The Essential Crypto Tax Guide
Here you'll find all you need to get smart about crypto tax tracking, calculating, reporting, and filing.
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How is crypto taxed in the U.S.?
In the United States, cryptocurrency is considered a capital asset, not a currency. This means that for tax purposes, digital assets are treated like property or traditional investments, such as stocks and bonds.
All of the following are taxable events:
Trading or swapping one cryptocurrency for another
Selling cryptocurrency for fiat currency
Earning crypto as payment for goods or services
Using crypto to pay for goods or services
However, while some of these transactions are reported and taxed as capital gains or losses, others are taxed as ordinary income.
Crypto capital gains
The basic rule of thumb is that if your profit comes from an appreciation in the value of your asset, it is a capital gain.
Crypto ordinary income
If your profit comes from additional tokens being deposited in your wallet, it is ordinary income.
Not every crypto transaction is taxable, however. Some actions that are not taxable include:
Buying crypto with fiat currency
Transferring crypto between your own wallets
For more on how specific transactions are taxed, visit our blog “How is Cryptocurrency Taxed?”
Crypto tax rates
Your overall income determines the rate at which your crypto ordinary income will be taxed.
While your tax bracket also affects your capital gains rate, so does the amount of time you held the traded asset. If you held the asset for a year or less, your profit is considered a short-term gain and taxed at the same rate as your ordinary income (10%–37%).
However, if you held the asset for more than a year, you will receive preferable long-term capital gains rates, which are 0%, 10%, or 20%, depending on your overall income.
Long-term capital gains rates
|Tax rate||Single filer||Married filing jointly||Married filing separately||Head of household|
|0%||up to $41,675||Up to $83,350||Up to $41,675||Up to $55,800|
|15%||$41,675 to $459,750||$83,350 to $517,200||$41,675 to $258,600||$55,800 to $488,500|
|20%||more than $459,750||Over $517,200||Over $258,600||Over $488,500|
For more details, visit our blog on crypto tax rates.
How to calculate crypto taxes
The basic formula for calculating your crypto capital gains is:
Proceeds - cost basis = capital gain (or loss).
Your proceeds are the fiat value of the assets you received from the sale or trade of a cryptocurrency.
Your cost basis is the amount for which you originally acquired the asset, plus any eligible associated fees. Knowing your cost basis is extremely important; without cost basis, your entire proceeds will be taxed as gains. This is one of the reasons that traders need to keep careful records of their transaction history with portfolio trackers or crypto tax software.
Capital gain calculation
James acquires 2 BTC when it is trading at $30,000, so his cost basis is $60,000.
He later sells the 2 BTC for $35,000 each, so his proceeds are $70,000.
$70,000-$60,000 gives him a capital gain of $10,000.
However, how you identify your cost basis can vary depending on which crypto accounting method you use. We’ll go over crypto accounting methods in the next section.
For a detailed walkthrough of each step of calculating your crypto gains, visit our blog “How to Calculate Your Crypto Gains Step by Step.”
Crypto accounting methods
The IRS allows the specific identification valuation method for crypto taxes. This means that by tracking your tax lots granularly–something a crypto tax calculator allows you to do—you can select one of several methods for matching up different acquisitions and sales of the same cryptocurrency. In other words, the method you choose will affect your cost basis, which can result in greater or lesser capital gains totals in a given tax year.
There are four main specific ID methods:
FIFO (First in, first out): The first assets acquired are the first to be disposed of
LIFO (Last in, first out): The last assets acquired are the first to be disposed of
HIFO (Highest in, first out): The assets acquired for the highest amount are the first to be disposed of
Minimization: TokenTax’s proprietary algorithm, which builds on HIFO but also takes tax rate into consideration
We outline more about how specific identification can affect your taxes in our blog about crypto accounting methods.
Are ETH gas fees tax deductible?
If the transaction in question is a trade, swap, or income from yielding, staking, or airdrops, you can likely add ETH gas and other related fees to an asset’s cost basis, thereby reducing the size of your capital gain.
However, if fees are related to a different type of transaction—particularly one that doesn’t include the acquisition of an asset—it’s less clear whether they could be added to the cost basis. We recommend consulting a crypto tax accountant.
To read more about tax deductions for transaction fees, read our blog “Are Ethereum Gas Fees Tax Deductible?”
Crypto tax loss harvesting
The IRS allows taxpayers to use capital losses to offset earnings. Traders can offset up to $3,000 of ordinary income and an unlimited amount of capital gains. Plus, losses can be carried forward to offset gains in future tax years.
However, in order to use them to offset gains, losses must be realized. Put simply, you have to sell, swap, or trade an asset to make the loss official. Strategically realizing losses to reduce your capital gains total (and thus your tax liability) is called tax loss harvesting. Be aware that you can only tax loss harvest during the current tax year: losses in 2022 cannot be used to offset 2021 taxes.
Crypto tax software can help you identify unrealized losses that are tax loss harvesting opportunities. For example, at the premium plan tier and above, TokenTax offers customers a Tax Loss Harvesting Dashboard.
Check out our blog on crypto tax loss harvesting for more guidance on using losses to reduce your taxes.
For more on reporting losses on your returns, read our blog “How to Report Crypto Losses on Your Taxes."
Does the wash sale rule apply to crypto?
