Do Crypto Investors Need to Pay the NIIT?

Arthur Teller
ByArthur Teller, CPAReviewed byZac McClure, MBAUpdated on May 20, 2024 · minute read
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  • 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.

What qualifies as 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. 

NIIT and crypto: 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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Crypto investors and the NIIT FAQs

Here are answers to frequently asked questions bout the NIIT and crypto investment.

Who pays the 3.8% net investment tax?

The net investment income tax (NIIT) is paid by individuals, estates, and trusts who meet specific criteria related to their income and investment earnings.

Are traders subject to NIIT?

Traders may be subject to NIIT if their gross income exceeds the threshold set by the IRS and if they have net investment income.

What is the NIIT threshold for 2024?

Not everyone is required to pay the NIIT, and it only applies to individuals whose incomes surpass specific thresholds set by the IRS. The statutory income thresholds for various filing statuses are as follows:

  • Married filing jointly — $250,000

  • Married filing separately — $125,000

  • Single or head of household — $200,000

  • Qualifying widow(er) with a child — $250,000

Individuals whose incomes exceed the specified thresholds for their filing status must assess whether their net investment income or the amount by which their Modified Adjusted Gross Income exceeds it is greater. The 3.8 percent additional tax is applied to the lesser of these two figures. It's important to note that these income thresholds are not adjusted for inflation.

Is crypto staking subject to net investment income tax?

While the IRS has not given clear guidance on crypto staking and NIIT, it's likely that earnings from crypto staking, including capital gains, may be considered part of net investment income. However, certain aspects, such as crypto earned from hobbyist mining, fall into a gray area, and consultation with a crypto tax professional is advised for clarification.

What is IRS Form 8960, and how does it relate to the Net Investment Income Tax (NIIT)?

IRS Form 8960 is used to calculate the Net Investment Income Tax (NIIT), which is a 3.8% tax on the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds certain thresholds. Taxpayers subject to the NIIT must use Form 8960 to report and calculate the tax.

Can income from cryptocurrency be subject to the Net Investment Income Tax (NIIT)?

Yes, income from cryptocurrency, including capital gains from trading and possibly earnings from activities like yield farming, may be considered part of your net investment income and therefore subject to the NIIT if your MAGI exceeds the threshold set by the IRS.

How does the NIIT apply to taxpayers with adjusted gross income (MAGI) that exceeds the threshold?

Taxpayers whose MAGI exceeds the threshold set by the IRS must pay the NIIT on the lesser of their net investment income or the amount by which their MAGI exceeds the threshold. The NIIT is calculated at a rate of 3.8% and is applied to the portion of the MAGI that exceeds the threshold.

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References

Last reviewed by Zac McClure,MBA on May 20, 2024 · Sources

Arthur Teller
Arthur TellerCOO (Former) 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.
Zac McClure
Reviewed byZac McClureCo-Founder & CEO at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.

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