Do Crypto Investors Need to Pay the NIIT?

The net investment income tax (NIIT) is levied on those with investment income and gross income over a certain threshold. Does it apply to crypto? Read more.

Arthur Teller
ByArthur Teller, CPAUpdated on April 28, 2022 · minute read

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Key Takeaways

  • The NIIT is a tax on individuals, estates, and trusts who have net investment income and whose total income is more than a certain threshold.

  • Crypto capital gains, and most likely most yield farming income, are counted as net investment income, so crypto traders may need to pay the NIIT, depending on their earnings.

Do Crypto Investors Need to Pay the NIIT?

What is the NIIT?

The net investment income tax (NIIT) is a 3.8% tax levied on individuals, estates, and trusts who have net investment income and whose gross income exceeds a certain threshold. For individuals filing singly, that threshold is $250,000. 

The NIIT is applied to the lesser of the two sums: net investment income or the amount by which gross adjusted income exceeds the limit. 

For example, if you are filing as an individual with $75,000 of net investment income and a modified adjusted gross income of $350,000, you would pay the NIIT on your $75,000 of investment income ($75,000<$100,000). 

Does crypto qualify as investment income? 

The IRS states that: ”in general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer.”[1]

Although the IRS has not given guidance on the NIIT and crypto, because capital gains are generally treated as investment income, crypto capital gains/losses would be included in your net investment income. It is also likely that most income from yield farming would be counted.

What is less clear, however, is the treatment of crypto that is earned as income from hobbyist crypto mining. This does not neatly fall into the categories described by the IRS, so their treatment is a gray area; they may be taxable and they may not. We recommend speaking to a crypto tax accountant about this matter. 

The bottom line

The main takeaway here is that if you’re filing as an individual and made more than $250,000 in a tax year and any portion of that was from traditional investments or from crypto trading, you likely need to pay the NIIT. If you’re a borderline case—for example, you had no traditional investments and all of your crypto earnings came from hobbyist mining—you should consult a crypto tax professional for more individual guidance. 

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References

Last reviewed by Arthur Teller, CPA on April 28, 2022 · Sources

Arthur Teller
Arthur TellerCOO at TokenTax
Arthur came to TokenTax after 12 years at KPMG. A specialist in partnership taxation and enterprise tax software, he is a licensed CPA in both California and Illinois and a member of the AICPA.

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