Jan
07
2023

Guide to Bitcoin Halving

By | Growing Wealth, invest, Investing | Comments Off on Guide to Bitcoin Halving

“Bitcoin halving” refers to an event that happens every four years when the block rewards for Bitcoin miners get cut in half. This reduces the supply of new bitcoins by 50%.

The crypto halving process was built into the Bitcoin protocol to ensure that Bitcoin would be a good store of value by remaining a deflationary currency. Read on to learn more about halving, why it matters, and the effect it has on Bitcoin’s value.

What Is Bitcoin Halving?

Bitcoin halving — also referred to as “the halvening,” in some instances — is a periodic event where the number of new Bitcoins that enter circulation as a result of crypto mining is reduced by half.

Bitcoin halving occurs once every four years, and as time goes on, the potential rewards for mining become less and less — while, in theory, helping to maintain Bitcoin as a store of value.

For example, when Bitcoin was first introduced, miners could mine as many as 50 Bitcoins every ten minutes. But since then, after several halvings, rewards have been reduced to 6.25 Bitcoins. Other types of cryptocurrencies may use other methods for maintaining value, including coin burning.

How Does Bitcoin Halving Work?

Halving Bitcoins is, as mentioned, built into the Bitcoin blockchain network’s protocol. It is, in a sense, a feature of the system, or a critical component to how Bitcoin works.

By decreasing mining rewards every four years or so, the network made it more enticing for early adopters to start mining early. That is, since the rewards were relatively high early after Bitcoin hit the market, more miners were likely interested in getting involved. But as the rewards are reduced with time, more miners compete for those rewards.

This adds more hashing power to the network, and also ensures that the market isn’t flooded with Bitcoin all at once.

Bitcoin Mining 101

To better understand halving, it may help to have a basic understanding of crypto mining — the process by which new Bitcoins are created. The Bitcoin network functions in a way that requires no centralized planning or authority. People can send value to each other peer-to-peer, for a small cost.

On the network, “mining” facilitates transactions. Bitcoin “miners” are computers that process transactions for the network. They verify that transactions are valid and keep the network secure. In exchange, miners receive new Bitcoins as they are created as rewards.

Bitcoin transactions form groups known as “blocks.” Each block gets attached to all the previous blocks, forming what’s known as a blockchain. A new block gets created once every ten minutes or so, and miners compete to “find” the next block and earn its rewards, with the miners who put in the most work rewarded with new coins.

Miners can also team up and participate in mining pools, which effectively means that miners are pooling their resources to earn reward.

The most recent halving occurred in 2020, which set the reward for finding the next block as 6.25 Bitcoins. This won’t change until the next halving, which will happen sometime in 2024. This is critical to know, especially if you’re actively investing in Bitcoin, as it could have market repercussions.

Recommended: How Many Bitcoins Are Left?

When Does Bitcoin Halving Occur?

Bitcoin halving happens approximately once every four years. The first halving occurred in 2012, when the block reward was reduced to 25 BTC per block from the original 50 BTC per block. Subsequent halvings dropped the reward from 25 BTC to 12.5 BTC, and then to 6.25 BTC. The next halving will set the reward at 3.125 BTC.

By constantly reducing the supply of new currency, the theory is that Bitcoin will remain a deflationary currency, rather than an inflationary one.

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Why Does Bitcoin Halving Happen?

Again, the logic behind halving is that it allows the system to have a set schedule for introducing new BTC into the market, and a set limit for new coins (as well as the total 21 million overall Bitcoin limit). By sticking to a set schedule, Bitcoin can avoid an overabundance problem, and retain value.

Given that there’s no regulatory body that can change that schedule, politics or economic pressure have no effect on the overall amount of BTC in circulation — something that differs when discussing fiat currencies.

Who Chose the Bitcoin Distribution Schedule?

In order to retain its value, a new currency must have a limited supply and be difficult to create. Bitcoin’s creator, Satoshi Nakamoto – whose identity remains a mystery — made the decision to halve Bitcoin’s block reward every four years, according to the project’s original whitepaper.

Halvings have occurred in the following years, with the block rewards being reduced as follows:

•   2012: 25 Bitcoins

•   2016: 12.5 Bitcoins

•   2020: 6.25 Bitcoins

When is Bitcoin halving next? As mentioned, the next halving will occur in 2024, when the block reward will be reduced to 3.125 Bitcoins.

Is Bitcoin Halving a Good or Bad Thing?

Bitcoin halving has its upsides. It has been said that halving is one of the reasons Bitcoin still has value.

When Bitcoin was created, it was the advent of a form of currency that has been created that is profoundly deflationary, and has a fixed supply limit (only 21 million bitcoins will ever exist).

Some say that Bitcoin is the “hardest” money ever known, meaning that Bitcoin is hard to create and has a limited supply. In this sense, Bitcoin is sometimes compared to gold or other precious metals.

Gold also has to be mined and has a scarce supply. This is why Bitcoin is sometimes referred to as “digital gold,” but Bitcoin is not correlated with the price or supply of gold, nor is it considered a precious metal. There is, however, a crypto on the market called “Bitcoin Gold,” which, again, is not the same as actual, out-of-the-ground gold.

