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The Ultimate Crypto Tax Guide (2022)

As the IRS continues to crack down on crypto tax evasion, itʼs becoming increasingly important to be mindful of how cryptocurrencies are taxed.

In this guide, we discuss everything you need to know about cryptocurrency taxes. From the high-level tax implications to the final tax forms you need to fill out, youʼll learn all about what you need to stay compliant and report your taxes properly.

This guide was created by the tax team at CoinLedger, the #1 crypto tax software. Today, hundreds of thousands of crypto investors use CoinLedger to finish their crypto taxes in minutes. You can create a free account here.

Note: This guide is updated regularly to keep up with the latest updates from the federal government and the IRS.
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Chapter 1

How is cryptocurrency taxed?

The basics of cryptocurrency taxation.
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Crypto taxes 101

In the U.S., cryptocurrencies like Bitcoin are treated as property for tax purposes.

Just like other forms of property (such as stocks, bonds, and real-estate) you incur capital gains and capital losses on your cryptocurrency investments when you sell, trade, or otherwise dispose of your crypto.

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Depending on what tax bracket you fall under, you will pay a certain percentage of tax on this capital gain. Tax rates fluctuate based on your personal tax bracket and whether the gain was short-term or long-term (more on this later).

Outside of buying, selling, and trading, if you earn cryptocurrencies—whether through a job, mining, staking, airdrops, operating a node, or interest from lending activities—you are liable for income taxes on the US Dollar value of your crypto earnings at the time you receive the cryptocurrency.

We will walk through examples for all of these scenarios in more detail below.

When do you owe taxes on your crypto?

Whenever you incur a taxable event from your crypto investing activity, you incur a tax reporting requirement.

A taxable event simply refers to a scenario in which you trigger or realize income or previously unrealized gains. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:

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Below, we run through practical examples to illustrate each of these taxable events further.

1. Do you pay tax when you trade crypto for fiat?

Yes, selling crypto for fiat currency is a taxable event.

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In this example, Emma incurs a $200 capital loss (1,000 - 1,200). This loss gets deducted and actually reduces Emmaʼs taxable income or can offset capital gains from other investments.

2. Do you pay tax when you trade cryptocurrency for other cryptocurrencies?

Yes, trading one crypto for another is treated as a disposal.

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In this scenario, John incurs a taxable event by trading his Litecoin for Ethereum. Trading one crypto for another is treated as a disposal, and here John incurs a $150 capital gain (400-250) from the trade which he would need to report on his taxes.

3. Do you pay tax when you buy goods and services with crypto?

Yes, buying goods and services with crypto is considered a taxable event.

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4. Do you pay taxes when you earn crypto income?

Yes, earning crypto income is considered ordinary income subject to income tax.

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Common forms of crypto income include earning crypto staking rewards, crypto interest, crypto referral rewards, and airdrops.

How much is cryptocurrency taxed?

Your personal income tax bracket and the holding period of your crypto assets (short term vs. long term) will determine how much tax (and what % of tax) you pay on your crypto income. This will be different for each investor and can be affected by more traditional sources of income such as stocks, income from your job, and other investments.

Short-term capital gains tax events

Short-term capital gains apply for any crypto that was held for less than 12 months before being sold. Short-term capital gains donʼt get any special tax treatment under the tax code. They are taxed at the same rate as your normal income (such as income from your job). Thus, you pay taxes on your short-term capital gains according to your personal income tax bracket (outlined further below).

Long-term capital gains tax events

Long-term capital gains apply to any crypto that was held for 12 months or more before being sold.

The government wants to encourage investors to hold onto their investments for the long term, so they offer tax incentives for doing so.

Long-term capital gains tax rates top out at much lower rates than short-term gains.

As depicted in the chart below, holding onto your crypto for more than one year can provide serious tax benefits. If you are in the highest income tax bracket, your taxes on your long-term capital gains will be 20% instead of 37% (the highest tax rate for short-term gains).

