Are There Taxes on Cryptocurrency?

You may have to pay taxes on cryptocurrency. Learn how taxes on crypto work and what is required in order to pay tax on your income and profits.

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This article is part of TokenTax's Crypto Tax Guide. Get help with cryptocurrency tax.

Cryptocurrencies such as bitcoin use the blockchain to record transactions and cryptography to verify the authenticity of the digital asset. First-time crypto users do not always realize that digital assets are taxable and that they need to report their crypto transactions to the Internal Revenue Service (IRS) or their country’s tax authority.

Is cryptocurrency taxed?

In the United States and in many other countries, there are taxes on cryptocurrency gains and income. There are potential consequences, ranging from penalties to criminal prosecution, for failing to pay taxes on your virtual currency transactions.

You pay taxes on trading profits / realized cryptocurrency gains via capital gains tax. Gains are realized when you sell, exchange away, spend, or otherwise dispose of your crypto. If you buy crypto and hold it at a gain without touching it, you won't owe tax yet.

Direct income in crypto, i.e. bitcoin income received for freelance work, is taxed like income.

You are subject to potential audits on your taxes in future years. Remember that crypto transactions are stored on an immutable ledger, and the IRS is becoming increasingly tech savvy in regards to the blockchain.

Additionally, some exchanges have been ordered to provide transaction information to the IRS.

You need to report crypto activity on your U.S. tax return, even if you don’t owe tax

The IRS now asks on the 1040 Schedule 1, “At any time during the last tax year did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Thus, you need to disclose if you held crypto and/or if you transacted it during the tax year.

IRS 1040 Schedule 1 crypto question

Even if you bought bitcoin five years ago and waited until this year to sell it, you still need to check the box disclosing that you owned crypto on your taxes.

This reporting requirement tends to catch beginning investors off-guard. They tend not to think their one-time purchase has tax implications, so they do not even realize that they could be misstating their tax returns.

Stablecoin trades need to be reported

Crypto users may not realize that stablecoin trades need to be reported if you traded crypto for stablecoins or sold stablecoins. However, since stablecoins are typically pegged to a fiat currency, they usually trigger very little or no capital gains tax when sold.

You are still required to report stablecoin sales, since they are still classified the same as other crypto. And, in some cases, you could have a capital gain or loss on stablecoins, pa if their values have fluctuated slightly.

You need to keep detailed records of all your crypto assets for your taxes

You need to document your crypto transactions for tax purposes. Tax software can collect your data and calculate your crypto tax automatically, greatly simplifying the tax process.

Additionally, for any given tax year, your crypto tax liability calculations may be based on holdings acquired in past years. It is therefore important to keep documentation backing up your crypto tax liability for all years until you close out all positions, as you will need it to prove how much you initially paid for your crypto.

Just like any other tax situation, you should keep backup records in case you are audited and need to prove your tax positions to the IRS. It can be difficult to compile your transactions if you traded on exchanges that closed during the tax year, so backing up your transaction data is highly recommended.

Your next steps for paying tax on cryptocurrency

You will need to report your crypto transactions on the relevant forms to the IRS. For more information on taxable events that could result in taxes on capital gains and losses, read our article on whether you need to file crypto taxes. The guide explains how you will be taxed on the sale or exchange of your cryptocurrency, as well as more complex tax situations.

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