In this guide, we discuss everything you need to know about cryptocurrency taxes. From the high level tax implications to the actual tax forms you need to fill out, you ’ ll learn all about what you need to stay compliant and get your taxes done properly.
This guide was created by the tax team at CoinLedger, the #1 crypto tax software. today, over 300,000 crypto investors use CoinLedger to finish their crypto taxes in minutes. You can create a free account here.
This guide breaks down the specific crypto tax implications within the U.S. You can see other country-specific tax guides here.
The basics of crypto taxes
In the U.S., cryptocurrencies like Bitcoin are treated as property for tax purposes.
barely like other forms of property like 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 . Depending on what tax bracket you fall under, you will pay a sealed 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, sell, and trading, if you earn cryptocurrencies—whether through a job, mining, venture, airdrop, or matter to from lending activities—you are liable for income taxes on the US Dollar value of your crypto earnings.
We will walk through examples for all of these scenarios in more contingent below .
When do you owe taxes on your crypto?
Whenever you incur a taxable event from your crypto investing activity, you incur a tax report necessity.
A taxable consequence simply refers to a scenario in which you trigger or realize income. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency :
- Trading crypto to fiat currency like the US dollar
- Trading one crypto for another cryptocurrency
- Spending crypto to purchase goods or services
- Earning crypto as income
Below, we run through hardheaded examples to illustrate each of these taxable events .
1. Do you pay tax when you trade crypto for fiat?
Selling crypto for decree currency is a taxable event . In this exercise, Emma incurs a $ 200 capital personnel casualty ( 1,000 – 1,200 ). This loss gets deducted and actually reduces Emma ’ s taxable income .
2. Do you pay tax when you trade cryptocurrency for other cryptocurrencies?
Trading one crypto for another is treated as a administration . In this scenario, John incurs a taxable event by trading his Litecoin for Ethereum. Trading one crypto for another is treated as a administration, and here John incurs a $ 150 capital acquire from the trade which he would need to report on his taxes ( 400 – 250 ).
3. Do you pay tax when you buy goods and services with crypto?
Buying goods and services with crypto is considered a taxable consequence . In this exemplar, Taylor incurs a taxable event when she disposes of her bitcoin.
4. Do you pay taxes when you earn crypto income?
Yes, earning crypto income is considered personal income subject to income tax . common forms of crypto income include earning crypto staking rewards, crypto sake, and crypto referral rewards .
When don’t you owe taxes on your crypto?
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 when you :
- Buy and hold crypto
- Transfer crypto from one wallet you own to another wallet you own
1. Do you pay taxes for holding cryptocurrency?
If you merely buy Bitcoin or another cryptocurrency and hold it in a wallet, you do not have any sort of tax report prerequisite as you haven ’ t realized a profit or loss on your investment however.
once you sell, trade, or trigger a taxable event by disposing of the mint, this is when you realize a capital gain or loss .
2. Do you pay taxes for wallet to wallet transfers?
Sending one cryptocurrency from one wallet you own to another wallet you own is not a administration of your crypto. You distillery own the crypto, and therefore you do not trigger a taxable event.
How do you calculate your crypto taxes?
To calculate your das kapital gains and losses from each of your crypto sells, trades, or disposals, you just apply the rule : Fair Market Value – Cost Basis = Capital Gain/Loss
What is fair market value?
Fair Market Value is just the price an asset would sell for on the open market. In the subject of cryptocurrency, this is typically the sale price in USD terms .
What is cost basis
Cost Basis represents how a lot money you put into purchasing your property ( i.e. how much it cost you ). Cost footing includes purchase price plus all other costs associated with purchasing your cryptocurrency ( fees, etc ).
From our examples above, it ’ randomness easy to see this recipe in military action. If you buy 1 Litecoin for $ 250, your price footing is $ 250 per Litecoin. If you sell or trade it when it ’ s worth $ 400, that $ 400 is the average market value. Applying the convention :
$ 400 ( Fair Market Value ) – $ 250 ( Cost Basis ) = $ 150 Gain
now, let ’ s dive into a more complex example to see how you would calculate your gains and losses using this same formula when you have a count of transactions alternatively of barely one or two .
