How Bitcoin and Cryptocurrency Is Taxed
Learn how crypto taxation works and how you should expect for your crypto trading and investing to be taxed.
Table of Contents
This article is part of TokenTax's Cryptocurrency Tax Guide.
The Internal Revenue Service (IRS) has stated that Bitcoin and other virtual currencies are to be taxed as property, just like how stocks and other capital assets are treated. This means that exchanging, spending or selling Bitcoin is a taxable event where you recognize any capital gain or loss on the asset.
Furthermore, if you mine crypto or receive crypto as payment, you are liable for income tax on those assets received. It is important to report your transactions, as the IRS has pursued criminal prosecution for a few high visibility cases in the past.
Crypto taxation at a basic level is quite simple. The initial acquisition amount spent (in USD) is the cost basis, and the amount received in a sale (also in USD) is the proceeds.
Subtract the cost basis from the proceeds and you have your gain or loss. Remember that these values must be reported on the Form 8949 in USD, even for crypto to crypto trades.
Here's an example:
- You buy 1 BTC for $8,000, thus your cost basis for this lot of 1 BTC is $8,000.
- You later sell this 1 BTC for $10,000, thus the proceeds are $10,000.
- Subtract the cost basis of $8,000 from the proceeds of $10,000, and your gain is $2,000, that amount of which you are liable for capital gains tax on.
As you can imagine, these calculations become hard to do when you have hundreds or more of crypto trading transactions. Luckily, crypto tax software automates this whole process, from importing all your trading data to creating your tax forms.
If you receive crypto in exchange for services, you recognize it as ordinary income. Ordinary income is income taxed at your income tax rate (the same as wages or salaries). Your subsequent transactions with that income follow the capital gains and losses rules from the previous section.
Crypto income may be self-employment income if it’s via a trade or business, thus subject to self employment tax as well as deductions. A common example of a trade or business is a crypto mining operation.
Hard forks and airdrops are also to be treated as income as per IRS guidance. The IRS has clarified that the amount of income you recognize is equivalent to the fair market value 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 fair market value of the assets when received
In addition to calculating capital gains, crypto tax software also calculates your income tax in fiat equivalent, so you can report it on your tax return. This income would be reported as self employment income in Schedule C.
While crypto being taxed as property has its hassles, there’s the primary advantage of long term capital gains, which has a tax rate of 0-20%, compared to short term capital gains which are taxed at marginal tax rates of up to 37% in 2019.
For more information on the 2019 federal tax brackets, you can read our article on short term and long term capital gains tax rates to see what rates you may have when it’s time for paying taxes.
Other tax treatments don’t have this long term gains advantage. For example, currency investments are taxed at your marginal tax rate (up to 37%) — but remember that crypto is taxed as property, not currency.
Additionally, other tax treatments don’t have the advantage of being able to take tax deductions on losses. While deductions are subject to an annual maximum, you can carry over losses for future tax years.