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is there a tax on cryptocurrencies? If you have invested in cryptocurrencies, understand how the IRS taxes these investments and what constitutes a taxable event.
Reading: How to report bitcoin on taxes
key takeaways
• The IRS treats cryptocurrency as property, which means that when you buy, sell, or trade it, it counts as a taxable event and typically results in a capital gain or loss.
• When you earn income from cryptocurrency activities, it is taxed as ordinary income.
• You report these taxable events on your tax return using various tax forms.
• Keep records of your transactions so you can report all your crypto activity to the IRS for the year.
Rise and attractiveness of cryptocurrencies as an alternative payment method
The interest in cryptocurrencies has grown enormously in recent years. Whether you accept or pay with cryptocurrencies, have invested in them, are an experienced forex trader, or received a small amount as a gift, it’s important to understand the tax implications of cryptocurrencies.
The term cryptocurrency refers to a type of digital asset that can be used to purchase goods and services, although many people invest in cryptocurrencies in a similar way to investing in stocks. Part of its appeal is that it is a decentralized medium of exchange, meaning it operates without the involvement of banks, financial institutions, or other central authorities such as governments.
The cryptocurrency has built-in security features. transactions are encrypted with specialized computer code and recorded on a blockchain, a public, distributed digital ledger where each new entry must be reviewed and approved by all network members.
You may have heard of bitcoin or ethereum as two of the most popular cryptocurrencies, but there are thousands of different forms of cryptocurrencies around the world.
do you pay taxes on cryptocurrencies?
People may refer to cryptocurrency as a virtual currency, but it is not a real currency in the eyes of the IRS. Per IRS Notice 2014-21, the IRS considers cryptocurrency to be property, and capital gains and losses must be reported on Schedule D and Form 8949 if required.
Despite the virtual and decentralized nature of cryptocurrencies, and because the IRS treats them like property, your gains and losses on cryptocurrency transactions will generally affect your taxes.
How are cryptocurrencies taxed?
If you buy, sell, or trade cryptocurrency in a non-retirement account, you will face capital gains or losses. Like other IRS-taxed investments, your gain or loss can be short-term or long-term, depending on how long you held the cryptocurrency before selling or trading it.
- If you owned the cryptocurrency for a year or less before spending or selling it, the gains are typically short-term capital gains, taxed at your ordinary income rate.
- if you held the cryptocurrency for more than a year, the gains 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:
2021 short-term capital gains tax rates
If you held your cryptocurrency for more than a year, use the table below to calculate your long-term capital gains.
2021 long-term capital gains tax rates
How you report crypto on your tax return depends on how you obtained 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 and 37%.
how to calculate capital gains and losses in crypto
When you buy and sell capital assets, your gains and losses are divided into two classes: long-term and short-term. The way 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 you owned for a year or less. these gains are generally taxed as ordinary income at a rate between 10% and 37% in 2021.
- Long-term capital gains and losses come from the sale of property you owned for more than a year and are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for 2021.
When calculating your gain or loss, you must first determine your cost basis on the property. Typically, this is the price you paid, which is adjusted (increased) by any fees or commissions you paid to participate in the transaction. this final cost is called your adjusted cost basis.
It then determines the amount of the sale and adjusts (reduces) it based on the fees or commissions you paid to close the transaction.
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Finally, you subtract your adjusted cost basis from the adjusted selling 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 cost adjusted basis.
You can use a crypto tax calculator to get an idea of how much tax you might owe on your capital gains or losses from crypto activities.
buy or sell cryptocurrencies as an investment
Buying cryptocurrencies is not a taxable event in itself. You can choose to buy and hold crypto for as long as you like without paying taxes, even if the value of your position increases.
Taxes are due when you sell, trade, or otherwise dispose of your cryptocurrency investments in any way that causes you to recognize a gain in your taxable accounts. this does not apply if you trade cryptocurrency in a tax-deferred or tax-free account, such as an individual retirement account (IRA).
For example, if you buy $1,000 worth of bitcoins and then sell them for $1,200, you would 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 would 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 be carried forward to future years as an offset to future earnings or up to $3,000 of your taxable income per year.
if you mine cryptocurrencies
Cryptocurrency mining refers to the resolution of 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 is considered taxable income and can be reported on the 1099-nec form at the fair market value of the cryptocurrency on the day you received it. You should report this even if you don’t receive a 1099, as the IRS considers this income taxable and it will likely be subject to self-employment tax in addition to income tax.
if you receive cryptocurrencies as payment for goods or services
many businesses now accept bitcoin and other cryptocurrencies as a form of payment. If someone pays you cryptocurrency in exchange for goods or services, the payment counts as taxable income, just as if you were paid in cash, check, credit card, or digital wallet. For tax purposes, the dollar value 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 cryptocurrencies
If you mine, buy, or receive cryptocurrency and eventually sell or spend it, you have an equity transaction that results in a gain or loss just as you would if you sold stock. this is where cryptocurrency taxes can get more involved. Every time you get rid of cryptocurrency, you are making a capital transaction that must be reported on your tax return.
