Capital Gains Tax

Capital gains tax may seem straightforward, but you must calculate the gain/loss on each individual cryptocurrency disposal or exchange throughout the whole tax year. This can be a tedious and time-consuming process. You need an accurate record of all your cryptocurrency transactions including date, amount, fees, and costs. This is where a solution like Recap, which keeps track of transactions and calculates gains/losses is useful.

Short Term & Long Term Capital Gains

The amount of capital gains tax that you pay depends on how long you have held assets for. You must determine if you have held them for a short or long term. The holding period begins on the day after you acquired the cryptocurrency and ends on the day you sell or exchange the cryptocurrency. The IRS separates capital gains into two categories: short term and long term.

Short Term Capital Gains

Short term capital gains are “gains from the sale or exchange of a capital asset not held for more than 1 year", and is taxed at the same rate as your ordinary income.

Long Term Capital Gains

Long term capital gains are “gains from the sale or exchange of a capital asset held for more than a year, and is typically taxed at a lower rate than ordinary income. As of the date of writing, the tax rates for long term capital gains are 0%, 15%, or 20% depending on your tax bracket.

Because long term capital gains are taxed typically at a lower rate than ordinary income or short-term capital gains, the IRS provides an incentive for being a “hodlr.” If you hold your cryptocurrency for more than a year before disposing of it, you can realize a lower tax bill.

Taxable events

Individuals investing in cryptoassets must calculate the capital gain or capital loss they have made whenever they “dispose” of cryptoassets.

Taxable events include:

Selling cryptoassets for fiat money (e.g. GBP, USD, EUR).

Exchanging cryptoassets for a different cryptoasset (e.g. exchanging Bitcoin to Ripple).

Using cryptoassets to pay for goods or services (e.g. paying fees on crypto trades, paying fees on crypto withdrawals and deposits of cryptoassets, buying a Starbucks Coffee or paying for a software subscription.

Giving away cryptoassets to another person is deemed to be a disposal at market value unless to a spouse/civil partner or a qualifying charitable/CASC donation.

Moving tokens between wallets owned by the same person does not result in a taxable disposal.

Purchasing cryptoassets is not taxable.