How to calculate gains and losses
Say you have the follow transaction history on Coinbase :
- 1/1/21 – Buy 1 BTC for $29,000
- 2/2/21 – Buy 1 BTC for $36,000
- 3/3/21 – Buy 1 BTC for $50,000
- 4/4/21 – Trade 0.5 BTC for 14.5 ETH (0.5 BTC was worth $29,000 at this time)
With this transaction history, you beginning trigger a taxable event ( and thus a capital gain/loss ) when you trade 0.5 BTC for 8 ETH. To calculate the gain/loss, you need to subtract your cost basis of 0.5 BTC from the fair market rate at the time of the trade.
The question here is, what is your monetary value footing in the 0.5 BTC that you traded for 8 ETH ? After all, you have purchased 3 different bitcoins all at unlike 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 respective cryptocurrencies, accountants use specific costing methods like First-In First-Out ( FIFO ) or Last-In First-Out ( LIFO ). The standard method acting is First-in First-out .
Understanding accounting methods
These costing methods work precisely 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 basically disposing of your crypto in the like order that you first base acquired them.
If we use First-In First Out for our model above, we “ sell off ” that first gear bitcoin which was acquired at $ 29,000 on 1/1/21. The cost basis in this first base bitcoin is $ 29,000, making the cost basis for 0.5 of this BTC $ 14,500 ( 0.5 * $ 29,000 ). As denoted in the exemplar, the clean marketplace value at the time of 0.5 BTC at the prison term of trade was $ 29,000. so by applying the rule, we can see that this transaction history triggers a $14,500 capital gain ( 29,000 – 14,500 ). This acquire gets reported on your taxes and increases your taxable income.
You can learn more about how assorted costing methods workplace to calculate your gains and loss for your crypto trades in this blog post : FIFO, LIFO, and HIFO for crypto trading.
The challenge for crypto traders
As you can see from the examples above, calculating your capital gains and losses from your crypto deal activity requires records to keep cut of your monetary value basis, bazaar market measure, and USD gain or loss every time you dispose of a crypto ( trade, sell, spend etc ).
Without this data, you aren ’ triiodothyronine able to calculate your realize income from your trading action, and you aren ’ metric ton able to report it on your taxes.
This is highly challenging for many cryptocurrency investors as most seaport ’ thyroxine been keeping detail records of their endow action. Trying to track the monetary value footing and USD prices for all of their cryptos across all of their exchanges, wallets, and protocols at any given prison term cursorily turns into a difficult, if not impossible, spreadsheet drill.
This is the rationality why hundreds of thousands of crypto traders are turning to crypto tax software like CoinLedger to automate all of their crypto tax report. You can sign up for a free account here .
How do you report crypto on your taxes?
If you ’ re like most cryptocurrency investors, you probably have merely bought, sold, and traded crypto ( i.e. capital gains investing activeness ) via a cryptocurrency exchange. This crypto income is considered capital gains income and is reported as such.
On the other pass, if you earned cryptocurrency—whether that ‘s from a job, mine, staking or earning pastime rewards—that earned income is generally treated as ordinary income and is reported as such.
We dive into the coverage for each of these income types below .
Reporting crypto capital gains and losses
Your capital gains and losses from your crypto trades get reported on IRS Form 8949.
form 8949 is the tax shape that is used to report the sales and disposals of capital assets, including cryptocurrency. other capital assets include things like stocks and bonds.
To fill out Form 8949, list all of your cryptocurrency trades, sells, and disposals onto form 8949 ( pictured below ) along with the date you acquired the crypto, the date your crypto was sold or traded, your proceeds ( Fair Market Value ), your monetary value footing, and your derive or loss for the deal . once you have each trade wind listed, total them up and fill in your net income capital gain or loss for the year at the bottom.