Recommended: Bitcoin vs. Gold

Does Halving Bitcoin Have Any Effect on Its Price?

Historically, the price of Bitcoin has increased in the 18 months following a halving. After the first halving occurred in 2012, Bitcoin hit a record high (for the time) of more than $1,000 in November 2013. In April of that year, before the halving, Bitcoin was trading at less than $50.

The second halving occurred in 2016. In December 2017, Bitcoin prices hit a record high of nearly $20,000, up from less than $1,000 in January of that year. And since the halving in 2020, Bitcoin prices increased to more than $60,000 — though they have fallen significantly since then.

After the price increase there is often a retreat, sometimes resulting in drawdowns as large as 90%. The price then begins appreciating slowly leading up to the next halving, and the cycle tends to repeat. This is an oversimplified version of events but it offers a general sense of how halving Bitcoin has impacted prices historically.

That said, past performance does not always indicate future results. Plus, markets move for a variety of reasons, from geopolitical issues and macroeconomic events. Cryptocurrencies can, at times, be correlated with broader financial markets, so it’s hard to pinpoint whether halving was the exact cause of any price increase.

Recommended: Next Bitcoin Bull Run

The Takeaway

Bitcoin halving refers to an event when the amount of Bitcoins miners receive in exchange for processing transactions is cut in half, occurring once every four years. The most recent halving was in 2020, and the next one will happen in 2024.

Halving is a fundamental part of Bitcoin’s network, and as a feature of that network, is what makes some people believe that Bitcoin is unique as a store of value. But the halving can and does have an effect on its price, too, which is something investors should keep in mind.

FAQ

Does Bitcoin halving increase the price?

Historically, Bitcoin prices have risen after a halving event. But there are numerous other factors that affect Bitcoin’s price, and it’s difficult to say that the halving itself has caused values to increase.

How often is Bitcoin halved?

Bitcoin halving occurs roughly once every four years. The most recent halving event was in 2020, and the next one will be in 2024. They will continue to happen on that schedule until the supply of Bitcoin is exhausted.

Is Bitcoin halved?

Yes, Bitcoin is halved, at a schedule of roughly once every four years. The halving process is built into the Bitcoin network’s protocol, as designed by its creator(s).

Photo credit: iStock/happyphoton

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

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Jan
07
2023
Does Cryptocurrency Have Trading Hours?

Does Cryptocurrency Have Trading Hours?

By | Growing Wealth, invest, Investing | Comments Off on Does Cryptocurrency Have Trading Hours?

Crypto trading hours are 24/7, 365 days per year — the market never closes. That’s good news for those who simply can’t peel themselves away from studying cryptocurrency charts or watching the crypto markets.

Though cryptocurrency trading hours are much more expansive than those of the traditional stock market, there are some caveats depending on your individual cryptocurrency exchange of choice. Read on to learn more about crypto trading, when it happens, and how to get in on it.

How Crypto Trading Works

If you’ve had any experience with other market types, or even the stock exchange, you likely already have a good grasp of how crypto trading works. Most people access the market through a crypto exchange, where buyers and sellers transact assets.

For those buyers and sellers, the exchanges simplify the trading process by showing real-time values for various cryptocurrencies (the actual cryptos on a given exchange will vary), and pairing traders and investors so that they can buy, sell, and trade. Of course, investors can still spend hours reading crypto charts, but an exchange streamlines the trading process. As such, for most end users, it’s pretty much the same process as buying or selling stocks.

What Time Will Crypto Coin Start Trading?

Since the crypto markets are always open, so to speak, crypto trading never starts or stops. Investors and traders can use an exchange or brokerage to trade crypto any time they’d like.

That’s not to say that all markets will have lots of liquidity or trading partners at any given time, but it’s a 24-hour market nonetheless.

Are There Time Limitations on Crypto Trading Networks?

Though crypto exchanges are similar to services that allow users to actively invest in stocks and other assets, there are some differences. One of the most important differences is time limitations — or, the hours of the day during which transactions are executed.

If you’re trading assets like stocks, bonds, and ETFs, transactions are executed during the market’s open hours, and to a lesser extent, the after-hours market. That’s generally 9:30 am ET to 4 pm ET, Monday through Friday, and 4 pm ET to 8 pm ET for after-hours trading.

But some assets can be traded 24 hours per day. The foreign exchange (forex) market is an example — traders can swap currencies all day between Monday and Friday. The crypto markets are likewise much looser with trading hours, in that the crypto markets never actually close.

Does The Time You Trade Affect Your Crypto Fees?

Though the crypto markets never close, when you choose to trade can have an impact on applicable trading fees. That’s because the markets can get busy, and it requires network resources to facilitate trades — network participants need to validate trades on blockchain networks, for instance, and if many traders are trying to execute transactions at once, it can create a logjam.

For that reason, you may end up paying higher or lower transaction fees (commonly called “Ethereum gas fees”) if you try to trade during busy hours. Conversely, the fees may be lower during slower times of the day, like the middle of the night.

Note, too, that there are ways to minimize crypto trading fees.