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You can use CoinLedger to automatically detect which cryptocurrencies in your portfolio qualify for long-term capital gains and to help plan for future trades. This can help save you tens of thousands of dollars in taxes in the long run. Get started for free here.

Crypto income tax events

Crypto transactions that are classified as income are generally taxed based on your personal income tax bracket.

This includes your short-term capital gains (as mentioned above), staking rewards, airdrops, node rewards, and interest earnings.

These income tax brackets are outlined in the chart below.

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How is crypto income taxed?

Letʼs say you made $25,000 in short-term capital gains from your crypto trading, and this was the only income you had for the year. Would you simply pay 12% of tax on that $25,000?

No. Instead of paying a flat tax on your entire income, youʼll pay different tax rates as you ascend through the income tax brackets. In this case, you only pay 10% on the first $9,950 and 12% on the next $15,050.

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Tax-free cryptocurrency transactions

In certain circumstances, you will not trigger any taxable events when transacting with crypto, and you will not have to pay or report any cryptocurrency taxes.

You do not trigger a taxable event in the following circumstances:

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1. Do you pay taxes for holding cryptocurrency?

No, if you simply buy Bitcoin or another cryptocurrency and hold it in a wallet, you do not have any sort of tax reporting requirement as you havenʼt realized a gain or loss on your investment yet. Once you sell, trade, or trigger a taxable event by disposing of the coin, you realize a capital gain or loss.

2. Do you pay taxes for wallet-to-wallet transfers?

No, sending one cryptocurrency from one wallet you own to another wallet you own is not a disposal of your crypto. You still own the crypto, and thus you do not trigger a taxable event.

3. Do you pay taxes for using your cryptocurrency as collateral for a loan?

No. Like other forms of property, you are allowed to use your cryptocurrency as collateral for a loan without disposing of the collateralized property. As long as the loan is paid back and the collateral returned, the underlying assets will return to the original owner tax-free.

Can the IRS track your cryptocurrency?

It’s often assumed that because cryptocurrency is anonymous, evading taxes is fairly easy.

This couldn't be further from the truth.

Major exchanges like Coinbase send 1099-MISC forms to the IRS which contain customer information and a record of cryptocurrency income.

If the IRS receives a 1099 from your crypto exchange but sees no cryptocurrency income reported on your taxes, your account will be flagged and an automated CP2000 letter will be sent alerting you of your non-reported income and tax liability.

The IRS can use the information that it receives from major exchanges to match ‘anonymous’ wallets to known individuals. In the past, the agency has worked with contractors like Chainalysis to analyze the blockchain and crack down on tax fraud.

In the future, the IRS will have even more information at its disposal to identify tax cheats. The 2021 infrastructure bill requires all parties that facilitate cryptocurrency transactions to send 1099-B form to users and the IRS, which will contain information about all of your cryptocurrency disposals.

For more information, check out our guide: Can the IRS Track Cryptocurrency?

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

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Intentionally not reporting your cryptocurrency gains, losses, and income on your taxes is considered tax fraud by the IRS.

The IRS can enforce a number of penalties for tax fraud, including criminal prosecution, five years in prison, and a fine of up to $250,000.

Over the past several years, the IRS has aggressively cracked down on cryptocurrency tax compliance issues. The agency has sent tens of thousands of warning and action letters to Coinbase users suspected of inaccurate tax reporting. Moreover, it has also updated the main US income tax form (1040) to include a question that every US taxpayer must answer under penalty of perjury:

At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?

As cryptocurrency adoption accelerates, it’s likely that we’ll see more cryptocurrency tax audits and tax prosecutions.

When do you need to report your crypto taxes?

For the 2022 tax year, the deadline for American taxpayers is April 15, 2023. The deadline for American expatriates is June 15, 2023.

How do you lower your crypto taxes?

As with any other form of income, there are certain steps and actions you can take to proactively minimize your cryptocurrency-related tax obligations. We discuss some of these strategies below.

