NATIONALLY RECOGNIZED FEDERAL LAWYERS
Who Qualifies for the Zero Cryptocurrency Capital Gains Tax Rate Under IRS Rules?
|Last Updated on: 18th September 2023, 09:18 pm
Who Qualifies for the Zero Cryptocurrency Capital Gains Tax Rate Under IRS Rules?
When you sell cryptocurrency at a profit, you may owe capital gains taxes on the increase in value. However, some taxpayers can qualify for a 0% capital gains tax rate depending on their income. This article will explain who can take advantage of the 0% crypto capital gains rate based on the latest IRS guidance for the 2022-2023 tax season.
Crypto Taxes: Short-Term vs. Long-Term Capital Gains
The IRS treats cryptocurrency, like Bitcoin or Ethereum, as property for tax purposes. This means that crypto is subject to capital gains taxes when sold at a profit. Your capital gains tax rate depends on how long you held the crypto before selling:
- Short-term capital gains: Applies to crypto held for 365 days or less. Taxed as ordinary income at your marginal tax bracket of 10%-37%.
- Long-term capital gains: Applies to crypto held for more than 365 days. Taxed at preferential rates of 0%, 15% or 20% depending on income.
So if you sold crypto at a profit after holding for over a year, you may qualify for long-term capital gains treatment and a lower tax rate. The specific long-term capital gains rate you’ll pay depends on your taxable income and filing status.
Income Thresholds for 0% Crypto Capital Gains Rate
Thanks to inflation adjustments by the IRS for 2023, there are now wider income ranges where long-term capital gains are taxed at 0%. For the 2022-2023 tax year, here are the income thresholds to qualify for the 0% long-term capital gains rate on cryptocurrency profits:
- Single filers: $0 to $44,625
- Married filing jointly: $0 to $89,250
- Head of household: $0 to $55,800
This means if your taxable income falls below these thresholds, any long-term capital gains from crypto are tax-free. You can sell cryptocurrency held for over a year without owing any capital gains taxes. This provides a significant tax advantage for lower-income crypto investors.
Examples of 0% Crypto Capital Gains
Here are some examples of how taxpayers can qualify for the 0% capital gains rate on cryptocurrency profits:
- Tim, a single filer, has $40,000 in taxable income from his job. He sells 1 Bitcoin at a $5,000 profit after holding for over a year. Since his income is below $44,625, Tim owes no taxes on his $5,000 long-term Bitcoin capital gain.
- A married couple files taxes jointly and has $80,000 in taxable income. They sell $10,000 of Ethereum at a profit after holding for 15 months. Their income is under $89,250, so they qualify for the 0% rate and don’t owe any capital gains taxes.
As these examples demonstrate, crypto investors with lower incomes can take advantage of the 0% capital gains rate threshold and avoid owing taxes on profits from long-held cryptocurrencies.
Other Ways to Qualify for 0% Crypto Taxes
There are a few other ways crypto traders may qualify for 0% capital gains taxes besides having income under the thresholds:
- Tax loss harvesting: Selling crypto at a loss can offset capital gains, reducing your taxable income to potentially reach the 0% threshold.
- Donating crypto to charity: If you donate appreciated crypto to a 501(c)(3) nonprofit, you can deduct the full fair market value and avoid capital gains tax.
- Using capital losses: Carrying forward capital losses from previous years can lower your capital gains and income.
Strategic tax loss harvesting, charitable donations, and utilizing past capital losses are smart ways crypto investors may be able to reduce their taxable income and get long-term capital gains down to the 0% rate.
Considerations for Higher Income Crypto Investors
Unfortunately, higher income crypto traders don’t benefit from the 0% capital gains tax bracket. Here are the income thresholds where the 15% long-term capital gains rate kicks in:
- Single filers: $44,626 to $492,300
- Married filing jointly: $89,251 to $553,850
- Head of household: $55,801 to $488,500
Above these amounts up to $1 million, the capital gains rate is 15%. And for incomes over $1 million, the rate jumps to 20%. So wealthier crypto traders will owe a higher tax on long-term capital gains.
Some strategies like tax-loss harvesting, donating crypto to charity, and moving to Puerto Rico can potentially help higher income traders reduce crypto taxes. But the 0% capital gains bracket is reserved for those with lower taxable incomes.
How to File Crypto Capital Gains Taxes
To report your cryptocurrency capital gains and losses, you’ll need to complete IRS Form 8949 and Schedule D and attach them to your Form 1040. Here are some tips for crypto tax reporting:
- Calculate your capital gains and losses for each crypto transaction.
- Input your crypto transactions data into crypto tax software to auto-generate Form 8949.
- Classify each crypto sale as short-term or long-term based on the holding period.
- Report short-term crypto gains as ordinary income and long-term crypto gains under capital gains.
- If any capital losses, apply them to offset capital gains.
- Transfer totals to Schedule D and Form 1040.
Crypto tax software like CoinTracker and ZenLedger can simplify the capital gains calculations and IRS reporting for your cryptocurrency transactions. Here are some tips for using crypto tax software to file your taxes:
- Import all your crypto transactions from exchanges and wallets into the software. This allows it to generate a consolidated view of your trading activity.
- Review the capital gains and losses calculated by the software for accuracy. Make any corrections to cost basis or transaction type if needed.
- Use the crypto tax software to auto-populate IRS forms 8949 and Schedule D with your net gains and losses.
- File the completed tax forms along with your Form 1040 to report your crypto activity and pay any capital gains tax owed.
- Retain copies of all your crypto tax documents in case of an IRS audit for at least 3-7 years.
Crypto tax software takes the manual work out of calculating capital gains and preparing tax reporting forms. This streamlines filing your cryptocurrency taxes properly and minimizes your tax obligations. Just make sure to use a reputable crypto tax software that integrates with the exchanges you use.