On the other hand, there is more liquidity in the market during stretches of higher trading volume. That means there are more participants, and generally speaking, more “action” in the market. That can likewise be a good or bad thing, but something crypto investors should know before they decide on a time of the day to trade.

Cryptocurrency Trading Hours vs Stock Market Trading Hours

The stock market has set operating hours: 9:30 am ET until 4 pm ET, Monday through Friday. The stock markets are closed during weekends and holidays.

Conversely, the crypto markets operate non-stop. That doesn’t necessarily mean that there aren’t certain days or times that are better to trade, as mentioned, since the numbers of traders and overall level of liquidity in the markets can vary. But access to the crypto markets is always open.

So, you can get real-time updates on crypto prices, add some coins to your portfolio, or fine-tune your crypto day-trading strategies at odd hours, on weekends, and even on holidays.

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Does The Global Market Affect Crypto Trading?

The global market does have an effect on crypto trading, but we’re still learning the degree to which that relationship exists. While crypto is, in some ways, siloed off from other trading markets, the two can and do affect one another, as you may have noticed by the fluctuating values in your investment portfolio.

During 2022, we saw this first-hand, as an overall market downturn likewise spilled over into the crypto markets — hence, 2022’s “crypto winter.” Similarly, the collapse of large crypto companies like FTX in late 2022 had an effect on global markets as well, causing some investors to lose money, likely altering their other investment decisions and creating a ripple effect in the markets.

Pros and Cons of Crypto Always Being Tradeable

There are some pros and cons given that the crypto markets have no set hours.

For instance, during times when fewer traders are on the market, it can affect crypto exchange liquidity — or more specifically, Bitcoin liquidity — and make values more volatile. Conversely, the open-ended hours of the market can make it easier to research and execute trades at your convenience.

Pros of 24-7 Crypto Trading

There are some advantages to the crypto markets always being open. These are the top benefits:

•   Convenience for traders

•   Higher potential returns due to bigger market and liquidity

•   Access to markets anytime, anywhere

Cons of 24-7 Crypto Trading

Of course, there are also potential downsides to crypto’s non-stop market:

•   Some exchanges and platforms may limit market access to certain times

•   Higher risks and higher Bitcoin volatility (or other crypto volatility) on certain days and times

•   Lack of regulated market hours means traders could miss big market movements

How Non-Stop Crypto Trading Hours Impact Institutions

There are some ways in which the non-stop crypto market affects institutions — banks and exchanges, in particular.

The stock market takes a break every day, and every weekend. That gives all the players in the market — individual investors and institutions — a chance to assess and reposition their assets for their next moves. But since crypto trades all the time, there are stretches during the 24-hour day when banks and exchanges are effectively closed, and money isn’t being moved around as quickly or efficiently as it would during business hours.

This can cause lags — if a crypto trader is trying to deposit money into their crypto exchange account to execute a trade at, say, 2 am ET on a Sunday night, that money won’t actually move until the next day. That has the potential to cause some friction in the markets.

In short, there’s a mismatch between the standard business hours of many institutions and the 24-hour nature of the crypto markets, which may have an effect on the markets.

How Does Crypto Trade on Weekends?

Crypto trades the same on weekends as it does during weekdays. Remember: The market never closes! But there is one thing to keep in mind: The crypto markets are volatile, and even more so on the weekends. In fact, crypto values often crash during the weekends for a few key reasons:

•   Less trading volume: Many people take the weekends off, and that includes crypto traders. As such, the volume of trades takes a dip. With lower volume, the trades that are executed (especially big ones) can have an outsized effect on the markets — more so than during times with higher trading volume.

•   Margin trading: Many traders trade crypto “on margin,” meaning that they borrow money to execute trades. And when prices drop, it may trigger a “margin call,” which means those margin traders must repay their loans. That forces traders to try and move some money around, but with banks closed on the weekends, it can make things more difficult, and in effect, potentially cause crypto values to fall further.

•   Hourly mismatches and liquidity: With banks closed on weekends but the crypto markets firing away at all hours, traders may have trouble getting more money into their crypto exchange accounts. This can limit market liquidity, potentially adding yet another systemic and chaotic element to weekend crypto trading.

When Are the Best Times to Buy and Trade Crypto?

As discussed, there are times and days that are generally more favorable to crypto traders to execute trades. The best times and days to trade crypto is generally “whenever it works for you,” but research shows that professional traders tend to be more active during weekdays.

Monday tends to be the day when traders historically see the biggest returns when trading, followed by Friday and Saturday. And as for which hours of the day are the most fruitful? Data shows that the markets are busiest around 12 pm ET.

But as with any investing, past performance and trends are no guarantee of future outcomes. There’s no promise that trading during these days or times will translate to bigger returns (or any returns) for an individual trader or investor. It’s also worth keeping in mind that these trends are likely to change with time.

The Takeaway

The crypto markets are a wild, non-stop ride, and they operate 24 hours per day, 365 days per year. The markets never close, which means you can buy, sell, or trade crypto any time you want — that’s not to say that there aren’t times that may be more advantageous, however.