For a detailed walkthrough of filling out Form 8949, check this web log post : How To Report Cryptocurrency to the IRS with Form 8949 .
Reporting crypto ordinary income
unfortunately, ordinary income doesn ’ thyroxine fall nicely onto one tax mannequin like we saw with capital gains and Form 8949.
The ordinary income you receive from mining, stake, interest accounts, or possibly crypto you received as payment from a job suffer reported on different tax forms, depending on the specific position.
Schedule C – If you earned crypto as a business entity, like receiving payments for a job or running a cryptocurrency mining operation, this is frequently treated as self-employment income and is reported on Schedule C.
Schedule B – If you earned staking income or interest rewards from lending out your crypto, this income is generally reported on Schedule B. Schedule 1 – If you earned crypto from airdrops, forks, or other crypto wages and hobby income, this is by and large reported on Schedule 1 as early income.
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 class : mining, stake, 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 dislodge to reach our live-chat customer corroborate team via the chat appliance on our homepage. We ‘re glad to answer any of your questions !
For a bit-by-bit walkthrough of the crypto tax report process, checkout our explainer television below .
How much tax do you pay on your crypto?
Your personal income tax bracket and the holding period of your crypto assets ( abruptly term vs. long term ) will determine how a lot tax ( and what % of tax ) you pay on your crypto income. This will be different for each investor .
Short-term capital gains tax events
short-run capital gains apply for any crypto that was held for less than 12 months . short term capital gains don ’ thymine get any special tax treatment. They are just treated as income on your taxes ( good like income from your job ), and therefore you pay taxes on your shortstop term das kapital gains according to your personal income tax bracket ( outlined foster below ) .
Long-term capital gains tax events
long-run capital gains apply for any crypto that was held for 12 months or more.
The government wants to incentivize investors to invest for the long terminus, so they offer tax incentives for doing indeed.
long-run capital gains tax rates offer lower taxes than curtly condition gains, and the graph below depicts these rates . As you can see, holding onto your crypto for more than one class 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 % alternatively of 37 % ( the highest tax rate for shortstop term gains ).
You can use CoinLedger to automatically detect which cryptocurrencies in your portfolio stipulate for long-run das kapital 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 by and large taxed at your personal income tax bracket.
This includes your short-run capital gains ( as mentioned above ), staking rewards, airdrops, and interest earnings.
These income tax brackets are outlined in the chart below.
How is crypto income taxed?
Let ’ s say you made $ 25,000 in short-run capital gains from your crypto trade, and this was the only income you had for the year. Would you merely pay 12 % of tax on that $ 25,000 ?
No. rather of paying a flat tax on your entire income, you ’ ll pay different tax rates on each person share. In this case, you actually pay 10 % on the first $ 9,875 and 12 % on the following $ 15,125.
How do DeFi taxes work?
recently, cryptocurrency lend platforms and other DeFi services like Uniswap, Maker, and Compound have exploded in popularity.
Receiving interest income from crypto lending activities or fluidity pools is considered a form of taxable income and must be reported on your taxes—similar to mining and bet on rewards.
The wax tax implications associated with transactions common to the DeFi landscape are outside of the scope of this nibble ; however, we discuss them thoroughly in our Defi Crypto Tax Guide .
How do NFT taxes work?
Non-fungible tokens, or NFTs, have exploded in popularity amongst crypto native audiences and beyond. From a tax position, NFTs are treated as place, exchangeable to early cryptocurrencies. When you buy an NFT and subsequently sell it, you incur a capital acquire or personnel casualty that gets reported on IRS Form 8949 . For more information, check out our Complete NFT Tax Guide.
Why crypto exchanges can’t provide accurate tax forms
This is where a big problem exists within the crypto tax space.
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 cryptocurrency rally itself, it is plainly a product of the alone 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 footing you in the first place acquired your cryptocurrencies. The exchange only sees when crypto appears in your wallet.
