NIIT and High-Income Crypto Investors: Understanding the 3.8% Surtax

For high-income crypto investors, selling Bitcoin or Ethereum isn’t just about locking in profits-it’s about facing a hidden tax bill that can sneak up on you. The Net Investment Income Tax (NIIT), a 3.8% federal surtax, applies to crypto gains for those earning above certain income thresholds. And unlike regular capital gains tax, this one doesn’t show up on your brokerage statement. It shows up as a surprise when you file your return.

What Is the NIIT and Who Pays It?

The NIIT was created in 2013 as part of the Affordable Care Act. It’s not a new tax-it’s an extra 3.8% on top of your regular capital gains tax. You pay it if your Modified Adjusted Gross Income (MAGI) exceeds:

• $259,400 for married filing jointly (2025)
• $204,500 for single or head of household (2025)
• $129,700 for married filing separately (2025)

These numbers are adjusted for inflation each year. In 2024, the thresholds were lower. If you made a big crypto trade in 2023 and your income jumped above the limit, you’re likely paying NIIT now.

The tax doesn’t apply to your salary. It applies only to your net investment income. That includes interest, dividends, rental income, and-critically-capital gains from selling cryptocurrency. The IRS treats crypto as property, not currency. So every sale, trade, or exchange is a taxable event.

How the 3.8% Surtax Actually Works

The NIIT isn’t applied to your total crypto gains. It’s applied to the smaller of two numbers:

1. Your net investment income (after losses)
2. The amount your MAGI exceeds the threshold

Let’s say you’re single, made $190,000 in salary, and sold Ethereum for a $70,000 profit in 2025. Your MAGI is $260,000. You’re $55,500 over the $204,500 threshold. Your net investment income is $70,000. So the NIIT applies to $55,500-not the full $70,000. That’s $2,109 in extra tax ($55,500 × 0.038).

Now imagine you made $150,000 in salary and $100,000 in crypto gains. Your MAGI is $250,000. You’re $45,500 over the threshold. Your net investment income is $100,000. So NIIT applies to $45,500 again-$1,729 extra. The math changes depending on your income level, but the rule is always the same: apply the 3.8% to the smaller number.

Why Crypto Investors Get Hit Harder

Crypto investors face unique challenges with NIIT that traditional investors don’t. For starters, there’s no wash sale rule. If you sell Bitcoin at a loss and buy it back the next day, you can’t claim that loss to reduce your taxes. In stocks, you can. In crypto, you can’t. That means you’re more likely to realize gains-and trigger NIIT-without being able to offset them.

Also, crypto trading is often frequent. One person might do 50 trades in a year. Each one could add to your net investment income. Even if your salary is under $200,000, a single big sale-like cashing out from a 2021 bull market run-can push you over the edge.

And here’s the kicker: if you’re an active trader who makes crypto your primary income, you might avoid NIIT entirely. The IRS lets you classify as a “trader” if you trade regularly, frequently, and for profit. But proving that takes documentation, time, and often a CPA. Most people don’t meet the bar.

What Counts as Net Investment Income?

Not all crypto activity triggers NIIT. Here’s what does:

• Selling Bitcoin, Ethereum, or any crypto for a profit
• Trading one crypto for another (e.g., ETH for SOL)
• Receiving crypto from a hard fork or airdrop (if it has value at receipt)
• Earning interest or staking rewards (if not part of a business)

What doesn’t count? If you use crypto to buy a car or pay for services, that’s a taxable event-but it doesn’t count toward net investment income unless you’re holding the crypto as an investment. If you mine crypto as a business, that’s business income, not investment income. NIIT doesn’t apply.

But if you bought ETH in 2020 and sold it in 2024 for profit? That’s investment income. And if your MAGI is over the threshold? That’s NIIT territory.

