Cryptocurrency has taken the world by storm, and with it, a whole new set of tax laws. The IRS has said that cryptocurrencies are taxable, but there are ways to avoid paying taxes on your gains. In this article, we will discuss how cryptocurrencies are taxed, the tax rate on crypto gains, how they can be calculated, and most importantly, how to avoid paying taxes on crypto.
Table of contents
How Is Crypto Taxed?
Cryptocurrencies are taxed similarly to other investments, with the capital gains tax applying to any profit (whether you sell, buy or dispose of any crypto) you make on the sale. For example, if you buy $2000 of a cryptocurrency and you sell it for $3000, you have to declare and pay taxes on the $1000 gain. However, because crypto is still a relatively new asset class, the tax implications are still being sorted out by some governments around the world.
In the U.S., the IRS sent letters to more than 10,000 crypto investors asking them to amend their tax returns and pay any back taxes they owe. Crypto investors and traders should be aware of the tax implications before they buy any digital assets. In Internal Revenue Notice 2014-21, the IRS classified virtual currencies as property and issued general guidelines for reporting income from investments in digital.
What is the tax rate on crypto gains?
The tax rate on crypto gains can vary depending on the country in which you reside. In the United States, the amount of tax you pay on cryptocurrency is determined by your income, tax filing status, and the duration you held it before selling it. You pay short-term gains taxes, which are the same as income taxes if you hold it for fewer than 365 days. If you’ve held it for a longer period of time, you’ll have to pay long-term capital gains taxes.
Due to inflation, the IRS adjusted the 2022 tax rate to reflect economic reality. For the long-term crypto tax rates:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
| 0% | $0-$41,675 | $0-$83,350 | $0-$55,800 |
| 15% | $40,676-$459,750 | $83,351-$517,200 | $55,801-$488,500 |
| 20% | More than $459,750 | More than $517,200 | More than $488,500 |
Short-term crypto tax rates for 2022:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
| 10% | $0-$10,275 | $0-$20,550 | $0-$14,650 |
| 12% | $10,276-$41,775 | $20,551-$83,550 | $14,651-$55,900 |
| 22% | $41,776-$89,075 | $83,551-$178,150 | $55,901-$89,050 |
| 24% | $89,076-$170,050 | $178,151-$340,100 | $89,051-$170,050 |
| 32% | $170,051-$215,950 | $340,101-$431,900 | $170,051-$215,950 |
| 35% | $215,951-$539,900 | $431,901-$647,850 | $215,951-$539,900 |
| 37% | More than $539,900 | More than $647,850 | More than $539,900 |
Source: IRS
Crypto Tax Calculator
A Crypto Tax Calculator is an online tool that allows users to calculate their cryptocurrency taxes. The calculator takes into account the user’s country of residence, as well as the type of cryptocurrency they are holding. The calculator then uses this information to generate a report that includes the user’s tax liability.
A Crypto Tax Calculator can be used by anyone who owns cryptocurrency. The calculator will help you calculate your total tax liability for your cryptocurrency holdings. This includes any gains or losses from buying, selling, or exchanging cryptocurrencies.
It is difficult for cryptocurrency exchange platforms to provide a comprehensive tax report for their customers due to the bulk of peer-to-peer transactions people make between different platforms. However, these platforms provide an avenue to get your transaction history which you can then input into a Crypto tax calculator for a comprehensive tax report. Most of these platforms provide two ways in which you can export your transaction history with a crypto tax calculator. You can link the exchange tax API with the crypto tax calculator for direct export, or you can export the transaction history in form of CSV files which you can then input manually into your preferred crypto tax calculator.
There are different crypto tax calculators out there.
Some of these include:
Bitcoin.tax – This online calculator helps you calculate your crypto taxes for free. The application allows you to upload trading data from popular exchanges including Coinbase, Kraken, Binance, and more. The app also allows you to import data from your CSV files.
CryptoTaxCalculator – This is an online calculator that allows you to calculate your gains and losses based on your trading history and the current market prices.
Koinly – Similar to CoinCap, Koinly’s crypto tax calculator allows you to input your transaction history into the application and also through API integration, and make calculations on how much in taxes you have to pay. It also allows people to export transactions to other tax software like TurboTax and TaxAct.
Cointracker – CoinTracker tax calculator is a tool that allows users to calculate their capital gains and losses from their cryptocurrency transactions. The calculator takes into account the purchase price, sale price, and quantity of each transaction in order to determine the gain or loss.
CryptoTrader – The CryptoTrader tax calculator is a tool that allows users to calculate the capital gains taxes they may owe on their cryptocurrency investments. The calculator takes into account the user’s country of residence, as well as the type of cryptocurrency they have invested in.
How to avoid paying taxes on crypto gains
There are a few ways that you can avoid paying taxes on your cryptocurrency gains, depending on your situation. Let’s take a look at some of these methods:
- A way to avoid paying taxes on your crypto gains is to invest in a tax-advantaged account like a 401k or an IRA. IRA is an individual retirement account (IRA) that allows you to save after-tax dollars and then withdraw them tax-free later in life. If you do this, your gains will be taxed when you withdraw them from the account. You’ll still have to pay taxes on your crypto gains eventually, but you can delay paying them until you retire. This can help you save money in the short term. Of course, you’ll need to be careful with this strategy. If you withdraw your money from the account before you’re supposed to, you’ll have to pay taxes on it plus a 10% penalty.
- You can move to Puerto Rico. Puerto Rico is a United States territory with a 100% tax exemption on capital gains. To qualify to file taxes in Puerto Rico, you must become an official resident and maintain that residency, and any profits on your cryptocurrency prior to moving and establishing official residency in Puerto Rico are still taxable in the United States at the appropriate tax rates.
- You can use the tax-loss harvesting strategy. Tax-loss harvesting is a strategy in which investors sell their crypto at a loss to offset their gains. However, capital gains can only be offset by capital losses of the same type, thus long-term losses are used to offset long-term gains, and short-term losses are used to offset short-term gains.
There are other ways you can avoid paying taxes on crypto gains. Those are just the most common ways.
What is the best way to avoid crypto tax?
The best way to avoid crypto tax is to invest in a tax-deferred or tax-free account. These accounts allow you to invest your money without having to pay taxes on the gains. Instead, the taxes are deferred until you withdraw the money from the account.
There are a few different types of tax-deferred accounts, including:
- 401(k)s
- IRAs
- Deferred annuities
- Variable annuities
- Permanent life insurance policies
- You can also invest in a tax-free account, such as a Roth IRA.
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