Long-term capital gains vs. short-term capital gains

There’s one easy and effective way to reduce your taxes liability: lock in long-term capital gains rates by simply holding your crypto-assets for over a year.

As discussed earlier, long-term capital gains offer significantly lower tax rates when compared to short-term gains.

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Before you make a sale or a trade, you should review your portfolio to see which assets qualify for long-term gains and which do not. This is a great strategy to help lower your cryptocurrency tax bill and plan ahead for the tax deadline.

Tax-loss harvesting

Remember, your total capital gains are calculated based on the net gain or loss across all of your winning and losing positions for the year. As a result, many traders choose to intentionally sell their assets at a loss to reduce their tax liability. This is called tax-loss harvesting.

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Unlike traditional stock investments, cryptocurrency has not been subject to the wash-sale rule. As a result, crypto investors can sell their assets, claim a capital loss, and buy back into the same position soon after.  It’s expected that this loophole will be closed in the future, but for the time being, investors use crypto wash sales to reap tax benefits from market downturns.

Looking to harvest your crypto losses? You can use the CoinLedger Tax-Loss Harvesting Dashboard to automatically detect which assets in your crypto portfolio are “underwaterʼ to more efficiently harvest your unrealized losses throughout the year.

Learn more about how you can tax loss harvest with cryptocurrency here.

What if you forgot to report your crypto taxes?

If youʼre like many other crypto investors, thereʼs a strong chance that you werenʼt always aware of the fact that your crypto-related income needed to be reported on your taxes.

If you are in this situation, donʼt worry. You can amend a prior year's tax return to include your crypto-related income with IRS Form 1040X.

Many cryptocurrency investors go through this amendment process without issue. Itʼs always better to amend your return in good faith rather than waiting for the IRS to find you. While there is never a way to guarantee that someone won’t be audited after amending their taxes, paying your taxes before the IRS begins an investigation can go a long way to demonstrate that further inquiry is unlikely to find additional reporting errors.

For a detailed guide, check out our blog post on how to amend your tax return to include your crypto.

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Chapter 2

How to report crypto trades on your taxes

In this section, we’ll explain in detail how to calculate your capital gains and losses and report them on your tax return.
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How can I calculate my cryptocurrency capital gains?

To calculate your capital gains and losses from each of your crypto sales, trades, or disposals, you simply apply the formula:

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What is gross proceeds?

Gross proceeds represents how much value received in exchange for disposing of your crypto-asset. Typically, this will be the fair market value of your assets at the time of disposal.

What is cost basis?

Cost basis represents how much money you put into purchasing your property (i.e. how much it cost you). Cost basis includes purchase price plus all other costs associated with purchasing your cryptocurrency (fees, etc).

From our examples above, itʼs easy to see this formula in action. If you buy 1 Litecoin for $250, your cost basis is $250 per Litecoin. If you sell or trade it when itʼs worth $400, your gross proceeds are $400.

Applying the formula:

$400 (Gross Proceeds) - $250 (Cost Basis) = $150 Gain

Now, letʼs dive into a more complex example to see how you would calculate your gains and losses using this same formula when you have several transactions instead of just one or two.

Example: How to calculate your tax liability

Say you have the following transaction history on Coinbase:

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With this transaction history, you first trigger a taxable event (and thus a capital gain/loss) when you trade 0.5 BTC for 14.5 ETH. To calculate the gain/loss, you need to subtract your cost basis of 0.5 BTC from your gross proceeds at the time of the trade.

The question here is, what is your cost basis in the 0.5 BTC that you traded for 14.5 ETH? After all, you have purchased 3 different bitcoins all at different prices prior to this trade.

To answer this, you have to determine which bitcoin you are disposing of in this scenario.

What accounting method should I use for my crypto taxes?

To determine the order in which you sell various cryptocurrencies, accountants use specific accounting methods like First-In First-Out (FIFO) or Last-In First-Out (LIFO). The standard method is First-in First-out.

These accounting methods work exactly how they sound. For First-In First-Out, the asset (or cryptocurrency) that you purchased first is the one that gets sold off first. So you are essentially disposing of your crypto in the same order that you first acquired them.