The second you transfer crypto into or out of an substitute, that rally loses the ability to give you an accurate report detailing the price footing and fair market value of your cryptocurrencies, both of which are mandatary components for tax coverage . As you can see depicted below, Coinbase themselves explains to their users how their render tax reports won ’ triiodothyronine be accurate if any of the downstairs scenarios took place. This affects over two thirds of Coinbase users, which amounts to millions of people.
You can read more about the “ crypto tax problem ” in our blog post : Why Exchanges Can’t Report Crypto Taxes.
The crypto tax reporting solution
The solution to the crypto tax problem hinges on aggregating all of your cryptocurrency data that makes up your buys, sells, trades, airdrops, forks, mined coins, exchanges, swaps, and pick up cryptocurrencies into one platform 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 in one topographic point, you ’ ll be able to calculate cost basis, honest grocery store values, gains/losses, and income for all of your endow activity.
You can aggregate all of your transaction history by hand by pulling together your transactions from each of your exchanges and wallets. Or you can avoid the manual of arms bring and automate this process with the use of crypto tax software .
Crypto tax software
Cryptocurrency tax software like CoinLedger was built to automate the stallion crypto tax report procedure.
By integrating directly with lead exchanges, wallets, blockchains, and DeFi protocols, the CoinLedger locomotive is able to auto-generate all of your necessary tax reports based on your historical datum. You can test out how it works by creating an account for spare .
How it works
1. Select each of the cryptocurrency exchanges, wallets, and platforms you ’ ve used throughout the years. 2. Import your historic 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 datum with the snap of a button. once you ’ ve generated your tax reports, you can send them to your tax professional or import them directly into your prefer tax file software like TurboTax or TaxAct. You can test out the software yourself by creating a free account here.
To make crypto tax report equally easily as possible, the CoinLedger team has partnered with TurboTax. This allows your tax reports to be imported directly into your TurboTax account.
How does the IRS know about your crypto?
The IRS uses a variety of tactics to detect cryptocurrency investments and unreported income. The most prevailing of which is the 1099 report arrangement.
major exchanges like Coinbase, Gemini, Uphold, Kraken, and others report certain customer activity to the IRS using form 1099-K and/or early refer 1099 ’ mho. These 1099 ’ s all serve the same general function : to report non-employment refer income to the IRS.
Both you and the IRS get sent a transcript of these forms at year-end.
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 indebtedness.
You can learn more about how 1099-K works for your crypto exchange activity here.
Outside of 1099 report, the IRS works with blockchain analytics companies like Chainalysis to track cryptocurrency movements immediately on-chain. Since 2015, the IRS has spent more than 10 million dollars on Chainalysis contracts. This data is used to identify tax imposter and money laundering .
What happens if you don’t report your crypto taxes?
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 imposter, including criminal prosecution, five years in prison, along with a fine of up to $ 250,000.
Over the past two years, the IRS has aggressively been cracking down on cryptocurrency tax submission. The agency has sent tens of thousands of warning and action letters to Coinbase users suspected of inaccurate tax report. It has besides 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, send, exchange, or differently acquire any fiscal concern in any virtual currency ? ”
With this much scrutiny on the cryptocurrency asset course, it ’ s probably that we will see audits and condemnable tax prosecutions continue to increase as cryptocurrency and bitcoin adoption accelerates .
How do other countries handle crypto taxes?
similar to the U.S., countries all over the universe have started taking action and enforcing cryptocurrency-related income taxes. While the tax rules are very like to the U.S., small differences do exist. For more detailed information, check out our guides on diverse countries below :
How do you lower your crypto taxes?
As with any other form of income, there are certain steps and actions you can take to actively minimize your cryptocurrency-related tax obligations. We discuss some of these strategies below .
Tax-loss harvest is the practice of selling a capital asset at a loss to offset a das kapital gains tax indebtedness. It provides one of the best opportunities for investors to reduce their cryptocurrency gains for the class.
Let ’ s research an example of tax personnel casualty harvest . In this model, Amy reduces her tax liability for the year by claiming her capital losses. You can use the CoinLedger Tax-Loss Harvesting Dashboard to mechanically detect which assets in your crypto portfolio are “ submerged ’.