For example, let’s look at an example of buying cryptocurrencies whose value increases and is then used to buy plane tickets. the example will involve the payment of ordinary income taxes and capital gains tax.
- first, he receives $200 of litecoin cryptocurrency in exchange for services on January 15.
- six months later, on July 15, the fair market value of his litecoin has risen to $500 , and you use it to buy plane tickets for a vacation.
- On your tax return for that year, you must report $200 of ordinary income (either as wages if reported on a w-2 form or as own income). employment income if you’re 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 worth of your litecoin when you bought the plane tickets, minus your base of $200 when you received the litecoin.
When calculating your litecoin basis for capital gains tax, you must account for $200 worth of ordinary income included in your taxes. that same litecoin position, now worth $500, is used to buy the plane tickets, meaning you would not pay capital gains tax on the original $200.
If you paid capital gains tax on the entire $500, the initial $200 would be taxed twice: once as ordinary income and once as capital gain.
so you subtract your original basis of $200 from the balance of $500.
Those two cryptocurrency transactions are pretty easy to trace. But imagine buying $1,000 worth of litecoin, loading it onto a cryptocurrency debit card, and spending it over several months on coffee, groceries, lunch, and more.
If, like most taxpayers, you think of crypto as an alternative to cash and don’t keep track of capital gains and losses for each of these transactions, it can be hard to figure out at the end of the year. keeping track of these transactions is important for tax reporting purposes.
if you exchange one type of cryptocurrency for another
Cryptocurrency enthusiasts often trade or exchange one type of cryptocurrency for another. For example, let’s say you have $1,000 worth of Litecoin and you trade it for $1,000 worth of Ethereum. If you originally paid $300 for the Litecoin, you must recognize a capital gain of $700 when you trade. established a $300 basis at the time of purchase for his original litecoin position, but recognized a capital gain of $700 as a result of currency appreciation between his purchase and the exchange for ethereum. Your ethereum basis is its fair market value at the time of trade, making your new cost basis $1000 after paying the $700 capital gain on the trade.
It is important to note that all of these transactions are in US dollars, as this is the currency used for your tax return. therefore, even if you buy one cryptocurrency using another without first converting it 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 is launched and various free tokens are sent to early adopters and their communities to encourage adoption as part of a broader marketing effort to promote the startup of the project. If you frequently interact with crypto platforms and exchanges, you may receive airdrops of new tokens to your account. These new currencies count as a taxable event, causing you to pay taxes on these virtual currencies.
A hard fork is a total change in the protocol of a blockchain network that invalidates previously verified transaction history blocks or vice versa. Often times, a cryptocurrency will participate in a hard fork as a result of wanting to create a new rule for the blockchain. the new and updated blockchain contains the new rule, while the old chain does not. many users of the old blockchain quickly realize that their old version of the blockchain is outdated or irrelevant now that the new blockchain exists after the hard fork, forcing them to upgrade to the latest version of the blockchain protocol. For a hard fork to work properly, all blockchain nodes or users must update to the latest version of the protocol software.
A hard fork does not always result in a new cryptocurrency being issued to the taxpayer and as a result does not necessarily result in a taxable event. however, in the event that a hard fork occurs and is followed by an airdrop where you receive new virtual currency, this generates revenue.
This counts as taxable income on your tax return and must be reported to the IRS, whether or not you receive a 1099 form reporting the transaction.
if you bet in cryptocurrencies
Staking in cryptocurrencies is a means of earning rewards for holding cryptocurrencies and providing an integrated base of investors and users to give value to the currency. Earning crypto through staking is similar to earning interest on a savings account. In exchange for staking your virtual coins, you may be paid money that counts as taxable income.
You treat staking income the same as mining income: it is counted as fair market value at the time you earn the income and is subject to income and possibly self-employment taxes own.
if you make charitable contributions and gifts in crypto
If you itemize your deductions, you can donate cryptocurrency to qualified charities and claim a tax deduction. You can generally deduct the fair market value of your cryptocurrency at the time of the charitable contribution, and you don’t have to pay capital gains tax when you donate.
Cryptocurrency charitable contributions are treated as non-cash charitable contributions. A charity can help you document your crypto charitable contribution by providing a written acknowledgment if you claim a deduction of $250 or more for the virtual currency deduction.
Do you pay taxes on lost or stolen cryptocurrencies?
Normally, you cannot deduct losses from lost or stolen crypto on your return. The IRS states that there are two types of losses for capital assets: casualty losses and theft losses. Generally speaking, casualty losses in the world of cryptocurrency would mean having your cryptocurrency damaged, destroyed, or lost due to 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, although other factors may need to be considered in determining whether the loss constitutes a casualty loss. Theft losses would occur when your wallet or an exchange gets hacked.
In any case, you cannot deduct these losses to offset your gains. Due to tax reform laws that went into effect in 2018, most casualty and theft losses are not deductible between 2018 and 2025. In the future, taxpayers can take advantage of this deduction if they itemize their deductions instead of claim the standard deduction .
Are there tax-free crypto transactions?