FAQ

What hours does cryptocurrency trade?

Cryptocurrency trades non-stop, 24 hours per day, 365 days per year. The crypto markets never close, which means traders and investors can always execute crypto transactions.

When are the best times to buy crypto?

The best times to buy crypto depend on an individual investor’s preferences, but the markets are generally more liquid during business hours on weekdays. Transaction fees, however, may be higher during those times, too.

Can I trade crypto on weekends?

Yes, you can trade crypto on weekends. The markets never close, so you can trade crypto on weekends, holidays, or any other day, too.

Photo credit: iStock/Stefan Tomic

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

SOIN1222007

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Jan
06
2023
bitcoin coin

Crypto Tax Guide 2023: How to Report Crypto on Your Taxes

By | Growing Wealth, invest, Investing | Comments Off on Crypto Tax Guide 2023: How to Report Crypto on Your Taxes

Make no mistake: You need to report your crypto activity on your tax return. Cryptocurrency has become very popular in recent years, and that hasn’t gone unnoticed by the IRS. If you were active in the crypto markets over the past year, you’ll need to report it on your tax return, or risk being penalized.

Because of this, it’s important that investors know the basics regarding filing and paying taxes on their cryptocurrency investments, which includes reporting their trading activity and income.

How Cryptocurrency Taxes Work

One of the most important things investors need to know before investing in cryptocurrency is how crypto taxes work. Additionally, investors should be aware that classification of cryptocurrencies varies depending on the federal government agency overseeing the investment activity.

The IRS defines cryptocurrencies as digital assets, and that includes non-fungible tokens (NFTs), and stablecoins, too. Despite the fact that crypto is often thought of as a currency, they are not considered currency for federal tax purposes.

Instead, transactions of cryptocurrencies are treated as property, like stocks, bonds, and other capital assets. So, when someone uses, sells, or is paid in a cryptocurrency, they are generally required to pay taxes on their realized gains.

Note, though, that even as the IRS treats cryptocurrencies as property for tax purposes, this categorization is not consistent across all federal government agencies.

The Commodity Futures Trading Commission (CFTC), for example, classifies cryptocurrencies as a commodity when regulating a variety of crypto-related trading markets. The CFTC oversees cryptocurrencies when they are “used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.”

In contrast, the U.S. Securities and Exchange Commission (SEC) attempts to regulate different cryptocurrencies as securities and investors can be subject to securities laws.

In all, there’s something of a turf war happening in Washington D.C. over crypto regulation. But for taxpayers, the most important thing to know is that crypto is considered “property” by the IRS, and investors will need to report it as such on their tax returns.

Do You Have to Pay Taxes on Crypto?

Investors are required to pay capital gain taxes on cryptocurrency when selling, trading, or disposing of their holdings. Additionally, cryptocurrencies can be taxed as income if an individual receives the crypto as a gift, from mining, or for services rendered. There are different types of income, and crypto income is among them.

So, there are two types of taxes potentially at play.

However, not all crypto transactions result in a tax liability. These nontaxable events include buying crypto with cash and holding it, donating it to a qualified charity or non-profit, or transferring crypto to yourself between wallets or accounts. In effect, investors need to realize a gain or loss.

Situations When You’ll Need to Pay Taxes on Crypto

•   Cryptocurrency is sold for cash: When an investor sells cryptocurrency for government-backed currency (fiat currency) and makes a profit, the investor will have to pay capital gains taxes on the proceeds, just as they would on the sale of a share of stock.

•   Cryptocurrency is used to purchase a good or service: If an individual uses their cryptocurrency to buy a new car or pay for a haircut, they will likely owe capital gains taxes on the purchase. To the IRS, using crypto to buy something is the same as selling it for cash, because the crypto needs to be sold for dollars before it can be used to exchange for a good or service. This creates a “realized” gain.

•   Exchanging cryptocurrencies: Converting or exchanging one crypto for another is comparable to selling the one to purchase the other. As a result, the investor may have to pay capital gains tax on the sale of the first crypto, if it was sold for a profit.

•   Being paid in cryptocurrency: If an individual decides to be paid in cryptocurrency, they will need to pay income taxes on that income (just as if they were being paid in dollars) which will depend on their individual tax bracket.

•   Mining cryptocurrency: The proceeds from mining Bitcoin and other cryptocurrencies are typically taxed as income. It’s also possible for the proceeds of some miners to be taxed as business income.

•   Crypto is acquired via an “airdrop” or “hard fork”: In the event of a crypto airdrop or hard fork that results in new coins, those new coins are taxed as income.

Is Crypto Investing Taxed as Income?

Crypto investing is taxed more or less the same way that investing in stocks, ETFs, or other securities is taxed. That is, tax liabilities are generated when an investor disposes of their holdings by selling or exchanging them. Only then do they have both a purchase price (cost basis) and a disposal price, which can be positive or negative ( a gain or a loss).

From there, capital gains taxes can be calculated, similar to how things work with traditional investment tax rules.

Crypto is taxed as income under a few select circumstances, as discussed. So, no, crypto investing itself isn’t taxed as income, but that doesn’t mean that crypto itself is never taxed as income.

