The Ultimate USA Crypto Tax Guide 2022

Cryptocurrency investments may be subject to federal taxation in the U.S. According to an announcement issued by the Internal Revenue Service (IRS) in 2014, virtual currency is treated as property for federal tax purposes. Any profit made from holding or transacting in cryptocurrency will be subject to capital gains tax, just like other assets like stocks. 

This capital gains tax is applied when cryptocurrency is sold for cash or other cryptocurrencies. A taxable event by the IRS is when you buy a cryptocurrency for $10,000 and then, over a period of time, sell it for $40,000. In this example, you would have to pay $30,000 in capital gains tax because you made a profit on your crypto sale.

How to Understand if you Owe Crypto Taxes? 

To understand if you owe taxes, it’s important to look at how you used your crypto in 2021. Let’s explore why and how crypto is taxed. 

Non-taxable crypto events

• Crypto investors can buy a cryptocurrency with cash and hold it for the long term without paying taxes on it. Building up your crypto positions over time won’t result in a taxable event even if the value of your crypto investments increases. You will only pay taxes on your crypto when you sell your crypto assets for a profit. 
• Donating crypto to a qualified tax-exempt charity or non-profit is treated as non-cash charitable contributions. It is not considered a taxable event if you follow the required steps. Once you itemize your deductions, you can donate cryptocurrency to a qualified charitable organization. By deducting the fair market value of your cryptocurrency at the time of your donation, you won’t need to pay capital gains tax on that donation. 
• If you decide to gift Gift crypto to a relative, as long as it's below the tax exclusion amount for 2022, which is $16,000 per person, you do not have to pay taxes. This also goes for the person receiving the crypto gift. 
• Transferring crypto to yourself either between cryptocurrency exchanges or between online and offline wallets is not a taxable event because you are not selling your crypto; you are just moving funds from one place to another

Crypto taxes as capital gains  

• When you sell crypto for cash you must pay short-term or long-term capital gains tax. Depending on how long you have held on to your crypto before you sold it, you will have to pay the corresponding amount in capital gains tax.
• If you want to convert one crypto to another, this will trigger a taxable event. Let’s say you want to take some of your and purchase it to add some Atheneum to your investment portfolio. In this case, you would have to sell some Bitcoin to convert it to cash to buy Ethereum because you can’t exchange one crypto for another; the IRS considers this transaction taxable.
• Using cryptocurrency as a medium of exchange to buy goods and services is a taxable event. If you use Bitcoin to buy groceries, you will have to pay taxes on that transaction. In many cases, you will need to sell your crypto to exchange it for a good or service, and when you sell crypto, you must pay capital gains tax.

Crypto Income Taxes

• If you get paid in cryptocurrency, you must pay income tax. According to your income tax bracket, Crypto as a form of compensation will be taxed as income.
• If you receive crypto in exchange for goods or services, you must report that as income to the IRS.
• If you earn cryptocurrency through crypto mining, that is considered taxable income and must be reported on your 1099-NEC form.
• Earning a return by holding certain cryptocurrencies is considered taxable income.

How to Estimate Crypto Taxes? 

Let’s dig deeper and understand how to estimate crypto taxes by calculating the income, gains, and losses.

How to calculate crypto income?

Income from cryptocurrency is calculated by subtracting the price you sold your cryptocurrency at from the price you bought your crypto at. This is the easiest way to find out whether you have a gain or loss from your crypto purchases.

How to calculate crypto capital gains: Short-term vs. Long-term capital gains 

There are two ways to calculate capital gains: short-term and long-term. Short-term capital gains tax for crypto transactions occurs if you’ve held your crypto investments for a year or less. Short-term gains are taxed as ordinary income at a rate between 10% and 37% in 2021. Long-term capital gains for crypto transactions occur if you’ve held your crate assets for more than a year. Long-term gains are taxed at preferential long-term gains rates of 0%, 15%, or 20% in 2021.

How to understand your crypto capital losses?

If you sold your crypto at a loss, that means you sold it for less than you paid for it. But losses can be a chance to reduce your tax bill. If you have more losses than gains or did not incur any gains, you can declare maximum losses of $3,000.

Crypto Tax Rates for 2021 vs. 2022

Some factors that impact cryptocurrency tax rates include your income, tax filing status, and how long you held on to your crypto before selling it. Since cryptocurrency is considered property for tax purposes, the tax rate can be anywhere between 0% to 37% depending on the investor’s tax bracket. 

Taxes on cryptocurrency fall under ordinary income, short-term capital gains, and long-term capital gains tax. Short-term and long-term gains depend on the period of time you’ve held on to your crypto investments. Short-term gains are for crypto investments held for a year or less and are subject to a higher tax rate, while long-term gains are held on for more than a year and are subject to a lower tax rate.

Crypto taxed as ordinary income can include payments in crypto, such as rewards from staking your crypto. Whether you file taxes single, married filing separately, or married filing jointly, as well as your taxable income will determine your tax rate and how much is owed in taxes for that particular year.

Some short-term capital gains tax for the 2021 tax year are based on federal income tax brackets and range from 10% to 37% depending on whether you are filed as single, head of household, married filed jointly, or married filed separately. For 2022, the range of the federal tax rates is the same as in 2021 but the income for each filing status is different. Check to see which federal tax bracket you are in depending on your income and the filing status you hold 

FAQ: Everything you should Know about Taxes on Crypto 

Do you have to pay taxes on crypto in 2022?
Yes. When it is sold, you must pay capital gains tax.

Are there penalties for not paying crypto taxes? 
Yes, you will incur charges and penalties if you do not pay taxes during a taxable crypto event.

How is crypto taxed in the USA?
In the U.S., cryptocurrency is classified as property according to the IRS.

How to report cryptocurrency to the IRS (Internal Revenue Service) in 2022?
According to the IRS, virtual currency is treated the same way regarding taxes as property. Depending on how long you hold your crypto investment before it is sold, you will either pay long-term or short-term capital gains tax when you sell your crypto and need to be reported on Schedule D and form 8949. 

How to avoid capital gains tax on cryptocurrency?
You can avoid paying capital gains tax by holding on to your crypto investment and not selling it or defer paying taxes by investing in crypto through a long-term retirement vehicle like a 401(k).

How can you minimize crypto taxes?
You can minimize crypto taxes by holding on to your crypto investments for more than a year. The longer you hold on to your crypto before you sell it, the lower the tax rate you will have to pay.

Is trading one cryptocurrency for another a taxable event?
Yes. Since you are not able to purchase one cryptocurrency with another, you would have to sell your cryptocurrency for cash to buy another cryptocurrency. This is a taxable event.

Is there a tax on crypto per transaction?
While there isn’t a tax on cryptocurrency trading, buying goods and services using cryptocurrency is a taxable event. 

Do different cryptocurrencies have different tax rates?
No. Factors that impact cryptocurrency tax rates include your income, tax filing status, and how long you held on to your crypto before selling it.