Navigating cryptocurrency taxes requires understanding key concepts like taxable events, capital … [+]
getty
Introduction To Cryptocurrency Taxes
Cryptocurrency has rapidly become a common investment vehicle in the U.S., with up to 25% of Americans estimated to hold bitcoin. However, owning crypto brings with it a tax obligation that can seem complicated at first. In this article I’ll cover the basics of how cryptocurrency is taxed, current tax rates and essential strategies to help you navigate your crypto tax obligations efficiently.
Please note that this article is for informational purposes and is tailored for U.S.-based readers. It should not be considered tax advice. Consult with your tax professional before making decisions about your cryptocurrency taxes.
Why Cryptocurrency Is Taxed
Cryptocurrency is subject to taxation because the IRS classifies it as property, similar to stocks, bonds or real estate. This classification means that any transaction involving cryptocurrency, such as earning, selling, trading or even using it to make purchases, can create a taxable event. Just like with traditional assets, any gains or losses must be reported for tax purposes.
Governments also tax cryptocurrency to ensure compliance and capture revenue from a growing asset class. As crypto adoption increases, regulatory bodies aim to establish clear tax guidelines to align crypto with existing frameworks for investment income and capital gains.
How The IRS Views Cryptocurrency
The IRS requires all taxpayers to answer a digital asset question on their tax return, even if no transactions occurred. Taxpayers must report income from digital assets, including payments, sales, exchanges, or rewards, using appropriate forms such as Form 8949 and Schedule D for capital gains or Schedule C for business income. Simply holding or transferring digital assets between personal wallets does not trigger a taxable event and allows for a “No” response.
The IRS treats cryptocurrency as property, not currency. This means it is taxed similarly to traditional investments like stocks or real estate. When you sell, trade or spend cryptocurrency, the transaction creates a taxable event, and any gains or losses must be reported on your tax return.
Just as with stocks, the IRS distinguishes between short-term and long-term capital gains based on how long you held the crypto before selling. Additionally, receiving cryptocurrency as payment, through mining, or staking is considered income and taxed at your ordinary income rate.
In this sense, you should think of cryptocurrency transactions as having two different types of tax obligations: Ordinary income tax and capital gains tax.
Crypto Tax Key Terminology
Understanding key terminology is essential to navigating cryptocurrency taxes effectively. Terms like capital gains, cost basis, fair market value (FMV), and taxable events are fundamental to calculating your tax obligations.
Capital Gains
Capital gains refer to the profit earned when you sell or trade an asset, including cryptocurrency, for more than you originally paid. The IRS classifies these gains as either short-term (held for one year or less) or long-term (held for more than a year), each taxed at different rates.
For crypto investors, calculating capital gains is vital when trading, cashing out, or using crypto for purchases. This requires knowing the cost basis (see below) of the crypto you spend or trade. You also need to choose which accounting method you are going to use, whether it be HIFO (Highest In, First Out), LIFO (Last In, First Out), or FIFO (First In, First Out). More on this below.
Cost Basis
Cost basis is the original value of an asset at the time of purchase, including the purchase price and any associated fees. Your cost basis determines the taxable profit or loss when you sell or trade. Accurately tracking cost basis is critical for reporting gains and losses to the IRS. Most cryptocurrency trading platforms allow you to download your purchase history which you can use to determine the cost basis of all of your cryptocurrency purchases.
Fair Market Value (FMV)
Fair market value (FMV) represents the price an asset would sell for on the open market. For crypto, FMV is typically determined at the time of a taxable event, such as selling or receiving cryptocurrency as payment. This value is essential for calculating both income and capital gains taxes, as it establishes the asset’s worth in U.S. dollars.
Taxable Event
A taxable event occurs whenever a cryptocurrency transaction generates a tax obligation. Examples include selling crypto for fiat, earning crypto, trading one crypto for another, or using crypto to purchase goods and services. Non-taxable events include purchasing crypto and transferring crypto from one of your own wallets to another one that you control.
