Is there a cryptocurrency tax? If you've invested in cryptocurrency, understand how the IRS taxes these investments and what constitutes a taxable event.
TABLE OF CONTENTS
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Cryptocurrency's rise and appeal as an alternative payment method
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Do you pay taxes on crypto?
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How is crypto taxed?
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Key Takeaways
• The IRS treats cryptocurrency as property, meaning that when you buy, sell or exchange it, this counts as a taxable event and typically results in either a capital gain or loss.
• When you earn income from cryptocurrency activities, this is taxed as ordinary income.
• You report these taxable events on your tax return using various tax forms.
• Keep records of your transactions so that you can inform the IRS of all your crypto activity during the year.
Cryptocurrency's rise and appeal as an alternative payment method
Interest in cryptocurrency has grown tremendously in the last several years. Whether you accept or pay with cryptocurrency, invested in it, are an experienced currency trader or you received a small amount as a gift, it's important to understand cryptocurrency tax implications.
The term cryptocurrency refers to a type of digital asset that can be used to buy goods and services, although many people invest in cryptocurrency similarly to investing in shares of stock. Part of its appeal is that it's a decentralized medium of exchange, meaning it operates without the involvement of banks, financial institutions, or other central authorities such as governments.
Cryptocurrency has built-in security features. Transactions are encrypted with specialized computer code and recorded on a blockchain — a public, distributed digital ledger in which every new entry must be reviewed and approved by all network members.
You may have heard of Bitcoin or Ethereum as two of the more popular cryptocurrencies, but there are thousands of different forms of cryptocurrency worldwide.
Do you pay taxes on crypto?
People might refer to cryptocurrency as a virtual currency, but it's not a true currency in the eyes of the IRS. According to IRS Notice 2014-21, the IRS considers cryptocurrency to be property, and capital gains and losses need to be reported on Schedule D and Form 8949 if necessary.
Despite the decentralized, virtual nature of cryptocurrency, and because the IRS treats it like property, your gains and losses in crypto transactions will typically affect your taxes.
How is crypto taxed?
If you buy, sell or exchange crypto in a non-retirement account, you'll face capital gains or losses. Like other investments taxed by the IRS, your gain or loss may be short-term or long-term, depending on how long you held the cryptocurrency before selling or exchanging it.
- If you owned the cryptocurrency for one year or less before spending or selling it, any profits are typically short-term capital gains, which are taxed at your ordinary income rate.
- If you held the cryptocurrency for more than one year, any profits are typically long-term capital gains, subject to long-term capital gains tax rates.
For short-term capital gains or ordinary income earned through crypto activities, you should use the following table to calculate your capital gains taxes:
2022 Short-Term Capital Gains Tax Rates
| Tax Rate | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
| Filing Status | Taxable Income | ||||||
| Single | Up to $10,275 | $10,276 to $41,775 | $41,776 to $89,075 | $89,076 to $170,050 | $170,051 to $215,950 | $215,951 to $539,900 | Over $539,900 |
| Head of household | Up to $14,650 | $14,651 to $55,900 | $55,901 to $89,050 | $89,051 to $170,050 | $170,051 to $215,950 | $215,951 to $539,900 | Over $539,900 |
| Married filing jointly | Up to $20,550 | $20,551 to $83,550 | $83,551 to $178,150 | $178,151 to $340,100 | $340,101 to $431,900 | $431,901 to $647,850 | Over $647,850 |
| Married filing separately | Up to $10,275 | $10,276 to $41,775 | $41,776 to $89,075 | $89,076 to $170,050 | $170,051 to $215,950 | $215,951 to $323,925 | Over $323,925 |
If you held your cryptocurrency for more than one year, use the following table to calculate your long-term capital gains.
2022 Long-Term Capital Gains Tax Rates
Tax Rate | 0% | 15% | 20% |
| Filing Status | Taxable Income | ||
| Single | Up to $41,675 | $41,676 to $459,750 | Over $459,750 |
| Head of household | Up to $55,800 | $55,801 to $488,500 | Over $488,500 |
| Married filing jointly | Up to $83,350 | $83,351 to $517,200 | Over $517,200 |
| Married filing separately | Up to $41,675 | $41,676 to $258,600 | Over $258,600 |
How you report cryptocurrency on your tax return depends on how you got it and how you used it.
You can also earn income related to cryptocurrency activities. This is treated as ordinary income and is taxed at your marginal tax rate, which could be between 10 to 37%.
