Tax Benefits of Holding Cryptocurrency Long-Term

March 17, 2025
Tax Benefits of Holding Cryptocurrency Long-Term

Introduction

Cryptocurrency investors are subject to capital gains tax when they sell or dispose of their digital assets. However, holding cryptocurrency for the long term can provide significant tax advantages, particularly in the U.S., where long-term capital gains tax rates are lower than short-term rates. By strategically managing when and how they sell their crypto, investors can minimize their tax liability and maximize after-tax profits.

 

This article explores the key tax benefits of holding cryptocurrency long-term, including reduced tax rates, deferral opportunities, and potential tax-free gains.

 

1. Lower Capital Gains Tax on Long-Term Holdings

  • The IRS classifies cryptocurrency as property, meaning gains from selling crypto are subject to capital gains tax.
  • If an investor holds cryptocurrency for more than one year before selling, the gains qualify for long-term capital gains tax rates, which are lower than short-term rates.
  • Tax Rates for 2025 (Long-Term vs. Short-Term Capital Gains):
    • Short-term capital gains (held for ≤1 year): Taxed at ordinary income tax rates (10%–37%).
    • Long-term capital gains (held for >1 year): Taxed at preferential rates (0%, 15%, or 20%, depending on taxable income).

 

2. Tax Deferral and Strategic Selling

  • By delaying the sale of cryptocurrency, investors defer taxes, allowing their holdings to grow without immediate tax consequences.
  • Selling in a lower-income year can reduce the capital gains tax rate applied to the sale.
  • Investors can offset capital gains with capital losses through tax-loss harvesting, reducing overall taxable income.

 

3. Potential for Tax-Free Gains (0% Tax Rate)

  • Taxpayers with low annual income may qualify for the 0% long-term capital gains tax rate.
  • For 2025, the 0% rate applies to single filers with taxable income up to approximately $47,000 and married couples filing jointly up to $94,000 (adjusted for inflation).
  • Investors who carefully plan withdrawals may sell crypto completely tax-free within this income threshold.

 

4. Avoiding the Net Investment Income Tax (NIIT)

  • The Net Investment Income Tax (NIIT) adds a 3.8% tax on high-income individuals with significant investment income.
  • Long-term holders with lower taxable income may avoid NIIT, further reducing their tax burden.

 

5. Gifting and Estate Planning Benefits

  • Gifting Cryptocurrency: Investors can gift crypto up to the annual gift tax exclusion amount ($18,000 in 2025) without triggering taxes.
  • Inherited Crypto and Step-Up in Basis: Crypto passed down through inheritance benefits from a step-up in cost basis, meaning heirs are taxed only on gains from the date of inheritance, not from the original purchase date.

 

Conclusion

Holding cryptocurrency for the long term offers significant tax benefits, including lower capital gains tax rates, tax deferral opportunities, and potential tax-free gains for low-income earners. Investors can further optimize their tax strategy through gifting, estate planning, and strategic selling. 

 

Tax Partners can assist cryptocurrency investors in developing personalized tax strategies to maximize profits while minimizing tax liabilities.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

 

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