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How is Cryptocurrency Taxed?

Andrew Perlin
ByAndrew Perlin, CPA Reviewed byArthur Teller, CPAUpdated on October 18, 2022 · minute read

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  • Trading, selling, swapping, or otherwise disposing of cryptocurrency like Bitcoin is a taxable capital gain or loss. Earnings from mining, staking, and most yield farming activities are taxed as income.

  • Buying crypto with fiat, giving or donating crypto, and transferring crypto between wallets (without changing coins) are not taxable events.

How is Cryptocurrency Taxed?

The Internal Revenue Service (IRS) has stated firmly that cryptocurrency must be included on your taxes. Gone are the days where bitcoin was considered anonymous; now, it's important that you properly file your crypto taxes.

Do I need to file crypto taxes?

The IRS treats bitcoin and other digital assets as property, just like it treats stocks and other capital assets. But which crypto trades are taxable? The following are taxable events:

  • Trading one cryptocurrency for another (BTC for SOL)

  • Spending crypto for goods or services (BTC for a pizza)

  • Selling cryptocurrency for fiat (BTC for USD)

  • Otherwise disposing of crypto

Additionally, the following activities may result in earnings taxed as income:

Failing to report and pay taxes on cryptocurrency transactions can potentially have serious consequences. These range from IRS crypto tax audits to penalties to criminal prosecution.

Taxes on sales, swaps, and trades: Capital gains and losses

Earnings from trading, swapping, selling for fiat, or otherwise disposing of cryptocurrency are taxed as capital gains/ losses. While crypto being taxed as property has its hassles, it does have some advantages.

Example: Selling crypto for fiat

Capital gains corrected

Most notable is the fact that if you hold your crypto for a year or more, it is a long-term capital gain and taxed at a rate of 0-20%, compared to short-term capital gains, which are taxed up to 37%.

You can also offset crypto gains with crypto losses, which includes carrying losses over into future tax years.

Do I have to pay taxes on crypto if I don't sell?

No, you do not have to pay taxes on crypto that you are still holding. in the United States capital gains and losses are only "realized" when the asset is sold or swapped.

Calculating your taxable crypto gains or losses

At a basic level, calculating your taxable crypto gains or losses is quite simple. The initial cost of the acquisition (in fiat) is the cost basis, and the amount received in a sale (also in fiat) is the proceeds.

Subtract the cost basis from the proceeds and you have your gain or loss. These values must be reported on Form 8949 in USD.

Capital gains calculation example

  • You buy 1 BTC for $40,000, so your cost basis for this lot of 1 BTC is $40,000.

  • You later sell this 1 BTC for $55,000, thus the proceeds are $55,000.

  • Subtract the cost basis of $40,000 from the proceeds of $55,000, and you get $15,000, your taxable capital gains amount.

However, these calculations quickly become more difficult when you start making a higher volume of trades or trading at a more advanced level, such as margin trading, using DeFi platforms, making cross-chain trades, or crypto lending. Crypto tax software is a huge help in these scenarios.

Taxes on mining, staking, or receiving payments: Income

Profits from crypto mining, staking, or receiving crypto as payment for goods or services are taxed as income.

Example: Mining bitcoin

Ordinary income

If you earn this crypto as an individual hobbyist, when it is received it is treated as ordinary income and taxed at your income bracket's crypto tax rate. Any subsequent change in value is treated as a capital gain or loss.

Staking income example

  • You receive $750 in rewards from staking ETH

  • You will need to report $750 of income on your IRS Form 1040.

Crypto income may be earned in the course of business or trade activities. A common example of a commercial activity is any crypto mining that relies on more than a personal computer’s excess computing power.

If you’re doing business as a sole proprietor, independent contractor, or as a member of a partnership, your profits will be taxed as self-employment income and reported on your Schedule C. You will have to pay self-employment tax.

If you’ve incorporated your business as a C corp, your profits will be taxed as corporate income, reported on Form 1120. For more on the pros and cons of incorporating, read our post on how to create an LLC or corporation for crypto.

Businesses may deduct qualified expenses from their income.

Crypto tax on hard forks and airdrops

The IRS has given explicit guidance that airdrops and hard forks are taxed as income.

The amount of income you recognize is equivalent to the fair market value (FMV) of the crypto when received. The receipt date is the time of the transaction on the ledger/ blockchain. Crypto received as income has a cost basis of the FMV of the assets when received.

Non-taxable crypto activities

Buying crypto with fiat

Buying cryptocurrency with cash is not a taxable event.

Gifting or donating crypto

Giving crypto as a gift (less than $15,000) or donating cryptocurrency to a 501(c)(3) organization is not a taxable event.

Direct donations of cryptocurrency to charitable or nonprofit organizations are not taxable. Additionally, they may be used to offset your gross income.

Transferring crypto between wallets

Moving cryptocurrency between wallets is not a taxable event, as long as you do not trade the tokens for another crypto or to fiat currency when you transfer the assets.

Wallet transfer example

  • You move 5 ETH from a Coinbase wallet to a Metamask wallet.

  • You have not experienced a taxable event.

Reporting crypto on your taxes

Income or capital gains from crypto assets need to be reported on your tax returns. To read more detailed information on how to do so, visit our guide to cryptocurrency tax reporting.

2021 1040 Crypto Question

On the Form 1040 Schedule 1, the IRS asks, “At any time during the last tax year did you receive, sell, send, exchange, or otherwise dispose of any financial interest in any virtual currency?” This is a slight update from previous years in which it asked “did you receive, sell, send, exchange, or otherwise acquire” cryptocurrency. The IRS made this change to clarify that purchases of crypto with fiat do not need to be reported.

For more info on crypto tax basics, visit our Crypto Tax Guide.

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

Related Content

Andrew Perlin
Andrew PerlinAccounting at TokenTax
Andrew Perlin is a CPA specializing in crypto taxes. After working as a financial controller, he co-founded CryptoCPAs, which was acquired by TokenTax in 2018.
Arthur Teller
Reviewed byArthur TellerCOO at TokenTax
Arthur came to TokenTax after 12 years at KPMG. A specialist in partnership taxation and enterprise tax software, he is a licensed CPA in both California and Illinois and a member of the AICPA.

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