Cryptocurrency

Crypto Tax Rates 2023 by Income Bracket

In the intricate realm of cryptocurrency, a web of tax obligations ensnares those who venture into its digital domain. From the seemingly innocuous act of trading one cryptocurrency for another, to reaping gains from non-fungible tokens (NFTs), each transaction holds the potential to draw forth the taxman’s gaze.

Indeed, the path to tax compliance is paved with meticulous record-keeping, for the absence of accurate documentation can obscure the intricate dance of gains and losses come tax season. A misstep in fulfilling one’s crypto tax obligations, even if borne of an honest oversight, may incur the weight of substantial penalties.

This comprehensive guide seeks to illuminate the enigmatic landscape of crypto taxes, guiding you through the labyrinth of regulations and requirements. You shall be acquainted with the intricacies of filing crypto taxes, the varying rates that govern this peculiar realm, and other vital details that govern this intricate and multifaceted subject. In the pursuit of financial clarity and compliance, this guide stands as a beacon of knowledge and understanding.

1. What is the cryptocurrency tax rate?

Cryptocurrency taxation dances to the tune of diverse circumstances, with long-term capital gains, short-term capital gains, and ordinary income each taking the stage.

When cryptocurrency is earned, whether through employment, mining, staking, or airdrops, it beckons the embrace of ordinary income tax, subjecting it to the grasp of income tax rates, which may range from 10% to 37% based on one’s income level.

On the other hand, cryptocurrency disposals take on the persona of capital gains tax. These disposals encompass activities like selling crypto, trading it for other cryptocurrencies, or employing it for purchases.

If one has held cryptocurrency for over a year, the spotlight falls upon long-term capital gains tax, with rates spanning from 0% to 20%, contingent upon income level. However, for those who have possessed cryptocurrency for less than a year, the stage is set for short-term capital gains tax, equivalent to ordinary income tax, with rates ranging from 10% to 37% based on one’s income level.

In this intricately choreographed realm of cryptocurrency taxation, each step must be taken with precision, as the tax implications weave a complex tapestry, impacting one’s financial journey in diverse ways.

2. Crypto tax rates for 2023

Here are the long-term crypto tax rates that will apply when you file your 2023 tax return:

Data source: IRS.
TAX RATESINGLEMARRIED FILING JOINTLYHEAD OF HOUSEHOLD
0%$0-$44,625$0-$89,250$0-$59,750
15%$44,626-$492,300$89,251-$553,850$59,751-$523,050
20%>$492,300>$553,850>$523,050

As previously noted, the IRS taxes short-term crypto gains as ordinary income. Here are the 2023 income tax rates that will apply to gains on crypto you held for 365 days or less:

Data source: IRS.
TAX RATESINGLEMARRIED FILING JOINTLYHEAD OF HOUSEHOLD
10%$0-$11,000$0-$22,000$0-$15,700
12%$11,001-$44,725$22,001-$89,450$15,701-$59,850
22%$44,726-$95,375$89,451-$190,750$59,851-$95,350
24%$95,376-$182,100$190,751-$364,200$95,351-$182,100
32%$182,101-$231,250$364,201-$462,500$182,101-$231,250
35%$231,251-$578,125$462,501-$693,750$231,251-$578,100
37%>$578,125>$693,750>$578,100

3. How do crypto tax brackets work?

In the realm of taxation, it is vital to grasp that the majority of taxpayers don’t traverse a singular flat tax rate across their entire income landscape. Instead, they gracefully waltz through a progressive journey, encountering higher tax rates on distinct portions of their earnings.

For instance, envision a taxpayer who garners $25,000 in income. They won’t glide through a uniform 12% tax experience. Instead, they’ll commence their dance with a nimble 10% tax on the first $10,275 of their income, and as they sway forward, they’ll transition to a poised 12% tax on the subsequent $14,725.

This dynamic dance of progressive taxation ensures that the tax burden is artfully distributed, mirroring the intricacies of individual financial circumstances, and casting a symphony of diverse tax rates to harmonize with one’s income thresholds.