If we use First-In First Out for our example above, we “sell off” that first bitcoin which was acquired at $29,000 on 1/1/21. The cost basis in this first bitcoin is $29,000, making the cost basis for 0.5 of this BTC $14,500 (0.5 * $29,000).

By applying the formula, we can see that this transaction history triggers a $14,500 capital gain (29,000 - 14,500). This gain gets reported on your taxes as capital gains and increases your overall tax liability.

You can learn more about how various accounting methods work to calculate your gains and loss for your crypto trades in this blog post: FIFO, LIFO, and HIFO for crypto trading.

Why reporting your crypto taxes can be difficult

As you can see from the examples above, calculating your capital gains and losses from your crypto trading activity requires keeping track of your cost basis, fair market value, and USD gain or loss every time you dispose of a crypto (trade, sell, spend, etc).

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Without this information, you cannot accurately calculate your realized income or capital gains from your trading activity, and you won’t be able to accurately report them on your tax return.

Gathering and maintaining this information is extremely challenging for many cryptocurrency investors as most havenʼt been keeping detailed records of their investing activity. Tracking the cost basis and USD prices for every cryptocurrency across all exchanges, wallets, and protocols at any given time quickly turns into a difficult, if not impossible, spreadsheet exercise.

This is the reason why hundreds of thousands of crypto investors are turning to crypto tax software like CoinLedger to automate their crypto tax reporting. You can sign up for a free account here.

How do you report crypto on your taxes?

If youʼre like most cryptocurrency investors, you likely have only bought, sold, and traded crypto (i.e. capital gains investing activity) via a cryptocurrency exchange. This crypto income is considered capital gains income and is reported as such.

On the other hand, if you earned cryptocurrency—whether that's from a job, mining, staking or interest rewards—that earned income is generally treated as ordinary income and is reported as such.

We dive into the reporting for each of these income types below.

How to report crypto capital gains

Your capital gains and losses from your crypto trades get reported on IRS Form 8949.

Form 8949 is the tax form that is used to report the sales and disposals of capital assets, including cryptocurrency. Other capital assets include stocks and bonds.

To fill out Form 8949, list all of your cryptocurrency trades, sells, and disposals into the relevant column (pictured below) along with the date you acquired the crypto, the date your crypto was sold or traded, your gross proceeds, your cost basis, and your gain or loss for the trade.

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Once you have each trade listed, total them up and fill in your net capital gain or loss for the year at the bottom.

For a detailed walkthrough of filling out Form 8949, check out this blog post: How To Report Cryptocurrency to the IRS with Form 8949.

How to report crypto income tax

Unfortunately, ordinary income doesnʼt fall nicely onto one tax form as we saw with capital gains and Form 8949.

The ordinary income you receive from mining, staking, interest accounts, or work compensation gets reported on different tax forms, depending on your specific situation.

Schedule C - If you earned crypto while operating a business, like receiving payments for contract work, running a cryptocurrency mining operation, or operating a node, this is often treated as self-employment income and is reported on Schedule C. Schedule C also allows you to calculate and deduct business expenses such as electricity used for mining to offset your business income.

Schedule B - If you earned staking income or interest rewards from lending out your crypto, it’s generally reported on Schedule B.

Schedule 1 - If you earned crypto from airdrops, forks, or other crypto hobby income, it’s generally reported on Schedule 1 as other income. (Not subject to self-employment tax.)

To make things easier for investors, CoinLedger generates a complete income report that is included with your completed crypto tax reports. This report details the US Dollar value of all of your cryptocurrency income events that you received throughout the year: mining, staking, airdrops, and more. This income report can be used to complete your relevant ordinary income tax forms like Schedule 1, Schedule B, and Schedule C.

If you have any questions about how your crypto-related income needs to be reported, feel free to reach our live-chat customer support team via the chat widget on our homepage. We're happy to answer any of your questions!

