This type of crypto investment is when its price is expected to increase over time, usually an investment that must be held for a minimum of 6 months to 1 year. In some cases, long-term crypto investors plan to hold their investments for several years. If you hold an investment in crypto for at least one year before selling, your earnings qualify for the preferential rate of long-term capital gains. Depending on your taxable income for the year, this can cut your tax rate by almost half, from a maximum rate of 37% for short-term earnings to a maximum rate of only 20% for long-term earnings.
For those who invest in cryptocurrencies for the long term using a buy and hold strategy, swings like this are to be expected. Buy cryptocurrencies that you think will increase in value and hold them for at least three to five years. Anjali Jariwala, certified financial planner, certified public accountant and founder of Fit Advisors, recommends holding bitcoin for at least 10 years. Rather than trying to trade in the short term, this strategy promotes maintaining an asset for the long term and overcoming the ups and downs.
Although cryptocurrency is considered to be a speculative and risky investment, if you already own or plan to buy it, experts agree that a buy and hold strategy is usually the best practice. More generally, new short-term investors who are selling their stakes in reaction to the latest drop may be contributing to bitcoin's falling value, according to a report by Glassnode Insights, a blockchain analytics firm. Despite the volatility, this virtual currency also has little correlation with other asset classes that investors may have in their portfolio, including stocks and bonds, Edelman said. The tax agency treats bitcoin holdings as property, just as it would consider stocks and other investments.
And if you own the same cryptocurrency that you mined or earned from these activities, its value increases, and you spend or sell it later at a profit, you also owe capital gains taxes on profits, depending on how long you have held it.