If you’re a US-based crypto investor, you’ve probably asked yourself: How does income tax apply to my Bitcoin, Ethereum, or token earnings? It’s a fair question. 

Crypto may be decentralised, but when it comes to taxes, the IRS sees it as property, and often as taxable income. 

That means understanding how income tax works is key to staying compliant and avoiding costly surprises. In this article, we’ll explain how your total income is taxed, using a clear $70,000 example based on the latest 2024–2025 US tax calculator.

What Is Income Tax and How Does It Work?

Income tax is money you pay to the government based on what you earn each year. This includes not only your salary, but also bonuses, freelance work, investment income, and, yes, profits from crypto. 

In the US, income tax is split into two main categories: federal tax, which everyone pays, and state tax, which depends on where you live.

But it’s not as simple as paying a flat percentage of everything you earn. The US uses a progressive system, meaning the more you earn, the higher the tax rate on the upper portions of your income. This is called the marginal tax rate.

Let’s picture your income as a ladder. Each rung represents a bracket of income. You only pay the higher rate on income that falls within that rung, not the full amount. 

So, while the marginal rate might be 22%, that doesn’t mean all $70,000 is taxed at 22%. In fact, the first chunk might be taxed at 10%, the next at 12%, and only the top portion at 22%.

That’s why there’s also the effective tax rate, the actual average percentage you end up paying on your full income. In our example, someone earning $70,000 pays about 14.93% in federal tax, which is $10,453.

If you live in a state like New York, you’ll also pay state tax. In this case, the New York state tax comes to $3,245, with an effective rate of 4.64%. Add both together, and the total income tax paid is $13,698. After taxes, that leaves $56,302 in take-home income.

Crypto investors often overlook how quickly gains can bump them up the ladder. If you earn $70,000 from your job and sell some Ethereum for a $15,000 profit, your total income becomes $85,000. 

This might push a portion of your earnings into a higher federal bracket, affecting the rate at which some of your crypto profits are taxed.

Read more: What are Crypto Tax Haven Countries?

How Filing Status, Deductions, and Crypto Impact Your Taxes

Now let’s dig a little deeper. Your filing status, such as single, married, or head of household, affects how much income you’re allowed to deduct before tax applies. Most people take the standard deduction, which for the 2024–2025 tax year is $14,600 for single filers.

However, in our TurboTax calculator example, the deduction was set to $0 to provide a clear view of gross tax liability. Without any deductions, the full $70,000 is considered taxable income. 

But most people will deduct at least the standard amount, reducing their taxable income to $55,400 and potentially lowering their total tax bill.

Crypto introduces more complexity. The IRS treats crypto gains just like traditional investment income. 

If you sell your tokens, convert them into dollars, or even swap one coin for another, you’ve created a taxable event. Those gains count toward your total income and are taxed according to the same bracket structure.

The type of gain also matters. If you held the asset for less than a year before selling, it’s a short-term capital gain, taxed at your ordinary income rate. 

If you held it longer, it’s a long-term capital gain, which is usually taxed at a lower rate, either 0%, 15%, or 20%, depending on your total income.

Here’s where it gets tricky for active crypto users: frequent trades, DeFi rewards, staking, and even receiving an airdrop can be taxable. Many investors forget to account for these when estimating their income tax, leading to underreporting or unexpected tax bills.

On top of that, contributions to retirement accounts like a 401(k) or IRA can reduce your taxable income. 

However, the TurboTax calculator used here does not factor in these deductions because of tax law limitations. That means the tax total of $13,698 could be lowered if contributions were made, something crypto investors should explore with a professional.

Keeping detailed records of crypto transactions is essential. Using software that tracks your gains and losses throughout the year can help you plan and stay organised when tax season arrives.

Read more: Analyzing the 25% Crypto Tax in Slovenia: Is This Fair?

Practical Advice for Crypto Investors Managing Income Tax

It’s easy to see how income tax can feel overwhelming, especially when crypto is involved. But there are ways to stay on top of it. 

One of the first steps is understanding how much income you’ve actually made, from all sources. If you don’t know your total income, you can’t estimate your taxes accurately.

Start by collecting documentation: W-2s, 1099s, trading statements, and crypto transaction logs. If you use multiple platforms or wallets, make sure all your activity is included. Every crypto transaction that results in a gain or income counts.

Next, use a reliable tax calculator to get a rough estimate. Tools like TurboTax can give you a ballpark figure. 

In the example used here, a person earning $70,000 as a single filer, with no deductions and living in New York, pays $13,698 in tax. But this is just a starting point. Add your crypto income to that number and see how it changes.

Once you know where you stand, you can take action. Consider timing your crypto sales to reduce your bracket exposure. If you expect a higher income next year, it might make sense to realise gains now. 

If you’re currently in a higher bracket, holding off might help you qualify for the lower long-term capital gains rate.

Also, be aware of wash sale rules and how they apply to crypto. As of now, crypto is not subject to wash sale rules in the US, but this may change in the future. 

For now, you can sell a coin at a loss and buy it back immediately to offset other gains. That can lower your total taxable income.

Finally, when in doubt, talk to a tax advisor. Taxes are personal, and what works for one investor may not be ideal for another. Getting proper guidance ensures you follow the rules and make the most of available deductions.

Conclusion

Income tax in the US isn’t simple, especially when crypto comes into the picture. But with the right knowledge and tools, you can stay ahead of the curve. 

Whether you’re earning a salary, staking tokens, or flipping NFTs, understanding how your total income is taxed will help you plan smarter and avoid costly mistakes.

And when you’re ready to trade crypto with confidence, check out Bitrue. As one of the most accessible and secure platforms out there, Bitrue offers tools that make crypto trading easier, whether you’re a long-term holder or an active investor.

Frequently Asked Questions

1. How do I calculate my income tax if I earn crypto?

Add your crypto income to your regular earnings, then apply the standard federal and state tax rates to the total. Use a calculator or tax software to estimate the amount.

2. Is crypto taxed the same as salary income?

It depends. Short-term gains are taxed at the same rate as salary. Long-term gains and some rewards may have different tax rates, but they still count as income.

3. Can I reduce my tax bill if I lost money on crypto?

Yes. If you sold crypto at a loss, you can use that to offset other gains or reduce your taxable income. This is called tax-loss harvesting.

Investor Caution 

While the crypto hype has been exciting, remember that the crypto space can be volatile. Always conduct your research, assess your risk tolerance, and consider the long-term potential of any investment.

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Disclaimer: The views expressed belong exclusively to the author and do not reflect the views of this platform. This platform and its affiliates disclaim any responsibility for the accuracy or suitability of the information provided. It is for informational purposes only and not intended as financial or investment advice.