How to Track and Calculate NIIT

You can’t calculate NIIT manually without detailed records. The IRS requires you to track:

• Acquisition date of each crypto asset
• Cost basis (what you paid)
• Sale date and proceeds
• Any losses from other crypto trades

Most people use crypto tax software. Tools like CoinTracker, Koinly, and TokenTax automatically flag NIIT exposure. In a 2024 survey, 68% of high-net-worth crypto users said NIIT calculation was the #1 feature they needed from tax software. The problem? Many tools still mess up cost basis calculations. One user reported a $12,000 NIIT bill because the software used FIFO instead of specific identification. That’s $456 in extra tax from a simple error.

You’ll need to file IRS Form 8960. It’s not part of your regular 1040. It’s a separate form that asks for your MAGI, your net investment income, and the lesser of the two. Then it applies the 3.8% rate. If you’ve never filed Form 8960 before, you’re not alone. The IRS saw a 27% jump in filings tied to crypto between 2022 and 2023.

What High-Income Crypto Investors Are Missing

A TaxBit survey of 500 high-net-worth crypto investors found that 42% didn’t know NIIT applied to crypto until they got their tax bill. The average unexpected tax hit? $8,240. That’s not a small number. It’s a surprise that can derail financial plans.

Reddit threads are full of stories:

• u/CryptoTrader87 sold $120,000 in Bitcoin bought in 2017. His salary was $180,000. He thought he owed $24,000 in capital gains. He owed $26,100-$2,100 more because of NIIT.
• u/DeFiInvestor got a token airdrop worth $40,000. He sold it the next week. He didn’t realize the airdrop itself was taxable income-and pushed him over the NIIT threshold.

These aren’t edge cases. They’re common. The IRS has been cracking down. The Inflation Reduction Act gave the agency $80 billion to improve enforcement, with crypto tax compliance as a top priority. By 2026, Deloitte predicts crypto-related NIIT revenue will hit $18.7 billion annually.

How to Reduce Your NIIT Exposure

You can’t avoid NIIT if you’re over the threshold and have investment income. But you can reduce it.

• Harvest losses: Sell losing positions before year-end. You can offset up to $3,000 of ordinary income per year with crypto losses. That lowers your MAGI and can keep you under the NIIT threshold.
• Time your sales: If you expect a big gain in 2025, consider spreading it over 2024 and 2026. Maybe sell half now, half next year.
• Use tax-advantaged accounts: If you hold crypto in a Roth IRA, gains aren’t taxable. But you can’t buy crypto directly in most IRAs. You need a self-directed IRA-complex and costly.
• Consult a CPA: A tax pro who understands crypto can help you structure trades, use cost basis methods, and avoid NIIT traps.

There’s no magic trick. But planning ahead saves money. One investor reduced his NIIT by $6,000 in 2024 by moving $150,000 in crypto gains into a 2025 sale-after his salary dropped due to a career change.

The Future of NIIT and Crypto

There’s talk in Congress about changing how NIIT applies to crypto. The 2025 Digital Asset Market Structure Act (H.R. 4763) proposes excluding active traders from NIIT. But the Congressional Budget Office says that would cost $1.2 billion in lost revenue over 10 years. Don’t count on it passing soon.

Meanwhile, the Treasury Department is tightening rules. Proposed regulations in late 2024 clarified that airdrops and hard forks are taxable events-and they can trigger NIIT if you’re over the income limit. The IRS is also pushing for better reporting. Exchanges may soon be required to issue 1099 forms for all crypto transactions, not just sales.

The bottom line? NIIT isn’t going away. It’s growing. In 2022, 3.8 million tax returns paid it. In 2024, over 1.2 million Americans with crypto held more than $10,000 met the MAGI threshold. That number will only rise.

If you’re a crypto investor with income over $200,000, NIIT is real. It’s not optional. It’s not a rumor. It’s a line item on Form 8960. Ignoring it costs money. Planning for it saves it.

What to Do Next

If you sold crypto in 2024 and your income is close to or above the threshold, act now. Use crypto tax software to project your 2025 tax liability. Look at your MAGI and your net investment income side by side. If you’re over the limit, consider:

• Timing your next sale
• Using losses to offset gains
• Adjusting your withholding or estimated payments

Don’t wait until April. The IRS is watching. And the cost of being surprised is far higher than the cost of planning.