How Much Do I Owe in Crypto Taxes?

The amount of crypto taxes owed varies depending on an investor’s income, tax filing status, and the length of time that an investor owned a crypto asset before selling it. Additionally, the type of crypto transaction affects what tax rate an individual will be charged. As mentioned above, some situations result in a capital gains tax liability, and others an income tax liability.

Long-Term Capital Gains Crypto Tax Rates for 2023

If an investor owned a cryptocurrency for more than 365 days before selling or using it, the proceeds of the transaction are taxed at the long-term capital gains tax rate. Here are the cryptocurrency capital gains rates on long-term gains for the 2022 tax year (taxes filed in 2023):

Long-Term Capital Gains Tax Rates for 2022
Tax Rate Single Married Filing Jointly Married Filing Separately Head of Household
0% $0-$41,675 $0-$83,350 $0-$41,675 $0-$55,800
15% $41,675-$459,750 $83,350-$517,200 $41,675-$258,600 $54,101-$488,500
20% >$459,750 >$517,200 >$258,600 >$488,500

Source: Internal Revenue Service

Short-Term Capital Gains Crypto Tax Rates for 2023

If an investor owned a cryptocurrency for less than a year before selling it or using it, the gains are taxed as ordinary income. Additionally, if an individual was paid in crypto, mined crypto, or received crypto via an airdrop, they are taxed as ordinary income. Here are the income tax brackets for the 2022 tax year (taxes filed in 2023):

Short-Term Capital Gains and Income Tax Rates for 2022
Tax Rate Single Married Filing Jointly Married Filing Separately Head of Household
10% $0-$10,275 $0-$20,550 $0-$10,275 $0-$14,650
12% $10,275-$41,775 $20,550-$83,550 $10,275-$41,775 $14,650-$55,900
22% $41,775-$89,075 $83,550-$178,150 $41,775-$89,075 $55,900-$89,050
24% $89,075-$170,050 $178,150-$340,100 $89,075-$170,050 $89,050-$170,050
32% $170,050-$215,950 $340,100-$431,900 $170,050-$215,950 $170,050-$215,950
35% $215,950-$539,900 $431,900-$647,850 $215,950-$539,900 $215,950-$539,900
37% >$539,900 >$647,850 >$539,900 >$539,900

Source: Internal Revenue Service

How to File Taxes on Cryptocurrencies

The most important thing for investors to understand is that they are required to report crypto holdings, gains, and losses to the IRS when filing their tax returns. If a cryptocurrency return is generated — positive or negative — or some type of income is realized from holdings, your crypto activity will need to be reported to the IRS. This is why it’s important to keep track of any and all crypto transactions.

Here are the basic steps to take when filing taxes on cryptocurrencies.

•   Determine what, if anything, is owed. If an investor completed a crypto transaction (selling, exchanging, or using to purchase a good or service), it is likely that it generated a tax liability.

•   Record and report transactions. All cryptocurrency transactions will need to be reported on your tax return. Like with stocks and other investments, the IRS requires a paper trail to ensure an individual reports their full tax liability. In some cases, crypto exchange will provide the transaction history for the investor via a 1099 form, or something similar.

•   File the correct forms with your tax return. The IRS requires specific forms depending on the activity an individual has conducted with their crypto. That could include making calculations on Form 8949 , and then reporting the results on Schedule D of Form 1040 , which outlines and summarizes capital gains or losses

Filing Crypto Taxes on Your Own

It is possible to figure out your crypto tax liabilities, and file on your own. But know that many experts may recommend against this, especially if you’re a particularly active crypto investor or trader. That’s because there can simply be so much information that needs to be reported, that it can be overwhelming for the typical person, and thus, hard to keep track of.

There are services that can help you keep track of your transactions, but if you’re using multiple exchanges or brokerages, and even some decentralized exchanges, you may miss a portion of your activity that needs to be reported.

If you only have a handful of crypto transactions to account for, you may be able to file your crypto taxes yourself. But it may be best to reach out to professionals for help.

How to Lower Crypto Tax Liability

If an investor is looking to lower their crypto tax liability (who isn’t looking for ways to reduce income taxes, and other taxes?), there are several options. Many of the same strategies that are used for traditional investments, like stocks, apply to crypto holdings. Here are a few examples:

Buy and Hold

The buy-and-hold strategy can help investors take advantage of the long-term capital gains tax rate, which is lower than the short-term capital gains tax rate as noted above. When an investor holds on to their crypto for at least one year, their tax rate for the crypto will be lower than if they sold within the first year.

Tax-Loss Harvesting

If a loss is realized on a crypto transaction, it can be used to offset the gains made on other holdings. This is called “tax-loss harvesting,” and is a common tactic used to lower tax liabilities on other investments. However, if an investor’s crypto is somehow stolen or lost, they are out of luck and won’t be able to apply the loss against their gains to lower their liability.

Investors can use tax-loss harvesting for their crypto holdings to offset as much as $3,000 in non-investment income. If they’ve incurred losses beyond that limit, they can carry forward those losses to use in future years.

