In the US, the amount you pay in federal taxes on your cryptocurrency gains depends on how long you have held the coins and your ordinary tax rate.
Your hold period for a cryptocurrency assets begins the day after you acquire the asset and continues until the day that you dispose of (e.g. send/sell/trade) the asset.
Coins that have a holding period of 365 days or less are subject to short term capital gains tax. Short term capital gains are taxed as ordinary income (this is the higher tax treatment scenario).
Coins that have a holding period of 366+ days are subject to long term capital gains tax. Long term capital gains are taxed between 0 – 20% depending on your ordinary income tax rate (this is the lower tax treatment scenario).
2020 Capital Gains Tax Rates
The IRS has released 2020 tax rates (source):
For example let’s say that your annual income is $50,000 and you are filing as single. You buy one bitcoin on January 1, 2016 for $400 and sell it on January 2, 2017 for $1,000. You have a short term capital gain (remember 365 days or less is a short term holding period, and the holding period starts the day after you get the coin). The short term gain is $600, which taxed at your ordinary income tax rate of 22% results in a tax of 0.22 * $600 = $132 in additional federal taxes (states taxes may be extra depending on the state).
Instead let’s say that your annual income is $30,000 (still filing as single). You buy one bitcoin on January 1, 2016 for $400 and sell if on January 3, 2017 for $1,000. You have a long term capital gain of $600. Your ordinary income tax rate is 12%, and your long term capital gains rate is 0%. Therefore you pay no federal tax on this bitcoin sale (state taxes may still apply).
Disclaimer: CoinTracker is provided for informational purposes only. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. For financial, tax, or legal advice please consult your own professional. The information on CoinTracker is subject to change without notice. All information is provided "as is." CoinTracker disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Please see our full disclaimer.