When you reinvest your cryptocurrency, you are essentially selling one type of crypto and purchasing another. This is considered a taxable event, even if you do not cash out to fiat currency. What you reinvest in isnât even relevant, but rather the gains or losses you make on the sale of crypto is whatâs taxed. In order to know how much tax youâll need to pay on the sale of crypto that you reinvested, you need to calculate your capital gains or losses. This is the difference between the original purchase price of the crypto you sold (i.e., the cost basis) and the price you sold at (i.e., the market value). The resulting gains or losses are then classified as either short-term (held for one year or less) or long-term (held for more than one year), which will affect the tax rate you pay.
Hey crypto enthusiasts! If you’ve been wondering whether you can avoid the taxman by simply reinvesting your crypto gains, I’ve got some news that might burst your bubble. The short answer is Yes you do have to pay taxes on crypto even if you reinvest it. But don’t panic! Let’s break down exactly what this means for your digital wallet and how to navigate the sometimes confusing world of cryptocurrency taxation.
The Basic Truth About Crypto Reinvestment and Taxes
When I first started trading crypto, I thought reinvesting would protect me from taxes. Boy, was I wrong! Here’s the deal:
When you reinvest cryptocurrency, you’re essentially selling one type of crypto and purchasing another. This transaction is considered a taxable event by the IRS, even if you never convert to traditional (fiat) currency like USD
The critical thing to understand is that the tax isn’t on what you reinvest in, but rather on the gains or losses you make on the sale of your original crypto. This distinction is super important and often misunderstood by new traders.
How Capital Gains Work With Cryptocurrency
To figure out how much tax you’ll owe when reinvesting we need to calculate your capital gains or losses
- Cost Basis: The original purchase price of the crypto you sold
- Market Value: The price you sold it at
- Capital Gain/Loss: Market Value minus Cost Basis
Your capital gains/losses are then classified as either short-term (held for one year or less) or long-term (held for more than one year). This classification makes a HUGE difference in how much tax you’ll pay!
Tax Rates: Short-Term vs. Long-Term Holds
Short-Term Capital Gains (Held for One Year or Less)
If you’re a crypto flipper who buys and sells quickly, I’ve got some bad news. Short-term gains are taxed at your ordinary income tax rate, which can be pretty hefty. For reference, here are the federal income tax rates for individuals for 2022:
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 10% | Up to $10,275 | Up to $14,650 | Up to $20,550 | Up to $10,275 |
| 12% | $10,276 to $41,775 | $14,651 to $55,900 | $20,551 to $83,550 | $10,276 to $41,775 |
| 22% | $41,776 to $89,075 | $55,901 to $89,050 | $83,551 to $178,150 | $41,776 to $89,075 |
| 24% | $89,076 to $170,050 | $89,051 to $170,050 | $178,151 to $340,100 | $89,076 to $170,050 |
| 32% | $170,051 to $215,950 | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $323,925 |
| 37% | Over $539,900 | Over $539,900 | Over $647,850 | Over $323,925 |
Long-Term Capital Gains (Held for More Than One Year)
Here’s where patience can seriously pay off! If you hold your crypto for longer than a year before selling or reinvesting, you’ll benefit from the much lower long-term capital gains tax rates:
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 0% | Up to $41,675 | Up to $55,800 | Up to $83,350 | Up to $41,675 |
| 15% | $41,676 to $459,750 | $55,801 to $488,500 | $83,351 to $517,200 | $41,676 to $258,600 |
| 20% | Over $459,750 | Over $488,500 | Over $517,200 | Over $258,600 |
Real-World Examples to Understand Crypto Taxes
Example 1: Swapping Bitcoin for Ethereum
Let’s say I bought 1 BTC for $10,000, and less than a year later, I decided to swap it for ETH when BTC was worth $40,000.
- Cost Basis: $10,000
- Market Value at Sale: $40,000
- Capital Gain: $30,000
- Tax Classification: Short-term (less than one year)
- Tax Owed: $30,000 taxed at my ordinary income tax rate
Even though I never “cashed out” to USD, I still owe taxes on that $30,000 gain!
Example 2: Buying an NFT with Ethereum
Imagine I use some ETH to buy a cool NFT. This is actually considered a sale of ETH to acquire an NFT. If my ETH had gone up in value since I purchased it, I’d need to pay taxes on that gain.
If I bought ETH for $2,000, and it was worth $5,000 when I used it to buy an NFT:
- Capital Gain: $3,000
- Tax Owed: Depends on how long I held the ETH before using it for the NFT purchase
Smart Selling: Which Crypto Should I Sell First?
When you’ve bought the same cryptocurrency at different times and prices, you have options for which ones to sell first. The smartest approach for tax purposes is often the Highest-In-First-Out (HIFO) method.
With HIFO, you sell your most expensive crypto purchases first. This gives you a higher cost basis, which means less taxable gain on your sale. It’s a completely legal strategy that can save you serious money!
