In the US, the amount you pay in federal taxes on your cryptocurrency gains depends on how long you have held the coins and your ordinary tax rate.
Your hold period for cryptocurrency assets begins the day after you acquire the asset and continues until the day you dispose of (e.g. send/sell/trade) the asset.
Coins or tokens with a holding period of 365 days or less are subject to short term capital gains tax. Short term capital gains are taxed as ordinary income (this is the higher tax treatment scenario).
Coins or tokens that have a holding period of 366+ days are subject to long term capital gains tax. Long term capital gains are taxed between 0 – 20% depending on your ordinary income tax rate (this is the lower tax treatment scenario).
2023 Capital Gains Tax Rates
The IRS has released 2023 tax rates (source):
Short Term Capital Gains Tax Brackets
Long Term Capital Gains Tax Brackets
For example, let’s say that your annual income is $50,000, and you are filing as single. You buy one bitcoin on January 5, 2022 for $400 and sell it on January 2, 2023, for $1,000. You have a short term capital gain (remember 365 days or less is a short term holding period, and the holding period starts the day after you get the coin). The short term gain is $600, which is taxed at your ordinary income tax rate of 22% resulting in a tax of 0.22 * $600 = $132 in additional federal taxes (state taxes may be extra depending on the state).
Instead, let’s say that your annual income is $30,000 (still filing as single). You buy one bitcoin on January 1, 2021, for $400 and sell it on January 3, 2023 for $1,000. You have a long term capital gain of $600. Your ordinary income tax rate is 12%, and your long term capital gains rate is 0%. Therefore you pay no federal tax on this bitcoin sale (state taxes may still apply).
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