Crypto Tax Classification: Capital Vs. Income
Cryptocurrency transactions are taxed differently depending on whether they fall under capital gains or ordinary income. Capital gains apply when you sell or trade crypto as an investment, while ordinary income applies to crypto earned as compensation, such as mining rewards or payments for services.
Capital Gains
Capital gains occur when you sell or trade cryptocurrency for more than you originally paid, including when exchanging one cryptocurrency for another or cashing out to fiat currency. Gains are categorized as short-term if held for one year or less and long-term if held for more than a year, with long-term gains generally taxed at lower rates.
The way “realized” gains (or losses) work in cryptocurrency is different than other investments. With traditional assets, gains or losses are realized when an asset is sold, but with cryptocurrency, gains or losses are realized whenever you dispose of your holdings—whether by selling, spending on goods or services, or exchanging one cryptocurrency for another.
Capital gains apply to transactions where the value of your cryptocurrency appreciates over time. If you divest cryptocurrency at a loss, the IRS allows you to offset some of your tax obligation on your other income.
Ordinary Income
Ordinary income applies to cryptocurrency received as compensation, such as mining, staking rewards or payment for goods and services. The IRS taxes this income at your regular income tax rate, based on the fair market value of the crypto at the time of receipt.
If you later sell or trade this crypto, any additional profit is taxed as a capital gain. Tracking the FMV when you receive crypto is crucial for calculating income taxes accurately.
Which Crypto Transactions Are Taxable?
Under IRS guidelines, not all cryptocurrency transactions are taxable, but many are. Taxable events occur whenever crypto is sold, traded or used in a way that creates a gain, loss or income.
Buying And Holding Crypto
Buying and holding cryptocurrency in your wallet is not a taxable event. As long as you don’t sell, trade, or use your crypto, you don’t owe any taxes on it. However, you should keep records of your purchase price (cost basis) to calculate any future capital gains or losses when you eventually sell or trade the asset.
Selling Cryptocurrency For Fiat
Selling cryptocurrency for fiat currency, such as USD, is a taxable event. The IRS requires you to report any gains or losses based on the difference between your sale price and the cost basis. If the sale price is higher, it’s a capital gain; if lower, it’s a capital loss, both of which must be included on your tax return.
Trading One Cryptocurrency For Another
Trading one cryptocurrency for another is considered a taxable event, even if no fiat currency is involved. The IRS views this as disposing of the first crypto and acquiring the second. Any gain or loss is calculated based on the fair market value of the crypto received and must be reported as a capital gain or loss.
Using Cryptocurrency To Purchase Goods Or Services
Using cryptocurrency to pay for goods or services is also a taxable event. The IRS treats this as a sale, requiring you to calculate the difference between the crypto’s fair market value at the time of purchase and its cost basis. Any resulting gain or loss must be reported on your tax return.
Receiving Cryptocurrency As Payment
Receiving cryptocurrency as payment for goods, services or work is taxable as ordinary income. The fair market value of the crypto at the time of receipt is considered income and taxed at your regular income tax rate. If you later sell or trade this crypto, additional gains or losses will be taxed as capital gains.
Non-Taxable Crypto Transactions
Not all cryptocurrency transactions result in a tax obligation. Certain activities, such as gifting crypto, earning crypto rewards, or transferring crypto between your wallets, are considered non-taxable events by the IRS. While these transactions may not generate taxes based on current rules and guidelines, it’s a good idea to maintain accurate records for potential future reporting needs.
Gifting Cryptocurrency
Gifting cryptocurrency to another individual is generally not a taxable event for the giver, provided the gift’s value remains below the annual gift tax exclusion limit ($17,000 per recipient in 2024). The recipient assumes the original cost basis and holding period of the gift. However, if the gift exceeds the exclusion limit, it may require filing a gift tax return, though the giver typically remains exempt from immediate taxes.
