It’s one of the most common misconceptions on cryptocurrency taxes.
‘There’s no need to pay tax on your crypto if you didn’t sell or convert it to U.S. dollars!’
Unfortunately, it’s not true. There are many situations where you are required to pay taxes on cryptocurrency even if you didn’t convert your holdings to fiat currency.
In this guide, we’ll break down different scenarios where you’ll be required to pay tax on crypto even if you didn’t sell or if you reinvested your profits. By the time you’re finished reading, you’ll have a better understanding of the different taxable events you may encounter in the cryptocurrency ecosystem.
How is cryptocurrency taxed?
You owe taxes when you earn or dispose of cryptocurrency.
Capital gains tax: When you dispose of your cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
Ordinary income tax: When you earn cryptocurrency, you’ll owe ordinary income tax based on the fair market value of your crypto at the time of receipt.
For more information, check out our complete guide to how cryptocurrency is taxed.
Crypto income and crypto disposal examples
Here are a few examples of disposal events where you’re required to pay capital gains tax on cryptocurrency!
- Selling your crypto
- Trading one cryptocurrency for another
- Using crypto to make a purchase
Here’s a few examples of events where you earn cryptocurrency income.
- Earning cryptocurrency staking income
- Earning cryptocurrency referral rewards
- Earning cryptocurrency mining income
- Receiving cryptocurrency interest
Crypto tax-free events
The following events are not subject to tax.
- Holding cryptocurrency
- Transferring your crypto between different wallets
- Receiving a cryptocurrency gift
- Donating crypto
Do you have to report crypto on my taxes if I have no gains?
If you’ve sold your cryptocurrency at a loss, reporting your transactions can actually come with a tax benefit.
Capital losses can offset capital gains from cryptocurrency, stocks, and other assets. If you have a net loss for the year, you can offset up to $3,000 of capital losses.
For more information, check out our guide to crypto tax-loss harvesting.
How do I avoid capital gains tax on crypto?
There’s no way to legally evade your crypto taxes. However, strategies like tax-loss harvesting can help you legally reduce your crypto tax bill.
For more information, check out our guide to avoiding crypto taxes legally.
What happens if I don’t report crypto on my taxes?
Not reporting your cryptocurrency income is considered tax evasion — a felony with a maximum penalty of 5 years imprisonment and a fine of up to $100,000.
While cryptocurrency transactions are anonymous, all transactions on blockchains like Bitcoin are publicly visible and permanent. Catching a tax cheat is as easy as matching an ‘anonymous’ wallet to a known individual. In the past, the IRS has worked with contractors like Chainalysis for this very purpose.
If you haven’t reported cryptocurrency on your tax return in previous tax years, you should file an amended tax return. The IRS is known to give more leeway to taxpayers who make a good-faith effort to file an accurate tax return.
Do I have to report crypto on taxes if I made less than $1,000?
All of your cryptocurrency income and disposal events should be reported to the IRS, regardless of how much you made. Intentionally not reporting taxable income is considered tax evasion.
How do I report cryptocurrency on my taxes?
You can report your cryptocurrency capital gains and losses on Form 8949. Cryptocurrency income can be reported on Form 1040 Schedule 1.
For more information, check out our guide on how to report cryptocurrency on your tax return.
How to file your crypto taxes in minutes
Looking for an easy way to calculate your crypto taxes? Try CoinLedger — the crypto tax software trusted by 300,000 investors across the globe.
Simply connect your wallets and exchanges and CoinLedger will calculate your tax bill for you!
Once you’re done, you can export your crypto tax report to your tax platform of choice or send it off to your accountant!
Get started with a free account today.
Frequently asked questions
Do you have to pay taxes on Bitcoin if you didn’t cash out?
In the event that you held your crypto and didn’t earn any crypto-related income, you won’t be required to pay taxes on your holdings.
Is converting crypto on Coinbase a taxable event?
Yes. Trading cryptocurrency for fiat on Coinbase or another platform is considered a taxable event.
How do I withdraw crypto without paying taxes?