Also, investors who are concerned about triggering wash sale rules in regards to their crypto sales have no reason to fear. Under current rules, wash sales do not apply to cryptocurrencies. (Though it’s generally expected that this will change at some point in the future.)

Charitable Donations

The IRS classifies crypto as property, and property donations are tax-deductible, and not subject to capital gains taxes.

Here’s how this might work in an investor’s favor: If an investor bought a Bitcoin for $10,000 more than a year ago, and it now has a value of $35,000, they would owe capital gains taxes on that $25,000 gain if they cashed out. But by donating it, they can avoid those capital gains taxes and also take a deduction “generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year,” according to the IRS .

Buy and Sell Cryptocurrency in 401(k) or IRA

Some tax-advantaged retirement accounts like a 401(k) or an IRA allow investors to add cryptocurrencies into their portfolios. In these accounts, no annual taxes are assessed on the transactions, since they enjoy tax-free growth. Investors can therefore take advantage of these benefits to trade within the accounts and not be taxed on every transaction.

However, depending on the type of account used, an investor may face taxes upon withdrawal. For instance, if you were to withdraw money from an IRA account prior to reaching age 59.5, you’d be subject to a 10% penalty.

Recommended: Guide to Bitcoin IRA: Pros, Cons, and What to Know

The Takeaway

Investors need to report their crypto activity to the IRS, and pay applicable tax liabilities. Most crypto activity is subject to capital gains taxes, but depending on the circumstances outlined above, cryptocurrency transactions and investments may be taxed as property, like stocks, or as income.

Investors should keep this in mind, remembering that cryptocurrency tax situations are nuanced and complicated. For that reason, it may be best to reach out to a tax professional for help when filing your taxes. But by keeping track of your crypto holdings and transactions, managing your cryptocurrency tax liabilities shouldn’t be too difficult.

FAQ

How much are crypto taxes?

The amount an investor owes in crypto taxes depends on several factors, including how much trading they did, and how much they profited from those trades. Income taxes may also be applicable, too.

When do your taxes for crypto investments need to be filed?

Investors need to report and pay applicable crypto taxes at the same time that they file their tax return. Generally, that’s due by mid-April, on Tax Day. Investors can ask for an extension, or even sign up for an installment plan if they can’t afford to pay their crypto taxes.

What happens if you don’t pay your crypto taxes?

If you don’t pay your crypto taxes (or fail to report your crypto activity to the IRS), you could incur financial penalties, or even jail time. If caught, you could be facing audits of several years’ of tax returns, and even face serious charges, such as tax evasion.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

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$100 $499.99 $15
$500 $4,999.99 $50
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Jan
04
2023

How to Mine Bitcoin: A Guide

By | Growing Wealth, invest, Investing | No Comments

Bitcoin miners rely on high-powered computer systems to validate blocks of digital transactions on the blockchain network and earn Bitcoin (BTC). Learning how to mine Bitcoin isn’t hard, but it can be expensive and time consuming.

Once a miner has completed a certain number of calculations (1 MB) to verify a block of transactions, they may be rewarded with new Bitcoins — if they are the first to verify the block.

This competitive process in turn helps to secure the system and prevent fraud. And it enables a network-wide consensus that essentially backs the validity of each Bitcoin, even without a central authority.

What Is Bitcoin Mining?

Mining Bitcoin is more than just the creation of Bitcoin tokens; it’s also the decentralized global system by which miners validate and secure all Bitcoin transactions — and earn Bitcoin themselves.

How does Bitcoin mining work exactly? It goes back to the blockchain technology that Bitcoin and other types of cryptocurrencies are built on. For many blockchain-based crypto networks to run, miners rely on super-charged computer systems — or in some cases cloud-based technology — to validate blocks of digital transactions that are then appended to the blockchain ledger.

How Bitcoin Mining Works

When a Bitcoin transaction is executed, it gets sent to miners for verification. Bitcoin miners use special computer hardware to do the complex mathematical calculations or hashing, required to confirm each item on the blockchain — an immense undertaking called proof-of-work (PoW) that involves literally trillions of calculations.

Many different types of crypto use a PoW algorithm, including Dogecoin, Litecoin, Bitcoin Cash, Monero, and others. It can be useful to understand the differences between certain types of crypto, like Bitcoin vs. Dogecoin, in order to learn more about mining crypto.

Understanding Bitcoin Hashing and Hash Rate

To solve these problems, each machine or node has to make millions of guesses per second — called hashing. This requires a lot of electricity. Estimates vary, but Bitcoin miners consume around 129 Terawatt-hours of energy, which is around 0.6% of the world’s total.

To successfully mine a block and receive bitcoin rewards, a miner has to hash the block’s header, which is a summary of the information contained within a given block. In order to keep the timing of each block consistent, the difficulty of solving each block has to increase over time. This keeps the number of Bitcoins entering the market steady. (If it got easier to validate each block, miners would get more rewards faster, which would quickly deplete the existing supply of Bitcoins).

The Bitcoin hash rate is a measurement of how many times the Bitcoin network attempts to complete those calculations each and every second. It’s the approximate average of all the hash rates of each individual miner in the network.