How to calculate capital gains and losses on crypto
When you buy and sell capital assets, your gains and losses fall into two classes: long-term and short-term. How the IRS treats these two classes is very different in terms of the tax consequences you’ll encounter.
- Short-term capital gains and losses come from the sale of property that you held for one year or less. These gains are typically taxed as ordinary income at a rate between 10% and 37% in 2022.
- Long-term capital gains and losses come from the sale of property that you held for more than one year and are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for 2022.
When calculating your gain or loss, you start first by determining your cost basis on the property. Generally, this is the price you paid, which you adjust (increase) by any fees or commissions you paid to engage in the transaction. This final cost is called your adjusted cost basis.
Next, you determine the sale amount and adjust (reduce) it by any fees or commissions you paid to close the transaction.
Finally, you subtract your adjusted cost basis from the adjusted sale amount to determine the difference, resulting in a capital gain if the amount exceeds your adjusted cost basis, or a capital loss if the amount is less than your adjusted cost basis.
You can use a Crypto Tax Calculator to get an idea of how much tax you might owe from your capital gains or losses from crypto activities.
Buying or selling cryptocurrency as an investment
Buying cryptocurrency isn’t a taxable event by itself. You can choose to buy and hold cryptocurrency for as long as you’d like without paying taxes on it, even if the value of your position increases.
Taxes are due when you sell, trade or dispose of your cryptocurrency investments in any way that causes you to recognize a gain in your taxable accounts. This doesn’t apply if you trade cryptocurrency in a tax-deferred or tax-free account like an individual retirement account (IRA).
For example, if you buy $1,000 worth of Bitcoin and later sell it for $1,200, you'd need to report this $200 gain on your taxes. The gain, whether it’s a short-term or long-term capital gain, will depend on how long you’ve held the cryptocurrency.
If you instead sold the same $1,000 worth of Bitcoin for $800, you’d recognize a loss that can offset other gains and up to $3,000 of your taxable income if your total losses are greater than your total gains. Any unused loss can roll forward to future years as an offset to future gains or up to $3,000 of your taxable income per year.
If you mine cryptocurrency
Cryptocurrency mining refers to solving cryptographic hash functions to validate and add cryptocurrency transactions to a blockchain. In exchange for this work, miners receive cryptocurrency as a reward.
If you earn cryptocurrency by mining it, it's considered taxable income and might be reported on Form 1099-NEC at the fair market value of the cryptocurrency on the day you received it. You need to report this even if you don't receive a 1099 form as the IRS considers this taxable income and is likely subject to self-employment tax in addition to income tax.
If you receive cryptocurrency as payment for goods or services
Many businesses now accept Bitcoin and other cryptocurrency as payment. If someone pays you cryptocurrency in exchange for goods or services, the payment counts as taxable income, just as if they'd paid you via cash, check, credit card, or digital wallet. For tax reporting, the dollar value that you receive for goods or services is equal to the fair market value of the cryptocurrency on the day and time you received it.
If you sell or spend cryptocurrency
If you mine, buy, or receive cryptocurrency and eventually sell or spend it, you have a capital transaction resulting in a gain or loss just as you would if you sold shares of stock. This is where cryptocurrency taxes can get more involved. Each time you dispose of cryptocurrency you are making a capital transaction that needs to be reported on your tax return.
For example, let's look at an example for buying cryptocurrency that appreciates in value and then is used to purchase plane tickets. The example will involve paying ordinary income taxes and capital gains tax.
- First, you receive $200 worth of the cryptocurrency Litecoin in exchange for services on January 15.
- Six months later, on July 15, the fair market value of your Litecoin has increased to $500, and you use it to buy plane tickets for a vacation.
- On your tax return for that year, you should report $200 of ordinary income (either as wages if reported on a W-2 or as self-employment income if you are not an employee getting paid in crypto) for receiving the Litecoin in January and a short-term capital gain of $300. That's the $500 value of your Litecoin when you purchased the plane tickets, minus your $200 basis when you received the Litecoin.
When you calculate your basis in the Litecoin for capital gains tax, you need to account for the $200 worth of ordinary income included in your taxes. That same Litecoin position, now worth $500, gets used to purchase the plane tickets, meaning you wouldn’t pay capital gains tax on the original $200.
If you paid capital gains tax on the full $500, the initial $200 would be taxed twice: once as ordinary income and once as a capital gain.
Therefore, you subtract your original $200 basis from the $500 balance.
Those two cryptocurrency transactions are easy enough to track. But imagine you purchase $1,000 worth of Litecoin, load it onto a cryptocurrency debit card, and spend it over several months on coffee, groceries, lunches, and more.