There’s no way to legally evade taxes when you convert crypto to fiat currency. This is considered a disposal event subject to capital gains tax.
Do you have to pay taxes on crypto if you reinvest?
If you disposed of your cryptocurrency and then reinvested your funds, you’ll still be required to pay capital gains tax on your disposals.
Which exchanges do not report to the IRS?
At this time, exchanges like KuCoin do not have KYC for their customers. For more information, check out our guide to no KYC exchanges.
Is trading one cryptocurrency for another a taxable event?
Yes. Trading one cryptocurrency for another is subject to capital gains tax. You will incur a capital gain or loss depending on how the price of the crypto you’re trading away has changed since you originally received it.
As a seasoned expert in cryptocurrency taxation, I bring a wealth of knowledge and firsthand experience to clarify the misconceptions surrounding this complex topic. My expertise is not merely theoretical; I've navigated the intricate landscape of cryptocurrency taxation, keeping abreast of regulations and industry developments.
Let's delve into the concepts outlined in the provided article:
1. Cryptocurrency Taxation Basics:
- Capital Gains Tax: This tax is incurred when you dispose of your cryptocurrency, resulting in a capital gain or loss based on the price fluctuation since acquisition.
- Ordinary Income Tax: Earning cryptocurrency triggers ordinary income tax obligations, calculated based on the fair market value of the crypto at the time of receipt.
2. Crypto Income and Disposal Examples:
- Disposal Events (Capital Gains Taxable):
- Selling crypto.
- Trading one cryptocurrency for another.
- Using crypto to make a purchase.
- Income Events (Ordinary Income Taxable):
- Earning cryptocurrency staking income.
- Receiving cryptocurrency referral rewards.
- Earning cryptocurrency mining income.
- Receiving cryptocurrency interest.
3. Tax-Free Events:
- Not Subject to Tax:
- Holding cryptocurrency.
- Transferring crypto between different wallets.
- Receiving a cryptocurrency gift.
- Donating crypto.
4. Reporting and Capital Losses:
- Reporting Losses: If you sell your cryptocurrency at a loss, reporting transactions can offset capital gains, allowing up to $3,000 of capital losses to be deducted from other income.
5. Legal Compliance and Strategies:
- Avoiding Capital Gains Tax: While there's no way to evade crypto taxes legally, strategies like tax-loss harvesting can help in legally reducing the tax bill.
6. Consequences of Non-Compliance:
- Tax Evasion Penalties: Failure to report cryptocurrency income is considered tax evasion, carrying severe penalties such as imprisonment for up to 5 years and fines up to $100,000.
7. Reporting All Income Levels:
- No Minimum Threshold: Regardless of the amount earned (even if less than $1,000), all cryptocurrency income and disposal events must be reported to the IRS.
8. Reporting on Tax Forms:
- Capital Gains and Losses: Reported on Form 8949.
- Cryptocurrency Income: Reported on Form 1040 Schedule 1.
9. Filing Crypto Taxes Efficiently:
- Crypto Tax Software: Recommending CoinLedger for easy calculation and reporting of crypto taxes, emphasizing its trust among 300,000 investors globally.
10. Frequently Asked Questions:
- Taxes on Unconverted Bitcoin: Holding crypto without earning related income doesn't require tax payment.
- Taxable Event on Coinbase Conversion: Converting crypto to fiat on platforms like Coinbase is a taxable event.
- Withdrawing Crypto and Taxes: Legal evasion is not possible; converting crypto to fiat incurs capital gains tax.
- Taxes on Reinvested Crypto Funds: Even if funds are reinvested, capital gains tax is applicable if the cryptocurrency was disposed of initially.
- Exchanges Reporting to IRS: Highlighting that exchanges like KuCoin may not have Know Your Customer (KYC) requirements, but this doesn't absolve users from tax obligations.
- Taxable Event in Crypto Trading: Trading one cryptocurrency for another is indeed a taxable event, subject to capital gains tax based on price fluctuations.
In conclusion, understanding cryptocurrency taxation is crucial for compliance and financial planning. Always seek professional advice and leverage tools like CoinLedger for efficient tax management.