The wash sale rule prohibits traders from claiming a loss on a security sold and repurchased within 30 days. This is designed to prevent investors from artificially inflating the amount of capital losses they can deduct from their taxes.
Legally speaking, cryptocurrencies are not considered securities in the United States, so the wash sale rule may not apply to them. However, expanding the wash sale rule to explicitly include cryptocurrencies has been on Congress’s legislative agenda, so crypto wash sales may be outlawed in the near future.
We recommend safer ways to lower your capital gains totals in our blog “The Crypto Wash Sale Rule: Is There a Loophole?”
Other ways to reduce your crypto taxes
Besides offsetting gains with losses and deducting fees, there are a few other ways to reduce your crypto taxes. These include:
Donating crypto: Direct donations of digital assets to a 501(c)(3) organization can be deducted from your capital gains total, provided the required documentation is provided.
Deducting business expenses: If your crypto trading is your business, you may be able to deduct some expenses from your taxes. For instance, bitcoin miners may be able to deduct the cost of mining equipment and electricity.
Do exchanges like Coinbase report to the IRS?
Yes. Most centralized exchanges based in the U.S. collect tax information about certain users to report to the IRS on a Form 1099; in fact, beginning in the 2023 tax year, doing so will be required. If you do receive a Form 1099 from a crypto exchange, you need to report your earnings on your taxes.
Currently, the most common form sent from crypto exchanges is Form 1099-MISC, which reports staking and lending income over $600. Coinbase sends Forms 1099-MISC. However, you may also receive a Form 1099-K or Form 1099-B from some other American exchanges.
To learn more about the different kinds of Form 1099, check out our guide to Forms 1099 for cryptocurrency.
How to report crypto on your taxes
There are five major steps involved in reporting your crypto earnings and income to the IRS.
Report capital asset dispositions on IRS Form 8949.
Include Form 8949 with your Form 1040 Schedule D. This is where you will also report any losses carried forward from past tax years.
Report any crypto income.
Complete and file your return.
In our blog about filing your Form 8949, we go over each of these steps in specific detail.
Depending on the volume and complexity of your trades, you may find that one or more of these steps can become complicated and/or arduous. This is why we recommend using crypto tax software, which can largely automate the tax calculation and reporting process.
The same rule of thumb discussed earlier applies to DeFi transactions: If profit is gained through an appreciation of an asset’s value, it is taxed as a capital gain. If profit is gained through the deposit of additional token’s to an investor’s balance, it is taxed as ordinary income.
Taxed as ordinary income: Staking rewards, crypto interest payments, airdrops, governance tokens received as a reward or incentive
Taxed as capital gains: Trading or selling governance tokens
However, there are still many DeFi crypto tax gray areas. Some notable issues about which the IRS has yet to issue guidance include:
Whether wrapping tokens is a taxable event
Whether minting interest-bearing tokens is a taxable event
When staking or interest income is taxed: when it is earned or when funds are removed from the platform
We go into great detail about what’s known—and not known—about DeFi taxes in our DeFi Tax Guide.
Creating and minting an NFT is not a taxable event. However, typically, NFT trades are taxed just like any other crypto capital asset transaction and should be reported on your NFT tax software.
However, if you create NFTs for a living, your transactions will likely be taxed differently. Because your NFTs are essentially your business’s inventory, the proceeds of your trades will likely be taxed as ordinary income.
Common crypto tax challenges
Crypto taxes can be especially challenging. Many exchanges and platforms do not provide exportable trade histories, and those that do provide them don’t use the same formatting. This makes collecting and reporting taxable events very difficult.
Some of the most common challenges include:
Inaccessible trade data (defunct exchange or geographical restrictions)
Missing cost basis errors
Data from unsupported DeFi platforms importing inaccurately
In our article about crypto tax headaches, we go over how to prevent these and other errors, but in general, our advice is: an ounce of prevention is worth a pound of cure. Keep detailed records of your trades as you make them.
How crypto tax software can help
As we’ve covered, every time you sell, trade, or otherwise dispose of cryptocurrency, you are realizing a taxable event. For many investors and traders, especially high volume traders, this makes reporting crypto taxes a challenge. However, crypto tax software helps in a few major ways, particularly if you start tracking transactions on them as they occur, instead of when you sit down to do your taxes.
It centrally organizes and compiles your data in real-time from multiple sources.
It establishes the cost basis of each asset by determining the asset’s price at the date and time it was acquired.
It automatically calculates your gains and losses.
It generates correctly formatted tax forms and audit trails.
It shows your current-year tax liability, so you can make more strategic decisions about tax loss harvesting.
Finding a crypto tax accountant
If you’ve made especially complex trades during the last tax year, or if you’re facing a special situation such as an audit or back taxes, we recommend connecting with a crypto tax accountant.
Although crypto taxes are becoming more widely discussed among the larger accounting community, you may find that finding a CPA who is experienced with digital assets is difficult. That’s why TokenTax offers our clients access to crypto-savvy accountants; however, we realize you may want to look elsewhere for help. To help you determine whether an accountant will be a good fit, we recommend asking:
How familiar are you with cryptocurrency?
What does your process look like and how long will it take?
Can you calculate my data from multiple exchanges?
Do you know the definitions of staking and mining and how they affect my taxes differently?
Have you filed a crypto FBAR before?
Do I need to give you my data for past years?
I don’t have all of my trade data. What can I do to still file accurately and on time?