Transferring Crypto Between Your Wallets
Transferring cryptocurrency between your wallets or accounts is not a taxable event because it does not involve a sale or disposal of the asset. The IRS views this as a self-transaction with no gain or loss. It’s important, however, to keep records of the transfer, including wallet addresses and timestamps, to ensure accurate cost basis tracking for future taxable events.
How Cryptocurrency Gains Are Calculated
Cryptocurrency gains are calculated by determining the difference between the purchase price, known as the cost basis, and the selling price, referred to as the fair market value (FMV) at the time of sale. If the selling price exceeds the cost basis, the result is a capital gain; if it’s lower, it’s a capital loss. These gains or losses must be reported on your tax return.
The holding period of the cryptocurrency also affects the tax rate. If the crypto is held for one year or less before sale, the gain is considered short-term and taxed at higher ordinary income rates. If held for more than a year, it qualifies as long-term and is taxed at lower capital gains rates.
Short-Term Vs. Long-Term Capital Gains
The IRS differentiates between short-term and long-term capital gains based on how long an asset is held before being sold. Cryptocurrency held for one year or less before disposal qualifies as a short-term capital gain and is taxed at the same rate as your ordinary income, which in 2024 can range from 10% to 37% depending on your tax bracket.
In contrast, cryptocurrency held for more than one year is subject to long-term capital gains tax rates, which are significantly lower, ranging from 0% to 20% in 2024 depending on your taxable income.
Tax Rates to Know for Crypto Transactions
Cryptocurrency transactions are taxed based on whether the gains are short-term or long-term, with the holding period determining the applicable rate. Short-term gains are taxed at higher ordinary income tax rates, while long-term gains are taxed at preferential rates.
Below are the 2024 tax brackets for both short-term and long-term capital gains, applicable for taxes due in 2025. Always consult with a tax professional for personalized advice.
Short-Term Capital Gains Rates for 2024 (Taxes Due in 2025)
Short-term capital gains apply to crypto held for one year or less before being sold or exchanged. These gains are taxed as ordinary income, according to your income tax bracket, which can range from 10% to 37% depending on your overall income level.
Single
- $0 – $11,600: 10%
- $11,601 – $47,150: 12%
- $47,151 – $100,525: 22%
- $100,526 – $191,950: 24%
- $191,951 – $243,725: 32%
- $243,726 – $609,350: 35%
- $609,351+: 37%
Married Filing Jointly
- $0 – $23,200: 10%
- $23,201 – $94,300: 12%
- $94,301 – $201,050: 22%
- $201,051 – $383,900: 24%
- $383,901 – $487,450: 32%
- $487,451 – $731,200: 35%
- $731,201+: 37%
Married Filing Separately
- $0 – $11,600: 10%
- $11,601 – $47,150: 12%
- $47,151 – $100,525: 22%
- $100,526 – $191,950: 24%
- $191,951 – $243,725: 32%
- $243,726 – $365,600: 35%
- $365,601+: 37%
Head of Household
- $0 – $16,550: 10%
- $16,551 – $63,100: 12%
- $63,101 – $100,500: 22%
- $100,501 – $191,950: 24%
- $191,951 – $243,700: 32%
- $243,701 – $609,350: 35%
- $609,351+: 37%
Long-Term Capital Gains Rates for 2024 (Taxes Due in 2025)
Long-term capital gains apply to crypto held for more than one year before sale or exchange. These gains benefit from lower tax rates, making them favorable for long-term investors.
Long-term capital gains are taxed at preferential rates based on taxable income, generally lower than ordinary income rates. For 2024, these rates are 0% for taxable income up to $47,025 (single) or $94,050 (married filing jointly), 15% for income up to $518,900 (single) or $583,750 (married), and 20% above those thresholds.
While capital gains add to total taxable income, they don’t push ordinary income into higher tax brackets. Instead, ordinary income is taxed first, followed by long-term gains at their own rates. Additionally, gains may impact Adjusted Gross Income (AGI), potentially triggering the 3.8% Net Investment Income Tax (NIIT) or affecting eligibility for certain deductions and credits.