If, like most taxpayers, you think of cryptocurrency as a cash alternative and you aren't keeping track of capital gains and losses for each of these transactions, it can be tough to unravel at year-end. Staying on top of these transactions is important for tax reporting purposes.
If you exchange one type of cryptocurrency for another
Cryptocurrency enthusiasts often exchange or trade one type of cryptocurrency for another. For example, say you have $1,000 worth of Litecoin and exchange it for $1,000 worth of Ethereum. If you originally paid $300 for the Litecoin, you have to recognize a $700 capital gain when you make the exchange. You established a $300 basis at the time of purchase for your original Litecoin position but recognized a $700 capital gain as a result of the coin’s appreciation between your purchase and the exchange for Ethereum. Your Ethereum’s basis is its fair market value at the time of exchange, making your new cost basis $1,000 after paying the $700 capital gain on the exchange.
It's important to note that all of these transactions are referenced back to United States dollars since this is the currency that is used for your tax return. So, even if you buy one cryptocurrency using another one without first converting to US dollars, you still have a taxable transaction.
If you participate in an airdrop or fork
An airdrop is when a new crypto project launches and sends out several free tokens to early adopters and their communities to encourage adoption as part of a broader marketing effort to promote the project’s inception. If you frequently interact with crypto platforms and exchanges, you may receive airdrops of new tokens in your account. These new coins count as a taxable event, causing you to pay taxes on these virtual coins.
A hard fork is a wholesale change in a blockchain network’s protocol that invalidates previously-verified transaction history blocks or vice versa. Many times, a cryptocurrency will engage in a hard fork as the result of wanting to create a new rule for the blockchain. The new, upgraded blockchain contains the new rule while the old chain doesn’t. Many users of the old blockchain quickly realize their old version of the blockchain is outdated or irrelevant now that the new blockchain exists following the hard fork, forcing them to upgrade to the latest version of the blockchain protocol. For a hard fork to work properly, all nodes or blockchain users must upgrade to the latest version of the protocol software.
A hard fork doesn’t always result in new cryptocurrency issued to the taxpayer, and doesn’t necessarily generate a taxable event as a result. However, in the event a hard fork occurs and is followed by an airdrop where you receive new virtual currency, this generates ordinary income.
This counts as taxable income on your tax return and you must report it to the IRS, whether you receive a 1099 form reporting the transaction or not.
If you stake cryptocurrencies
Staking cryptocurrencies is a means for earning rewards for holding cryptocurrencies and providing a built-in investor and user base to give the coin value. Earning cryptocurrency through staking is similar to earning interest on a savings account. In exchange for staking your virtual currencies, you can be paid money that counts as taxable income.
You treat staking income the same as you do mining income: counted as fair market value at the time you earn the income and subject to income and possibly self employment taxes.
If you make charitable contributions and gifts in crypto
If you itemize your deductions, you may donate cryptocurrency to qualified charitable organizations and claim a tax deduction. You typically can deduct the fair market value of your cryptocurrency at the time of charitable contribution, and you don’t have to pay capital gains taxes when you donate.
Cryptocurrency charitable contributions are treated as non-cash charitable contributions. A charitable organization may assist in documenting your crypto-charitable contribution by providing a written acknowledgement if claiming a deduction of $250 or more for the virtual currency deduction.
Do you pay taxes on lost or stolen crypto?
Typically, you can't deduct losses for lost or stolen crypto on your return. The IRS states two types of losses exist for capital assets: casualty losses and theft losses. Generally speaking, casualty losses in the crypto world would mean having damage, destruction, or loss of your crypto from an identifiable event that is sudden, unexpected or unusual. As an example, this could include negligently sending your crypto to the wrong wallet or some similar event, though other factors may need to be considered to determine if the loss constitutes a casualty loss. Theft losses would occur when your wallet or an exchange are hacked.
In either case, you can’t deduct these losses to offset your gains. Due to tax reform laws going into effect in 2018, most all casualty and theft losses aren’t deductible between 2018 and 2025. In the future, taxpayers may be able to benefit from this deduction if they itemize their deductions instead of claiming the standard deduction.
Are there tax-free crypto transactions?
You can make tax-free crypto transactions under certain situations, depending on the transaction you make, the account you transact in, your income, and filing status.
When you buy cryptocurrency, this doesn’t create a taxable event even if the value increases over time. Tax consequences don't result until you decide to sell or exchange the cryptocurrency.
