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When you start investing in cryptocurrency, it can be exciting to see your balance grow. And if you can manage to sell some crypto or NFTs for a profit, seeing that windfall hit your bank account can be a thrill.
But investing in crypto or NFTs can also come with a swarm of fees, especially if you don’t know how to avoid them. Read below for the most common fees – and how to minimize them.
Common cryptocurrency and NFT fees
There are many different fees associated with trading cryptocurrency and buying NFTs. Here are the various kinds of fees.
When you buy and sell cryptocurrency on an exchange, you have to pay a trading fee. This is similar to the fee you’d pay when you’re buying and selling individual stocks. You pay this to the corporation or entity that is operating the exchange.
Trading fees may vary depending on the exchange you’re using, so make sure to compare these before you initiate a trade.
When you use cryptocurrency on a blockchain, such as the Ethereum network, the transaction has to be processed by a real person or group of people to go through. These people are known as miners or validators depending on the type of blockchain you are using.
Users pay network fees, also called “gas,” to miners and validators to process each transaction. The network fee compensates the miners and validators for the service of processing transactions.
For example, let’s say you’re using Bitcoin to buy a physical item. In this case, you’d have to move your Bitcoin from your wallet to someone else’s wallet in the form of a sale. This will incur a network fee.
Unlike other types of crypto fees, network fees will vary, depending on how many transactions are being processed at any given time. The more transactions that are going through, the higher the network fees will be. Fewer transactions means the network fees will be lower.
If you want to minimize network fees, you can wait to move your cryptocurrency until the network activity has died down. You can get a general idea of what fees to expect by using online tools like www.ethereumprice.org/gas. Typically, fees are lowest in the early morning on the weekends or on Mondays and Tuesdays.
When you sell cryptocurrency, you will have to pay a fee to the network. Selling fees are usually charged as a percentage of the amount. The fee will be taken directly from the amount you sell.
Consumers usually don’t incur fees when depositing cryptocurrency, but there may be a minimum deposit requirement. If you don’t meet the deposit requirement, you won’t be able to deposit funds.
Withdrawing cryptocurrency will usually incur a fee, but some networks offer a certain amount of free withdrawals per month. Every network is different, and you should make sure you understand the free withdrawal limit before you initiate a withdrawal.
Also, there may be a minimum withdrawal amount. If you don’t meet the minimum, you won’t be able to withdraw that amount.
Many crypto users don’t realize that they have to pay taxes on their crypto investments if they have a profit. This isn’t the case if you lose money on cryptocurrency.
In the event that you do turn a profit, the tax rate will depend on how long you have owned the cryptocurrency. If it’s been less than a year, then you will have to pay the short-term capital gains tax rate.
Here’s how the short-term capital gains tax rate varies depending on your income:
Filing status 10%12%22%24%32%35%37%SingleUp to $10,275$10,276 to $41,775$41,776 to $89,075$89,076 to $170,050$170,051 to $215,950$215,951 to $539,900Over $539,900Head of householdUp to $14,650$14,651 to $55,900$55,901 to $89,050$89,051 to $170,050$170,051 to $215,950$215,951 to $539,900Over $539,900Married filing jointlyUp to $20,550$20,551 to $83,550$83,551 to $178,150$178,151 to $340,100$340,101 to $431,900$431,901 to $647,850Over $647,850Married filing separatelyUp to $10,275$10,276 to $41,775$41,776 to $89,075$89,076 to $170,050$170,051 to $215,950$215,951 to $323,925Over $323,925
If you’ve owned the cryptocurrency for a year or more, then you will only have to pay the long-term capital gains tax rate, which is lower than the short-term rate.
Here is how the long-term capital gains tax rate works based on your income:
Filing status 0% rate15% rate20% rateSingleUp to $41,675$41,676 to $459,750Over $459,750Head of householdUp to $55,800$55,801 to $488,500Over $488,500Married filing jointlyUp to $83,350$83,351 to $517,200Over $517,200Married filing separatelyUp to $41,675$41,676 to $258,600Over $258,600
When you sell a cryptocurrency, you should determine how much of a profit you have made and what kind of capital gains tax rate you’ll be paying. Set aside that portion in a savings account so you’ll be prepared when tax time comes around.
The trading platform you use should send you a 1099 form that shows your profit and loss. If you’re not sure how much you should set aside for taxes, contact a tax accountant who can help you plan ahead.
If you created or sold NFTs for a profit, you may also have to capital gains taxes or collectibles taxes on those. The collectible tax rate is higher than the capital tax rate and is capped at 28%, no matter how long you’ve held the NFT.
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Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins. More from Zina Kumok