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You can transact crypto tax-free in certain situations, depending on the transaction you make, the account you transact in, your income, and your marital status.
When you buy cryptocurrency, this does not create a taxable event even if the value increases over time. the tax consequences do not result until you decide to sell or exchange the cryptocurrency.
For crypto transactions you make in a tax-deferred or tax-free account, such as a traditional or Roth IRA account, respectively, these transactions are not taxed as they would be in a brokerage account. These exchanges avoid taxes.
Depending on your income each year, long-term capital gains rates can be as low as 0%. for 2021, you can also avoid paying taxes when selling your cryptocurrency if your table income is less than or equal to $40,400 if you file as a single person, married, file separately, or if your taxable income is less than or equal to to $80,800 if filing jointly as a married couple.
keep records of your crypto transactions
The Internal Revenue Service (IRS) is stepping up crypto tax filing enforcement as these virtual currencies grow in popularity. As a result, you must track 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 who bought, sold, and traded cryptocurrency correctly reported those transactions on their tax returns. the agency provided further guidance on how cryptocurrencies should be reported and taxed in October 2019 for the first time since 2014.
Beginning with tax year 2020, the irs also made a change to the 1040 form and began to include the question: “at any time during 2020, did you receive, sell, send, exchange, or acquire any financial interest in any currency virtual ?”
If you check “yes”, the IRS will likely expect to see the income from cryptocurrency transactions on your tax return.
crypto tax software helps you keep track of all these transactions, ensuring you have a comprehensive list of activities to report when it comes time to prepare your taxes. The software integrates with various virtual currency brokers, digital wallets, and other crypto platforms to import cryptocurrency transactions into your online tax software. this can include transactions made in cryptocurrency but also transactions made with the virtual currency as a form of payment for goods and services.
Depending on the cryptographic software, the transaction report may resemble the documentation you might submit with your return on Form 8949, Sales and Other Dispositions of Capital Assets, or it may be formatted so that it is easily imported into the preparation of taxes. software. often, you’ll pay for service levels based on the number of transactions reported.
can the irs track crypto activity?
Despite the anonymous nature of cryptocurrencies, the IRS may still have ways to track your crypto activity.
for example, if you transact on a cryptocurrency exchange that provides reporting via form 1099-b, broker and barter exchange transaction earnings, they will provide a report of these transactions to the irs.
In addition, the IRS makes use of blockchain analytics tools to identify crypto activity from digital wallets and link them to individuals in cases where they suspect tax evasion and/or money laundering may be occurring.
As a result, you’ll want to be sure to report all crypto activity during the year on your tax return.
how are cryptographic transactions reported?
When you transact crypto through a brokerage or by using these digital currencies as a means of payment, this constitutes a sale or exchange. As a result, you will need to document the details of your cryptocurrency sales, 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 exchange and barter transactions
If you traded cryptocurrency in an investment account or on a cryptocurrency exchange or used it to make payments for goods and services, you may receive Form 1099-b reporting these transactions. In other investment accounts such as those held with a stockbroker, this information is usually provided on this 1099 form. However, not all platforms offer these forms. in this case, they can usually still provide the information even if it’s not on a 1099-b.
1099-misc or 1099-nec
if you mined cryptocurrency or received cryptocurrency as a prize, then you could receive form 1099-misc, miscellaneous income, or 1099-nec, non-employee compensation. These forms are used to report how much ordinary income you were paid for different types of work-type activities. The information on these forms can be used to help you prepare Schedule C, Business Profit or Loss, and Schedule SE, Self-Employment Tax.
When any of these 1099 forms are issued to you, they are also sent to the IRS so they can compare the information on the forms with what you report on your tax return.
turbotax tip: cryptocurrency exchanges will not be required to submit 1099-b forms until tax year 2023. if you do not receive a 1099-b form from your cryptocurrency exchange, you should still report all sales or exchanges of cryptocurrencies on your taxes.
does coinbase report to the internal revenue service?
coinbase was the subject of a subpoena from john doe in 2016 that required it to provide transaction information to the irs for its customers. As a result, the company provided information on more than 8 million transactions made by its customers.
Today, the company only issues 1099-misc forms if it pays you rewards or bonuses for taking specific actions on the platform. In addition, you may need to exceed the minimum payment threshold of $600 in order for the business to issue you and the IRS a 1099-misc documenting your payments.
However, beginning in fiscal year 2023, the US Infrastructure Bill of 2021 requires cryptocurrency exchanges to submit 1099-b forms reporting all transaction activity.
Although Coinbase does not provide this information through direct reporting to the IRS, you must still report this activity on your tax return as it is taxable income. You can access account information through the platform to calculate applicable capital gains or losses and the resulting taxes you must pay on your tax return.
turbotax has you covered
turbotax online is now the authority on crypto taxation with the most comprehensive import coverage, including all top 15 exchanges. Whether you’re investing in crypto through coinbase, robinhood, or other exchanges, turbotax online can help you import and understand crypto taxes just like other investments.
Have questions about turbocharging and crypto? our cryptocurrency information center has answered frequently asked questions to help make taxes easier and more comprehensive.
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