When a miner has a higher hash rate it increases the miner’s chances of finding the next block and receiving a Bitcoin reward. More hashing power also is an indication of a network’s overall security.

It takes about 10 minutes for miners to successfully confirm a block of transactions (1 MB) and get rewarded with new Bitcoin. But mining is intensely competitive, especially because the reward is halved every 210,000 blocks and now stands at 6.25 BTC.

What Is Bitcoin Halving, Why Does It Matter?

Every type of cryptocurrency follows its own protocol. Bitcoin is a deflationary crypto, which means the number of coins being minted is steadily decreasing.

How many Bitcoins are left? The number of Bitcoins that can be produced is capped at 21 million. That’s where the halving of Bitcoin rewards comes in.

Since mining rewards create Bitcoin, the number of Bitcoin you can earn from mining is decreased over time through the process called halving. In June of 2024, the Bitcoin block reward for mining is slated to drop to 3.125 BTC from 6.25 BTC.

Understanding Proof of Work

The process of mining Bitcoin actually helps secure the network, and the transactions that fly across it every day. For a hacker to take control of the blockchain, to commit fraudulent charges, and to steal Bitcoin, they’d have to control over 51% of the network.

It’s an important insight into the decentralized world of mining cryptocurrency: Rewarding miners creates a competitive environment that encourages more miners to join the network. This increases the size of the network, making it harder to get more than 51% control of it, which in turn makes transactions more secure for users who are sending Bitcoins back and forth.

Can Bitcoin Work Without Miners?

The short answer is no. Bitcoin relies on a proof-of-work consensus mechanism that requires miners and mining for transaction verification and block creation, for minting new coins, and for helping to secure the network. That’s how the system is built.

If Bitcoin were to switch to a proof-of-stake system, the way Ethereum did with the Merge in 2022, then miners would no longer be needed.

There is an ongoing debate about the value of crypto staking vs. mining. While mining uses special hardware to solve complex computational problems, staking locks up crypto for a fixed period. PoW is energy intensive, whereas PoS requires less energy. PoW relies on a high hash rate to secure a network, whereas PoS relies on a large amount of tokens (money) — a high level of market capitalization.

In a proof-of-stake network, transactions aren’t validated by miners running vast computer rigs, but validators who stake a certain amount of their crypto in order to help monitor and run the network — and earn crypto rewards.

Recommended: Is Crypto Mining Still Profitable in 2022?

Mining Bitcoin: What You Need

With the right equipment, nearly anyone can mine Bitcoin — in theory. The catch? As just discussed, Bitcoin mining has become highly competitive because of the potential rewards — and the complexity of the calculations and technology involved.

When Bitcoin was first launched in 2009, all miners needed was a sturdy PC and they could potentially get in the Bitcoin-mining game. Things progressed quickly, though. In 2010, software was released that let miners mine with graphics processing units (GPUs), the technical name for a video card.

The Evolution of Bitcoin Mining Hardware

This was a major shift in Bitcoin mining because a single GPU was 100 times faster than a central processing unit (CPU), which was how most people were initially mining.

Next, miners built computers specifically for mining Bitcoin, as well as other cryptocurrencies. These “crypto mining rigs” typically featured motherboards, the main hub of a computer, which supported four to eight graphics cards.

If a single card was 100 times faster than a CPU, it’s easy to see how the average user looking to mine Bitcoin might be left in the dust by a high-powered crypto rig that featured anywhere from four to eight GPUs churning away at blockchain calculations.

From there, as is the case with many things tech, the hardware got better, faster, and more specialized. In 2013 the first Bitcoin ASIC miners hit the scene. ASIC stands for application-specific integrated circuit. These mining tools are built to do one thing — mine cryptocurrencies (including Bitcoin), and they are far more powerful than GPUs.

Mining-Specific Hardware

How do you mine Bitcoin with your own rig? A mining rig is basically a super custom PC. The fundamental components are what you’d expect: You need a motherboard, RAM, a CPU, and storage.

The key enhancements are either the added GPUs, as noted above, or using an ASIC. Generally, using an ASIC is the preferred mining tool. GPUs are no longer considered fast enough to solve Bitcoin calculations and earn rewards; you’re up against far more powerful machines.

While ASICs are more effective at processing Bitcoin transactions than their GPU and CPU predecessors, and they’re generally more energy efficient, they can come with some upfront costs. And this doesn’t include the potentially high utility costs needed to maintain them (read: keep them cool enough to function).

The cost of electricity is a significant one for most miners, and something to include in your calculations, as it can impact your profits.

Miners also need to take into account the cost of mining fees.

Mining Software and a Bitcoin-Compatible Wallet

Selecting the best software to mine Bitcoin doesn’t have to be complicated or expensive. While mining Bitcoin can be costly in terms of hardware and electricity, the software to mine Bitcoin usually isn’t. Most Bitcoin mining software is free and open-source.

Once you have the hardware and software in place to mine Bitcoin, next you’ll need to set up a type of crypto wallet that’s compatible with Bitcoin.

Another option to consider may be a mining pool.