Chapter 3

Taxability of common transaction types

Let’s run through various types of cryptocurrency transactions and explain how they are taxed.
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How do DeFi taxes work?

Cryptocurrency lending platforms and other DeFi services like Uniswap, Maker, and Compound have exploded in popularity in the past few years and brought with them new ways to invest in cryptocurrency.

Receiving interest income from crypto lending activities or liquidity pools is considered a form of taxable income and must be reported on your taxes much like mining and staking rewards.

It’s important to remember that the DeFi space is constantly innovating. As a result, there are often novel investment arrangements that do not fit squarely into existing tax frameworks.

The full tax implications associated with transactions common to the DeFi landscape are outside of the scope of this piece; however, we discuss them thoroughly in our DeFi Crypto Tax Guide.

How do NFT taxes work?

Non-fungible tokens, or NFTs, have gained popularity amongst crypto native audiences and beyond.

From a tax perspective, NFTs are treated as property, similar to other cryptocurrencies. When you buy an NFT and later sell it, you incur a capital gain or loss that gets reported on IRS Form 8949. In addition, it’s possible that some NFTs will be considered ‘collectibles’ like physical artwork and trading cards and will be taxed accordingly.

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For more information, check out our Complete NFT Tax Guide.

How do other countries handle crypto taxes?

Similar to the U.S., countries all over the world have started taking action and enforcing cryptocurrency-related income taxes. While the tax rules are very similar to the U.S., small differences do exist. For more detailed information, check out our guides on various countries below:

Other cryptocurrency transactions and tax examples

How are airdrops taxed?

Cryptocurrency received from an airdrop is taxed as income. This means that you are liable for income taxes on the USD value of the claimed airdrop.

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For more information, check out our guide to airdrop taxes.

How are hard forks taxed?

If a certain cryptocurrency that you are holding goes through a hard fork which “occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger,” the newly forked cryptocurrency you receive is taxed as income.

Your cost basis in the newly received cryptocurrency becomes the income you recognize.

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How are cryptocurrency soft forks taxed?

Sometimes, a cryptocurrency will need to rebrand or change its architecture for increased functionality. When this happens, the conversion from the old version of the token to the new version of the token is likely not a taxable event. Similar to a stock split or a company changing tickers on the stock market, the underlying cost basis will carry through into the new asset without triggering a taxable event.

Generally, if you haven’t received any new cryptocurrency as a result of a fork, there is no taxable event.

How is crypto interest taxed?

Currently, platforms like Gemini and BlockFi offer users interest rewards for holding select cryptocurrencies. Meanwhile, DeFi protocols like Compound offer users rewards for staking crypto. Cryptocurrency interest and crypto staking rewards are both considered personal income and are taxed accordingly.

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How is margin and futures trading taxed?

Cryptocurrency exchanges like BitMex and Binance.com have popularized the use of margin and futures trading. The IRS has not yet set forth explicit guidance on how these cryptocurrency transactions should be handled from a tax perspective, but it’s likely that any profits or losses from margin trading will be treated as capital gains and losses.

For more information, check out our guide to cryptocurrency margin trading taxes.

How are crypto gifts taxed?

If you are feeling generous, you can send a cryptocurrency gift to a friend or family member without having to worry about paying additional taxes.

Generally, cryptocurrency gifts are tax-free for all but the most generous gift-givers. Gift taxes are not imposed until the gift-giver has gifted away over $11.7 million dollars in their lifetime. Even then, the gift recipient will never have to pay taxes for merely receiving the gift.

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However, if you send a gift or gifts with a fair market value above $15,000 to any individual in a year, you will need to file a gift tax return in addition to your traditional tax returns. This form is for informational purposes and does not mean you will be required to pay taxes on your gift.

For more information, check out our guide to crypto gift taxes.

How are crypto donations taxed?

Donating your crypto is tax-free and deductible as long as you are donating to a registered charity.

If you are claiming a deduction larger than $500, you will need to report this on Form 8283.