For crypto transactions you make in a tax-deferred or tax-free account, like a Traditional or Roth IRA, respectively, these transactions don’t get taxed like they would in a brokerage account. These trades avoid taxation.
Depending on your income each year, long-term capital gains rates can be as low as 0%. For 2022, you can also avoid paying taxes when selling your cryptocurrency if your table income is less than or equal to $41,650 if you file as a single person, as married, filing separately, or your taxable income is less than or equal to $83,350 if you file jointly as a married couple.
Keep records of your crypto transactions
The IRS is stepping up enforcement of cryptocurrency tax reporting as these virtual currencies grow in popularity. As a result, you need to keep track of your crypto activity and report this information to the IRS on the appropriate crypto tax forms.
The IRS estimates that only a fraction of people buying, selling, and trading cryptocurrencies were properly reporting those transactions on their tax returns. The agency provided further guidance on how cryptocurrency should be reported and taxed in October 2019 for the first time since 2014.
Beginning in tax year 2020, the IRS also made a change to Form 1040 and began including the question: "At any time during 2022, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?"
If you check "yes," the IRS will likely expect to see income from cryptocurrency transactions on your tax return.
Crypto tax software helps you track all of these transactions, ensuring you have a complete list of activities to report when it comes time to prepare your taxes. The software integrates with several virtual currency brokers, digital wallets, and other crypto platforms to import cryptocurrency transactions into your online tax software. This can include trades made in cryptocurrency but also transactions made with the virtual currency as a form of payment for goods and services.
Depending on the crypto tax software, the transaction reporting may resemble documentation you could file with your return on Form 8949, Sales and Other Dispositions of Capital Assets, or can be formatted in a way so that it is easily imported into tax preparation software. Often, you’ll pay for tiers of service for the number of transactions reported.
Can the IRS track crypto activity?
Despite the anonymous nature of cryptocurrencies, the IRS may still have ways of tracking your crypto activity.
For example, if you trade on a crypto exchange that provides reporting through Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, they'll provide a reporting of these trades to the IRS.
Further, the IRS makes use of blockchain analytics tools for identifying crypto activity of digital wallets and ties them to individuals in instances where they suspect tax evasion and/or money laundering may be occurring.
As a result, you’ll want to make sure you report all crypto activities during the year on your tax return.
How are crypto transactions reported?
When you place crypto transactions through a brokerage or from using these digital currencies as a means for payment, this constitutes a sale or exchange. As a result, you’ll need to document your crypto sales details, including how much you bought it for and when. These transactions are typically reported on Form 8949, Schedule D, and Form 1040.
1099-B, Proceeds from Broker and Barter Exchange Transactions
If you traded crypto in an investment account or on a crypto exchange or used it to make payments for goods and services, you may receive Form 1099-B reporting these transactions. In other investment accounts like those held with a stock broker, this information is usually provided on this 1099 Form. However, not every platform provides these forms. In this case, they can typically still provide the information even if it isn't on a 1099-B.
1099-MISC or 1099-NEC
If you mined crypto or received crypto as an award, then you might receive either Form 1099-MISC, Miscellaneous Income, or 1099-NEC, Nonemployee Compensation. These forms are used to report how much ordinary income you were paid for different types of work-type activities. The information form these forms can be used to help you prepare Schedule C, Profit or Loss from Business and Schedule SE, Self-Employment Tax.
When any of these 1099 forms are issued to you, they're also sent to the IRS so that they can match the information on the forms to what you report on your tax return.
TurboTax Tip: Cryptocurrency exchanges won't be required to send 1099-B forms until tax year 2023. If you don’t receive a Form 1099-B from your crypto exchange, you must still report all crypto sales or exchanges on your taxes.
Does Coinbase report to the IRS?
Coinbase was the subject of a John Doe Summons in 2016 that required it to provide transaction information to the IRS for its customers. As a result, the company handed over information for over 8 million transactions conducted by its customers.
Today, the company only issues Forms 1099-MISC if it pays out rewards or bonuses to you for taking specific actions on the platform. Further, you may need to exceed the $600 minimum payment threshold for the company to issue both you and the IRS a Form 1099-MISC documenting their payments to you.
However, starting in tax year 2023, the American Infrastructure Bill of 2021 requires crypto exchanges to send 1099-B forms reporting all transaction activity.
Even though Coinbase doesn’t supply this information through direct reporting to the IRS, you still must report this activity on your tax return as it is taxable income. You can access account information through the platform to calculate any applicable capital gains or losses and the resulting taxes you must pay on your tax return.
TurboTax has you covered
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