Single
- $0 – $47,025: 0%
- $47,026 – $518,900: 15%
- $518,901+: 20%
Married Filing Jointly
- $0 – $94,050: 0%
- $94,051 – $583,750: 15%
- $583,751+: 20%
Married Filing Separately
- $0 – $47,025: 0%
- $47,026 – $291,850: 15%
- $291,851+: 20%
Head of Household
- $0 – $63,000: 0%
- $63,001 – $551,350: 15%
- $551,351+: 20%
Crypto Staking And Mining Taxes
Income from crypto staking and mining is taxable as ordinary income and must be reported on your tax return. The fair market value (FMV) of the crypto at the time it is earned determines the taxable amount.
If you are planning to earn mining income, it may be a good idea to incorporate a business. Keeping accurate records of business expenses, such as electricity or equipment, can help offset the taxable income you earn from business activities.
How Airdrops And Forks Are Taxed
Airdrops and hard forks are typically considered taxable income by the IRS. The FMV of the crypto received through an airdrop or fork is treated as ordinary income at the time you gain control of it. These events must be reported on your tax return, even if you do not immediately sell or trade the crypto. Proper documentation of dates and values is critical to comply with tax obligations.
Best Practices For Filing Crypto Taxes
Proper preparation is essential for filing crypto taxes accurately and avoiding penalties. Best practices include keeping detailed records of all transactions, using reliable crypto tax software to simplify calculations, and consulting a tax professional for personalized guidance.
Keep Accurate Records
Maintaining detailed records of all crypto transactions is vital for tax compliance. This includes dates, transaction types, amounts, cost basis and fair market value at the time of each transaction. Accurate records simplify tax reporting and help you claim appropriate deductions or losses while avoiding penalties.
Use A Reliable Crypto Tax Software
Using crypto tax software streamlines the process of calculating taxes. Reputable bitcoin and crypto exchanges provide downloadable transaction histories that can be used with these tools. These tools integrate with major exchanges and wallets, automatically importing transaction data and generating accurate tax reports. They save time, reduce errors and ensure compliance with complex regulations.
Consult A Tax Professional
A tax professional with crypto expertise can provide tailored advice and ensure accurate reporting. This is particularly important for complex scenarios, such as staking income, airdrops or international transactions. Professional guidance can also help you identify strategies to minimize your tax burden.
Common Mistakes To Avoid
When filing crypto taxes, common mistakes can lead to penalties or overpayments. These include failing to report all transactions, miscalculating the cost basis and overlooking international tax rules. Awareness of these pitfalls ensures accurate and compliant tax filings.
Not Reporting All Transactions
Failing to report all crypto transactions, including trades, sales, and uses for purchases, is a common mistake. The IRS requires full disclosure of taxable events, and missing even small transactions could trigger audits or penalties.
Overlooking Cost Basis
Neglecting to calculate or track the cost basis can lead to inaccurate reporting of gains and losses. The cost basis is essential for determining taxable profit and avoiding overpayment or underpayment of taxes.
Ignoring International Rules
If you trade on foreign exchanges or earn crypto internationally, you may be subject to additional reporting requirements, such as the FBAR. Ignoring these obligations can result in significant penalties, so understanding international tax rules is critical.
Crypto Tax Software To Know
Several crypto tax software platforms make it easier to prepare taxes. CoinTracker, CoinLedger, and Koinly are widely used options that automate tax calculations by syncing with exchanges and wallets. They simplify reporting for various scenarios, including trades, staking, and airdrops, and generate IRS-compliant forms
Bottom Line
Navigating cryptocurrency taxes requires understanding key concepts like taxable events, capital gains, and income classifications. Keeping detailed records, using crypto tax software, and consulting professionals can help ensure compliance while minimizing tax burdens. By staying informed, you can approach crypto tax season with confidence.