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How Bitcoin Mining Pools Work

A bitcoin mining pool is a group of users who have decided to join forces to validate Bitcoin transactions (create a new block). Users who join mining pools contribute their own CPUs, GPUs, or ASICs to a network and when rewards are paid out, they all get a share.

If you’re going solo, mining software will try to verify transactions with just the processing power of whatever hardware (CPU, GPU, or ASIC) that you’ve got. That said, many people agree that the computations have gotten so complex, it’s less likely that a solo miner will create a new block on their own. If you’re joining a pool, the mining software will help you connect to your pool.

Many mining pools these days are located in China because of the cheaper electricity. Some of these pools are actually companies, including F2Pool, AntPool, BTCC, and BW. While these are some of the biggest pools, there are pools based in the U.S. and Europe as well.

While pools might seem appealing to miners with less computing horsepower, there may be some things to consider before joining. Pools may charge users a fee. And miners might be paid out their shares based on the level of their contribution, which could mean that miners with fancy ASICs take home more of the rewards.

Since this is Bitcoin, there’s probably another innovation around the corner.

Cloud mining is an example — an option if you don’t want to own your own mining hardware and would rather mine with someone else’s. However, cloud mining may also come with its own costs and risks that have left some members of the Bitcoin community less than impressed with this approach to mining coins.

What’s Cloud Mining?

Much like storing data or running applications in the cloud, cloud mining is the process of paying someone else to use their crypto mining hardware. This could save a miner the upfront cost of setting up an ASIC system.

To get started, a miner would likely open an account with a cloud mining company, decide how much they want to spend, and how much they want to mine.

While cloud mining may seem like an easier way to get started with Bitcoin mining, it’s worth mentioning that there have been reports of cloud mining companies that might not be on the up and up. Miners looking to get started might consider doing a fair bit of research before deciding if cloud mining is right for them — as well as what company to go with.

Recommended: A Closer Look at Bitcoin Cloud Mining

The question of whether Bitcoin mining is legal is still fairly complex and can vary from region to region. The short answer is that Bitcoin itself, as well as Bitcoin mining, are both legal in many developed countries, including the U.S., U.K., and Japan. In general though, it’s wise to consider the use of any cryptocurrency within the context of the laws and regulations in a specific jurisdiction, as many are still in flux.

In some countries, the use of cryptocurrencies is forbidden and mining Bitcoin is illegal. In others, like China and India, the use of crypto is restricted. In Canada it’s not illegal to use cryptocurrencies, but they are not considered legal tender — which is a key distinction in how crypto is treated in the U.S. as well.

The question of Bitcoin’s legality is increasingly complex and depends on a wave of cryptocurrency regulations around the world that seem to fluctuate week to week, region to region. These may include how Bitcoin is defined (e.g. as a commodity or a currency); how it can be used (e.g. for some purchases or payments but not others); how it’s taxed.

According to IRS guidelines issued in 2014, cryptocurrencies like Bitcoin are considered property, and are taxed as such. Also, if an employer compensates an employee using a cryptocurrency, the employee will get a W2 or 1099 tax form and may owe income taxes on their crypto trading.

The status of cryptocurrency mining as well as crypto’s legal standing can shift as new regulations come into play.

Is Bitcoin Mining Right for You?

Despite some hurdles, learning how to mine Bitcoin is still an intriguing and potentially lucrative opportunity for some. With the right equipment, it’s possible to validate enough transactions to earn actual Bitcoin tokens. That said, mining Bitcoin is not the gold rush it once was. Even if you invest in some serious Bitcoin mining ASICs, mining itself keeps getting more complex and competitive.

That doesn’t mean you can’t do crypto mining, though. There are thousands of cryptocurrencies that could use help from eager miners willing to donate some processing cycles from their CPUs or GPUs, and even if you don’t hit the mother lode, you could mine for a better understanding of how cryptocurrency works. Whether or not you want to grab a metaphorical hat and mining pick is up to you.

The Takeaway

Bitcoin mining requires a substantial investment of time and energy on the part of any would-be miner. The equipment alone can set you back thousands. And while the payoff — assuming you earn actual BTC — could make the overhead cost worth it, there are no guarantees. Bitcoin mining has become highly competitive.

FAQ

How do you start mining for Bitcoin?

The most important step if you want to mine Bitcoin is to look into the cost of setting up your own mining rig (or computer hardware and software) and comparing that to the cost of joining a mining pool or cloud mining. Next, it would be a good idea to compare potential rewards and risks of different mining options, since Bitcoin mining is expensive and competitive, and there are no guarantees of “striking it rich.”

How hard is it to mine one Bitcoin?

It’s very difficult. Miners are rewarded when they are the first to confirm a 1 MB block of Bitcoin transactions. Currently the reward is 6.25 BTC. Being able to get that reward takes considerable time and energy — and there are no guarantees.

What are the steps to mining Bitcoin?

The first step is to decide which type of mining you want to set up (PC, mining pool, or cloud mining). Next, you have to obtain the necessary hardware and software to run your node, as well as setting up a Bitcoin-compatible crypto wallet to pay mining fees and (perhaps) rewards.

Photo credit: iStock/Stanislav Gvozd

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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