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Crypto Ordinary Income vs Capital Gains
Hey Saim, recently I was calculating my tax and a term appeared ordinary vs capital gains. Can you please explain these terms in the context of crypto?
Ordinary Income is basically income you have earned. This is separate from appreciation of assets.
Ordinary income is from staking, similar to Interest Income.
Ordinary Income is also from investing in DeFi protocols, when you are receiving coins for your Investment.
Once you have received income, for such coins, the FMV received is recorded as income and is the cost basis of such coins, if held for more than 1 year and then sold or exchanged, it is considered a capital gain and will be eligible for preferential tax rates.
In the Capital Gain bucket, you have two pieces. 1. Short Term Capital Gains 2. Long Term Capital Gains.
Short Term Capital Gains are taxed as ordinary Income rates.
Long Term Capital Gains (gains of over 1 year) rates are 0%, 15% and 20% depending on your income.
Keep track of all cost basis and consult with a crypto CPA on how to lower your tax burden.
© Saim Akif, 2021