The amount of your donation that is tax-deductible depends on how long you have held the assets:

  • For crypto held for more than 1 year, you can deduct the cryptocurrencyʼs fair market value at the time of the donation
  • For crypto held for less than a year, you can deduct whichever is lower: the cryptocurrencyʼs fair market value at the time of your donation or your cost basis

For more information, check out our guide to how cryptocurrency donations are taxed.

Chapter 4

How to simplify the crypto tax reporting process

Trying to file your taxes on your own can be stressful. Here’s how you can automate the process.
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Why crypto exchanges can't provide accurate tax forms

Cryptocurrency exchanges like Coinbase, Binance, and others do not have the ability to provide their users with accurate capital gains and losses tax reports. This is not a fault of the exchanges themselves, it is simply a product of the unique characteristics of cryptocurrencies—namely their transferability.

Because users are constantly transferring crypto into and out of exchanges, the exchange has no way of knowing how, when, where, or at what cost basis you originally acquired your cryptocurrencies. The exchange only sees when crypto appears in your wallet and what the USD value was at the time of the deposit.

The second you transfer crypto into or out of an exchange, that exchange loses the ability to give you an accurate report detailing the cost basis of your cryptocurrencies, one of the mandatory components for tax reporting.

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As you can see pictured below, Coinbase themselves explained to their users how their generated tax reports wonʼt be accurate if any of them took assets out of or added assets into their Coinbase accounts from a different exchange or wallet. This affects over two-thirds of Coinbase users, which amounts to millions of people who cannot rely on Coinbase’s calculations to prepare their tax forms.

You can read more about the “crypto tax problem” in our blog post: Why Exchanges Canʼt Report Crypto Taxes.

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How to track cryptocurrency for tax purposes

The solution to the crypto tax problem hinges on aggregating all of your cryptocurrency transaction data that makes up your buys, sells, trades, airdrops, forks, mined coins, exchanges, swaps, and received cryptocurrencies into one place so that you can build out an accurate tax profile containing all of your transaction data.

Once all of your transactions (buys, sells, trades, earnings) are accounted for, youʼll be able to calculate cost basis, fair market values, gains/losses, and income for all of your investing activity.

You can aggregate all of your transaction history by hand by pulling together your transactions from each of your exchanges and wallets. Of course, this can take a lot of time and energy. You can avoid the manual work and automate this process with the use of crypto tax software.

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How cryptocurrency tax software can help

Cryptocurrency tax software like CoinLedger is built to automate the entire crypto tax reporting process. By integrating directly with leading exchanges, wallets, blockchains, and DeFi protocols, the CoinLedger engine can auto-generate all of your necessary tax reports based on your historical data. You can test out how it works by creating an account for free.

How CoinLedger can help

1. Select each of the cryptocurrency exchanges, wallets, and platforms youʼve used throughout the years.

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2. Import your historical transactions by connecting your accounts via API or uploading the CSV transaction history report exported by your exchanges.

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3. Finally, generate your tax reports based on this imported data with the click of a button.

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Once youʼve generated your tax reports, you can send them to your tax professional or import them directly into your preferred tax filing software like TurboTax or TaxAct.

You can test out the software yourself by creating a free account here.

How to stay up-to-date on crypto tax news

The entire cryptocurrency ecosystem is still in its infancy. As the industry evolves, further rules and regulations will inevitably move forward.

Our team tracks every update within the world of cryptocurrency regulation, and we will continue to update this blog post with the most pertinent information as it is released. You can also follow us on Twitter for real-time updates and tax savings strategies.

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Frequently asked questions

Let’s cap things off by answering some frequently asked questions about cryptocurrency taxes.

  • Do I pay taxes on my cryptocurrency?
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  • When do you pay taxes on cryptocurrency?
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  • Do I have to pay taxes on Bitcoin if I don’t cash out?
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  • What happens if I don’t report cryptocurrency on my taxes?
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  • How do I report cryptocurrency on my taxes?
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  • How do I calculate my crypto profits?
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