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.
In the United States, Bitcoin and other cryptocurrencies are a form of property that are subject to capital gains and income tax.
You incur a taxable event when you dispose of or earn cryptocurrency.
Anytime you incur a taxable event, you are realizing income that needs to be reported on your taxes.
When you dispose of cryptocurrency, you’ll recognize a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
Disposals include:
When you earn cryptocurrency, you’ll recognize income based on the fair market value of your crypto at the time of receipt.
Earning events include:
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.
When you dispose of your cryptocurrency after 12 months or more of holding, you’ll pay long-term capital gains tax.
When you dispose of your cryptocurrency after less than 12 months or earn cryptocurrency income, you’ll pay ordinary income tax rates.
Remember, you don’t pay one flat tax rate on all of your taxable income. Instead, you’ll pay progressively higher tax rates on each portion of your income.
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 $10,275 and 12% on the next $14,725.
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:
It’s often assumed that because cryptocurrency is anonymous, evading taxes is fairly easy. This is not true.
Major exchanges like Coinbase send 1099 forms to the IRS which contain your information and records of your crypto income.
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 strict reporting requirements for American exchanges.
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. It’s updated the main US income tax form (1040) to include a question that every US taxpayer must answer under penalty of perjury:
As cryptocurrency adoption accelerates, it’s likely that we’ll see more cryptocurrency tax audits and tax prosecutions.
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.
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.
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.
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.
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.
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.
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.
To calculate your capital gains and losses from each of your crypto sales, trades, or disposals, you simply apply the formula:
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.
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:
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.
Say you have the following transaction history on Coinbase:
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.
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.
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).
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.
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.
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.
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.
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!
Buying cryptocurrency with fiat currency is tax-free.
However, you should keep detailed records of your cryptocurrency purchases for tax purposes. If you dispose of your cryptocurrency in the future, you’ll need to know your original cost for acquiring your crypto to calculate your total capital gain.
There’s no tax for simply holding cryptocurrency. You won’t be charged until you dispose of your existing cryptocurrency or earn new cryptocurrency.
Transferring crypto between wallets that you own is tax-free.
However, you should keep a detailed record of your cryptocurrency transfers so that you can calculate your capital gains and losses in a disposal event.
Selling cryptocurrency is a disposal event subject to capital gains tax. You’ll incur a capital gain or loss depending on how the price of your crypto changed since you originally received it.
When you spend cryptocurrency to purchase goods and services, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
Trading your crypto for another cryptocurrency is considered a disposal event subject to capital gains tax. You’ll incur a capital gain or loss depending on how the price of the crypto you traded away has changed since you originally received it.
Cryptocurrency losses can be used to offset 100% of your gains from cryptocurrency, stocks, and other assets and up to $3,000 of income for the year. Any additional losses can be rolled forward into future tax years.
Exchange fees and blockchain gas fees related to acquiring and disposing of your crypto can reduce your capital gains.
Fees related to acquiring your crypto can be added to your cost basis.
Meanwhile, fees related to disposing of your crypto can be subtracted from your gross proceeds.
Cryptocurrency mining rewards are considered income based on the fair market value of your crypto at the time of receipt. When you dispose of your rewards, you’ll pay capital gains tax based on how the price of your crypto has changed since you originally received it.
If you’re mining cryptocurrency as a business, you can deduct relevant expenses such as the depreciation of your equipment and electricity.
If you’re mining cryptocurrency as a hobby, you are not allowed to deduct relevant expenses.
Cryptocurrency staking rewards are considered income based on the fair market value of your crypto at the time of receipt.
When you dispose of your rewards, you’ll pay capital gains tax based on how the price of your crypto has changed since you originally received it.
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.
When you dispose of airdrop rewards, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
For more information, check out our guide to airdrop taxes.
In a cryptocurrency hard fork, a blockchain splits into two and an entirely new cryptocurrency is created. If you receive units of this new cryptocurrency, you’ll recognize income based on the fair market value of your coins at the time of receipt.
If you dispose of your forked cryptocurrency in the future, you’ll incur a capital gain or loss depending on how its price has changed since you originally received it.
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.
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.
If you dispose of your forked cryptocurrency in the future, you’ll incur a capital gain or loss depending on how its price has changed since you originally received it.
Today, investors can receive loans using cryptocurrency as collateral from centralized platforms like Nexo and DeFi protocols like Compound.
Generally, receiving a loan is not considered a taxable event.
However, some DeFi loan protocols use crypto-to-crypto swaps to facilitate loans. It’s possible that these swaps will be considered disposals subject to capital gains tax.
For more information, check out our guide to how cryptocurrency loans are 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.
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.
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.
Crypto donations to registered charities come with multiple tax benefits! Not only are they not considered a taxable disposal of your crypto, you can also treat your donation as a tax deduction!
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 more information, check out our guide to how cryptocurrency donations are taxed.
Despite being explicitly designed for transactions, stablecoins are taxed the same as other cryptocurrencies. You’ll incur a capital gain or loss when you dispose of your stablecoin (though it’s likely that your capital gain will be close to 0).
For more information, check out our guide to stablecoin taxes.
Lost, stolen, and hacked cryptocurrency is no longer tax-deductible after the Tax Cuts and Jobs Act of 2017. This includes:
For more information, check out our guide to lost, stolen, and hacked crypto taxes.
In 2022, exchanges like Voyager and Celsius went bankrupt, causing millions of investors to lose access to their cryptocurrency.
Cryptocurrency that is permanently lost after an exchange bankruptcy likely can be treated as an investment loss.
For more information, check out our guide to how exchange bankruptcies are taxed.
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.
It’s important to remember that the same tax rules that apply to other cryptocurrency transactions apply to DeFi. That means:
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.
From a tax perspective, NFTs are treated as property, similar to cryptocurrencies. When you dispose of an NFT, you’ll incur a capital gain or loss depending on how the price of your NFT has changed since you originally received it.
If you’re a creator who mints NFTs, you’ll recognize income based on the revenue you receive from primary and secondary NFT sales.
For more information, check out our Complete NFT Tax Guide.
So far, the IRS hasn’t provided any guidance on how Decentralized Autonomous Organizations (DAOs) are taxed. It’s likely that they’ll be considered ‘flow-through entities’. This means that while the DAO itself won’t pay taxes, individuals recognize income based on their share of the organization’s profits.
For more information, check out our guide to DAO taxes.
In recent years, governments all over the world have been creating tax policies for the cryptocurrency ecosystem. For more detailed information, check out our guides on various countries below:
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.
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.
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.
1. Select each of the cryptocurrency exchanges, wallets, and platforms youʼve used throughout the years.
2. Import your historical transactions by connecting your accounts via API or uploading the CSV transaction history report exported by your exchanges.
3. Finally, generate your tax reports based on this imported data with the click of a button.
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.
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.
Let’s cap things off by answering some frequently asked questions about cryptocurrency taxes.
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