your marginal tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37%).
How Are Long-Term Crypto Capital Gains Taxed?
All the long-term gains and losses are combined to get the net long-term gain. Long-term gains are taxed at a special rate (0%, 15%, or 20%).
When You Have Negative Crypto Capital Gains Taxes (Net Losses), How Is It Taxed?
When net short-term gains and net long-term gains are added together, resulting in a negative amount (net loss), a special tax rule kicks in. A taxpayer can only claim $3000 of loss on their tax return. The remainder is carried over or saved for the next year to offset future gains.
The silver lining here is that the $3000 of loss reduces taxable income and thus your taxes.
When Do I Qualify For A 0% Crypto Capital Gains Tax Rate?
If your taxable income (your income after deductions) is zero or in the lowest tax bracket (10%), then the first $54,100 of net long-term capital gains if single, or $80,800 if married, is taxed at 0% long-term capital gains.
Please take note: these rates I am discussing are the 2021 rates.
When Am I Subject To The 20% Crypto Capital Gains Tax Rate?
Almost everyone else enjoys the 15% long-term capital gains tax rate. However, if your taxable income puts you into the highest tax bracket of 37%, your long-term capital gains tax rate increases to 20%. The 37% tax for 2021 starts when income exceeds $523,600 if single or $628,300 for married filing jointly.
Wait, there’s more and something for the medium to large investors to be aware of…
What Is The Net Investment Income Tax?
As a part of the Obamacare tax, taxpayers with capital gains (passive) income above $200,000 (single) or $250,000 (married) also are subject to the Net Investment Income Tax (NIIT).
NIIT is an additional 3.8% tax on the passive income over the thresholds.
A Final Note For Medium To Large Crypto Owners
One last note, If you expect to have crypto assets worth over $150,000, you may want to consider our CryptoTaxAudit Defense Membership a good investment for you.
Be sure to keep up-to-date with our emails. We will continue to have some insight that you should consider for protecting yourself against an IRS examination.
1 IRS 2014-21
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