By Team SalaryCalculate · 9/10/2025
The tax treatment of cryptocurrency depends entirely on how you acquired it and what you did with it. Understanding the difference between crypto income and capital gains can save you thousands in taxes and help you plan your investment strategy more effectively.
In most jurisdictions, crypto income is taxed at your ordinary income tax rate, which can be as high as 37% in the US or 45% in the UK. Capital gains, on the other hand, often benefit from lower tax rates and generous tax-free allowances that can significantly reduce your tax burden.
What Counts as Crypto Income?
Crypto income refers to cryptocurrency you receive as payment for services, rewards for activities, or compensation for work. This includes mining rewards, staking income, airdrops, hard forks, and any crypto received as salary or payment for goods and services.
Common examples of crypto income include:
• Mining rewards from validating transactions on proof-of-work networks
• Staking rewards from participating in proof-of-stake networks
• Airdrops and hard fork tokens received for free
• Crypto received as payment for freelance work or services
• Interest earned from lending or yield farming
What Are Crypto Capital Gains?
Capital gains occur when you sell, trade, or dispose of cryptocurrency for more than you paid for it. This includes selling crypto for fiat currency, trading one crypto for another, or using crypto to purchase goods and services.
Examples of capital gains transactions:
• Selling Bitcoin for USD after the price increased
• Trading Ethereum for another cryptocurrency
• Using crypto to buy a car or other goods
• Gifting crypto to family members (in some jurisdictions)
Tax Rate Differences
The tax rate difference between income and capital gains can be substantial. Here's how they typically compare:
| Tax Type | US Rate | UK Rate | Notes |
|---|---|---|---|
| Crypto Income | 10-37% | 20-45% | Taxed at ordinary income rates |
| Short-term Capital Gains | 10-37% | 20-45% | Same as income tax rates |
| Long-term Capital Gains | 0-20% | 10-20% | Lower rates for assets held >1 year |
UK Tax Treatment
In the UK, crypto income is subject to Income Tax and National Insurance contributions. The rates depend on your total income:
• Basic rate (20%): Income up to £50,270
• Higher rate (40%): Income between £50,271 and £125,140
• Additional rate (45%): Income above £125,140
Capital gains in the UK benefit from the Annual Exempt Amount of £6,000 (2023/24), meaning the first £6,000 of gains each year are tax-free. Above this threshold, rates are:
• 10% for basic rate taxpayers
• 20% for higher and additional rate taxpayers
US Tax Treatment
In the US, crypto income is taxed as ordinary income at your marginal tax rate. The rates range from 10% to 37% depending on your income bracket.
Capital gains are divided into short-term and long-term categories:
• Short-term gains (assets held less than 1 year): Taxed at ordinary income rates (10-37%)
• Long-term gains (assets held more than 1 year): Taxed at preferential rates (0%, 15%, or 20%)
Tax Planning Strategies
1. Hold investments for the long term: In the US, holding crypto for more than one year can reduce your tax rate from up to 37% to as low as 0%.
2. Use tax-loss harvesting: Sell losing positions to offset gains from winning positions, reducing your overall tax liability.
3. Consider timing of income recognition: If possible, defer crypto income to a year when you expect to be in a lower tax bracket.
4. Keep detailed records: Track the cost basis, acquisition date, and disposal date for all crypto transactions to ensure accurate tax reporting.
Use Our Crypto Tax Calculators
Calculating your crypto tax liability can be complex, especially when dealing with multiple types of transactions. Our specialized calculators can help you determine your tax obligations:
• Use our comprehensive crypto tax calculator to estimate your overall crypto tax liability
• Calculate taxes on free tokens with our crypto airdrop tax calculator
• Determine mining tax obligations using our crypto mining tax calculator
Frequently Asked Questions
Q: If I receive crypto as payment for work, is it income or capital gains?
A: Crypto received as payment for work is considered income and is taxed at your ordinary income tax rate. The fair market value of the crypto at the time you receive it becomes your cost basis for future capital gains calculations.
Q: How do I determine the cost basis for crypto I received as income?
A: The cost basis is the fair market value of the crypto in your local currency at the time you received it. This value is used for both income tax purposes (as the amount of income) and future capital gains calculations when you dispose of the crypto.
Q: Can I offset crypto losses against other income?
A: In most jurisdictions, capital losses from crypto can be used to offset capital gains. In some cases, excess losses can be carried forward to future years or used to offset other income, but the rules vary by country.
Conclusion
Understanding the difference between crypto income and capital gains is essential for effective tax planning. By properly categorizing your crypto transactions and taking advantage of favorable tax rates for long-term investments, you can significantly reduce your tax burden.
Remember to keep detailed records of all your crypto activities, consult with a tax professional for complex situations, and use our calculators to estimate your tax obligations. With proper planning and understanding of the tax rules, you can maximize your crypto investment returns while staying compliant with tax regulations.
