Cryptocurrency gains, like most other investments made outside of an IRA, are taxed as capital gains. There are two types of capital gains tax, short term if the position is liquidated in less than one year and long term for positions held for over one year.
Currently, short term capital gains are taxed as income, both federal and state, with the maximum federal rate of 37%. State income tax rates vary from state to state, with the highest in CA of 13.3%.
Long term capital gains are taxed differently with the maximum federal rate currently 20%.
Biden’s Proposed Policy
If Biden’s plan were to be passed, both would change. First, the top income bracket would go from 37% to 39.6%. Second, and more painful for crypto investors if we see another bull cycle like 2017, long-term capital gains would be taxed at the same rate as income tax for households making over $1 million per year. The top rate would go from 20% to 39.6%, nearly a 100% increase!
And don’t forget, if you live in a state that has an income tax, go ahead and add that on as well. So for those in states like CA, NY, IL, and many others, you will pay an additional 6-13%.
Think This Won’t Affect You?
Think again. For those investing in cryptocurrency, all we have to do is go back a few years to the previous bull market cycle that peaked in 2017/2018. We saw numerous crypto assets increase by several thousand percent.
Example: You turn a $25,000 investment into $2,500,000. Under the Biden plan, even if you hold your position for over a year before liquidating, you would owe 39.6% federal taxes on your gains of $2,475,000. That’s $980,100 vs. $495,000 at today’s Federal Rates. Keep in mind that long-term cap gains are included in your AGI even though they are subject to the lower tax rate. So the gain itself would push you into that higher tax rate no matter how little ordinary income you had for the year.
I am sure no one will feel sorry for you if you turn $25,000 into $2.5M and have to pay more in taxes, but it still hurts.
Now a lot has to happen for this policy or anything resembling it to get passed, but given the current rate of debt piling up, something has to give. In the long run, higher taxes across the board is very likely.
So be sure to take as many steps as possible to legally shelter your future gains. Whatever they may be. Hint hint…IRAs.