Explaining Short-Term and Long-Term Capital Gains

Ty GainesUpdated at: Aug 26th, 2021

This article is part of TokenTax's Cryptocurrency Tax Guide: Get help on cryptocurrency tax filing.

Crypto holding period has an effect on your taxes

How long you hold a capital asset like cryptocurrency can have an affect on your tax liability. If you hold crypto for a year or less, it’s a short term sale. If you hold crypto for more than a year, it’s a long term sale. Long term gains are taxed at a lower tax rate, making long term holds advantageous for savvy investors. 

Per the IRS’s cryptocurrency tax FAQ, the holding period begins on the day after you receive an asset. When you have a taxable event, like a sell, trade, or spend on goods and services, you recognize a capital gain or loss. On your tax return, via IRS Form 8949, you separately report short term and long term capital gains.

Tax software for cryptocurrency will automatically calculate your holding period for assets you sell or exchange away and then estimate your owed taxes per your tax rates.

Short-term capital gains

A short-term gain occurs when you buy and then sell or exchange a crypto asset within one year. Short-term gains are subject to your marginal tax rate — that’s the rate you pay on your income.

This rate ranges from 0% to 50% depending on your location and your total income for the year. 

Long-term capital gains

A long-term gain occurs when you buy and then sell or exchange a crypto asset after holding it for a year or longer. Long term gains are subject to a different set of tax rates, called the capital gains rate. 

There may also be additional long-term state taxes. In New York, for example, the long term total rate can be as high as 31.5% (20% + 11.5% New York state rate), if you’re in the top income bracket. 

How to use long-term capital gains to your advantage

The IRS allows for specific identification for crypto tax lots. This is particularly useful due to the nature of digital currencies, which are divisible into decimal amounts unlike more traditional assets like stocks. 

There are cases where you could have a smaller tax liability with a long term gain rather than short term gain — or sometimes vice versa, depending on your area's federal and state tax rates.

Different accounting methods like FIFO, LIFO, and Minimization, will adjust the holding periods for tax lots. Minimization, which is unique to TokenTax, will find the lowest tax liability by deferring to long term gains where advantageous considering your tax rates.

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