Learn more about how you can tax loss harvest with cryptocurrency here .
Long-term capital gains vs. short-term capital gains
For any significant cryptocurrency gains that you plan to realize, you should see if you have the ability to lock in long term capital gains rates.
Remember, long-run capital gains apply for crypto that is held for longer than 1 year, and they offer significantly lower tax rates when compared to short-run gains . Prior to selling or 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 for the year .
What if you forgot to report your crypto taxes?
If you ’ re like many other crypto investors, there ’ s a firm opportunity that you weren ’ thymine always mindful of the fact that your crypto-related income needed to be reported on your taxes.
If you are in this site, don ’ t try out. You can amend a anterior class ‘s tax tax return to include your crypto-related income with IRS Form 1040X.
many cryptocurrency investors go through this process without issue, and it ’ s always better to amend your return in effective religion quite than waiting for the IRS to find you.
For a detail template, check out our web log post on how to amend your tax return to include your crypto .
Other cryptocurrency transactions and tax examples
How are airdrops taxed?
Cryptocurrency received from an airdrop is taxed as income. This means that you are apt for income taxes on the USD value of the claim airdrop. If you sell, trade, or differently discard of your airdropped tokens in the future, you will incur das kapital gains or losses depending on how the price of your tokens has fluctuated.
The IRS is well-defined in its guidance regarding the income treatment of airdrops.
How are hard forks taxed?
If a certain cryptocurrency that you are holding goes through a hard branch which “ occurs when a cryptocurrency undergoes a protocol deepen resulting in a permanent wave diversion from the bequest distributed ledger, ” the new bifurcate cryptocurrency you receive is taxed as income.
Your cost basis in the newly received cryptocurrency becomes the income you recognize.
How is crypto interest taxed?
presently, platforms like Gemini and BlockFi offer exploiter interest rewards for holding choice cryptocurrencies. interim, DeFi protocols like Compound offer users rewards for staking crypto. Cryptocurrency interest and crypto bet on rewards are both considered personal income and are taxed accordingly .
How is margin trading taxed?
Cryptocurrency exchanges like BitMex have popularized the use of margin trade. The IRS has not so far set away explicit steering on how cryptocurrency margin transactions should be handled from a tax perspective, but we can infer the probably treatment based on other steering.
A margin deal consists of borrowing funds from an exchange to carry out a trade and repaying the loanword afterwards. The button-down approach is to treat the borrow funds as your own investment and pay capital gains tax on the margin trade net income and personnel casualty .
How are crypto gifts taxed?
If you are feeling generous, you can send a cryptocurrency endowment to a friend or family member. broadly, cryptocurrency gifts are tax-exempt. If you send a giving with a fair commercialize value above $ 15,000, you will need to file a giving tax render. Remember, this form is for informational purposes and does not mean you will be required to pay taxes on your endow. For more information, check out our guide to crypto gift taxes .
How are crypto donations taxed?
Donating your crypto is tax free and deductible a long as you are donating to a register charity.
If you are claiming a tax write-off larger than $ 500, you will need to report this on Form 8283.
The measure of your contribution 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 cryptocurrency’s fair market value
- For crypto held for less than a year, you can deduct whichever is lower: the cryptocurrency’s fair market value or your cost basis
The entire cryptocurrency ecosystem is still in its infancy. As the industry evolves, foster rules and regulation will inescapably move ahead.
Our team tracks every update within the world of cryptocurrency regulation, and we will continue to update this web log post with the most pertinent information as it is released. You can besides follow us on Twitter for real time updates and tax savings strategies.
“ Our mission is to make cryptocurrency more accessible for everyone. If we can make tax report seamless, the entire ecosystem will benefit. ”
– David Kemmerer, Co-Founder & CEO, CoinLedger
If you have any questions about cryptocurrency taxes or your specific situation, feel free to reach out to our live-chat customer corroborate team from the chat appliance on our homepage. We have been doing this for a farseeing clock and are glad to answer any questions you have !