How to Report Crypto Taxes Correctly
The IRS wants to know about your crypto activities, and they’re getting better at tracking them. Here’s what forms you’ll need:
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Form 8949 (Sales and Other Dispositions of Capital Assets): List each crypto transaction with:
- Date of acquisition
- Date of sale/exchange
- Cost basis
- Fair market value
- Resulting capital gain/loss
- Whether it’s short-term or long-term
-
Schedule D (Capital Gains and Losses): Summarize your total gains and losses from Form 8949 here, then transfer to your Form 1040.
What If I Lost Money on Crypto?
If your crypto adventures resulted in losses (we’ve all been there!), there’s a silver lining. You don’t owe taxes on losses, AND you can use those losses to offset other capital gains. You can even deduct up to $3,000 in capital losses from your ordinary income each year!
Record-Keeping: Your Best Defense
The IRS can request documentation of your crypto transactions, so keeping good records is essential. This includes:
- Date and time of transactions
- Value of crypto in USD at time of transaction
- Transaction details (what was exchanged)
- Wallet addresses involved
Honestly, trying to track all this manually is a nightmare, especially if you’re an active trader. That’s why many of us use crypto accounting software to automate this process and stay compliant.
Tax Planning Strategies for Crypto Investors
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Hold for the long term: If possible, hold your crypto for over a year before selling to qualify for lower long-term capital gains rates.
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Tax-loss harvesting: If you have crypto assets that have decreased in value, consider selling them to realize the loss and offset gains from other investments.
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Use HIFO method: Sell your highest-cost-basis coins first to minimize gains.
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Keep detailed records: Use crypto tax software to track everything automatically.
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Consider retirement accounts: Some retirement accounts allow for crypto investments with tax advantages, though there are limitations.
Common Questions About Crypto Taxes
Does staking crypto create a taxable event?
Staking rewards are typically considered taxable income at the fair market value when received.
What about mining cryptocurrency?
Mining rewards are generally taxable as ordinary income when received.
Are airdrops taxable?
Yes, airdrops are typically taxable as ordinary income based on the fair market value when received.
Do I need to report small crypto transactions?
Yes, technically all crypto transactions should be reported, regardless of size.
Can I avoid taxes by using a crypto credit card?
No, using crypto to make purchases is still considered a disposal of the crypto and creates a taxable event.
The Bottom Line
As much as we’d like to think otherwise, reinvesting your crypto doesn’t shield you from taxes. The moment you sell or exchange one crypto for another, you trigger a taxable event based on any gains from your original purchase price.
The good news is that with proper planning, like holding for longer than a year and using strategies like HIFO, you can significantly reduce your tax burden. And remember, paying taxes on crypto gains means you’re making money—which is ultimately what we all want!
I’ve learned the hard way that ignoring crypto taxes isn’t worth the risk. The IRS is getting more sophisticated in tracking crypto transactions, and the penalties for non-compliance can be severe.
So track your transactions, understand your tax obligations, and when in doubt, consult with a tax professional who specializes in cryptocurrency. Your future self (and the IRS) will thank you!
Disclaimer
The information provided in this article is for general informational purposes only and should not be considered tax, accounting, or financial advice. I’m just sharing what I’ve learned, but every situation is different! Always consult with a qualified tax professional about your specific circumstances before making decisions.
How much tax you pay depends on how long you held the crypto
If you held on to the crypto for less than one year before selling, youâre going to be taxed at ordinary income rates. This means that any gains that you made will be taxed at a rate that corresponds to your individual, joint, or business income tax rate. For reference, the federal income tax rates for individuals in the tax year 2022 are listed below:
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 10% | Up to $10,275 | Up to $14,650 | Up to $20,550 | Up to $10,275 |
| 12% | $10,276 to $41,775 | $14,651 to $55,900 | $20,551 to $83,550 | $10,276 to $41,775 |
| 22% | $41,776 to $89,075 | $55,901 to $89,050 | $83,551 to $178,150 | $41,776 to $89,075 |
| 24% | $89,076 to $170,050 | $89,051 to $170,050 | $178,151 to $340,100 | $89,076 to $170,050 |
| 32% | $170,051 to $215,950 | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $323,925 |
| 37% | Over $539,900 | Over $539,900 | Over $647,850 | Over $323,925 |
On the other hand, if you hold your crypto for longer than one year, you will benefit from the federal long-term capital gains tax rate. In most instances, the long-term capital gains tax rates are appreciably lower than individual income tax rates. So if you are close to the one year holding period and donât need to reinvest immediately, hold on as you could pay less taxes.
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 0% | Up to $41,675 | Up to $55,800 | Up to $83,350 | Up to $41,675 |
| 15% | $41,676 to $459,750 | $55,801 to $488,500 | $83,351 to $517,200 | $41,676 to $258,600 |
| 20% | Over $459,750 | Over $488,500 | Over $517,200 | Over $258,600 |
Most businesses will pay similar tax rates on capital gains to those listed above because of the pass-through provisions written into the tax code.
What if I had a capital loss?
You donât owe any taxes if you have a loss. Plus you can use it to offset capital gains and potentially reduce your taxable income.Â
Remember to retain records and documentation of your cryptocurrency transactions, as the IRS may request this information to verify the accuracy of your tax return. Itâs best to use crypto accounting software to automate and remain compliant with these requirements to avoid any lapses.