How do crypto tax brackets work?
How do crypto tax brackets work? | Source: coinledger

4. Capital gains vs. income tax events

When do I pay capital gains tax on crypto?

‍Trading your cryptocurrency for fiat.

‍Trading your cryptocurrency for fiat
‍Trading your cryptocurrency for fiat | Source: coinledger

Trading your cryptocurrency for other cryptocurrency.

Trading your cryptocurrency for other cryptocurrency | Source: coinledger
Trading your cryptocurrency for other cryptocurrency | Source: coinledger

Using cryptocurrency to buy goods and services.

Using cryptocurrency to buy goods and services | Source: coinledger
Using cryptocurrency to buy goods and services | Source: coinledger

When do I pay income tax on crypto?

Here is a list of common income events for crypto users:

  • Receiving cryptocurrency as a referral bonus.
  • Receiving cryptocurrency in an airdrop.
  • Earning cryptocurrency interest.
  • Receiving a paycheck in cryptocurrency.
  • Earning cryptocurrency from staking and/or mining.

5. Do I have to pay net investment income tax (NIIT)?

Certain highly successful crypto investors may be subject to an additional 3.8% tax on their net investment income.

Net investment income encompasses earnings from various investments, such as bonds, stocks, mutual funds, and cryptocurrency. It comprises capital gains, interest, dividends, and any income generated from cryptocurrency investments.

It’s crucial to understand that the majority of crypto investors are unlikely to be affected by this Net Investment Income Tax (NIIT). The tax is only applicable if an investor’s net investment income surpasses specific thresholds.

Investment income tax | Source: coinledger
Investment income tax | Source: coinledger

6. Can I reduce my income and get to a lower tax bracket?

Itemized deductions play a significant role in reducing your annual tax liability.

Let’s say you earned $40,000 in income for the year, and you claim $16,000 in itemized deductions. This will lower your taxable income to $24,000. In certain situations, itemized deductions can even push your taxable income down to a level that may place you in a lower marginal tax bracket.

Itemized deductions can cover various expenses, such as cryptocurrency donations, mortgage interest payments, and state/local taxes paid.

It’s important to remember that itemized deductions will only result in a reduced tax bill if their total exceeds the standard deduction available to you. By comparing both options, you can determine which deduction method is more advantageous for your specific tax situation.

7. Ways can reduce cryptocurrency taxes

Here are some effective strategies to help you minimize your crypto tax bill:

Realize Profits in Low-Income Years

Consider selling your cryptocurrency holdings and realizing profits during years when your taxable income is low. By doing so, you can take advantage of lower tax rates on capital gains, thus reducing the overall taxes you’ll need to pay. This approach is particularly beneficial during times when you may have lower income, such as during a transitional period between jobs or while attending full-time education.

Opt for Long-Term Capital Gains

Remember that long-term capital gains are taxed at a considerably lower rate compared to short-term gains. Holding onto your assets for more than 12 months can lead to significant tax savings. By practicing a long-term investment strategy, you can effectively decrease the amount owed on your tax bill.

Capital Loss Harvesting

Take advantage of the tax benefits associated with selling your cryptocurrency at a loss. Capital losses can be used to offset capital gains and up to $3,000 of ordinary income. Any net losses exceeding $3,000 can be carried forward into future years to further reduce your tax liability.

Unique Advantage for Cryptocurrency

Unlike stocks in the United States, cryptocurrency may not be subject to the wash sale rule. This rule prohibits investors from claiming losses if they repurchase the same assets within 30 days. This unique advantage allows crypto investors to engage in tax loss harvesting more flexibly, potentially optimizing their tax strategies.

Using cryptocurrencies can be a bit overwhelming, as it involves various complexities like tracking cost basis, calculating effective realized prices, and potential tax obligations even without official Form 1099 statements. Adding to the challenge, the IRS is intensifying its efforts to detect tax evasion and closely monitoring cryptocurrency exchanges. These factors collectively contribute to making cryptocurrencies less user-friendly and may hinder their widespread adoption.

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Emily TayLor

Hello, Emily TayLor Here. I’m a content Writer. I’m Writing About Life, Food, Finance and Related Contents on Trendbbq.com Website.

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