How Cryptocurrency Taxes Work: Getting Started Guide
Crypto taxes explained: Learn how taxes on cryptocurrency are calculated and how to pay taxes on crypto. Learn step by step how to calculate crypto taxes
Table of Contents
- Do I have to report cryptocurrency on my taxes?
- How is bitcoin and other crypto taxed?
- What crypto transactions are taxable?
- What happens when you have taxable crypto transactions?
- How to calculate your crypto taxes
- How crypto income is taxed
- How to pay tax on crypto
- Which crypto tax software should I use?
We've seen crypto rise from obscure virtual currency to worldwide phenonemon, and with that, the IRS has stated firmly that cryptocurrency sales must be reported on your taxes. Long gone are the days where Bitcoin was considered anonymous; now, it's important that you properly file your crypto taxes.
This guide explains the tax implications of cryptocurrency and how to calculate your bitcoin and crypto taxes. Note that this guide primarily applies to crypto taxes in the U.S., but other countries may have similar tax policies as well.
Barring certain exceptions, you generally owe tax on any income or realized capital gains, and by definition this includes profits you've made with cryptocurrency.
This may sound a little overwhelming, but don’t worry: we’re making filing crypto tax easier for everyone!
To learn what tax forms you need and how to include crypto on your return, be sure to read our Complete Guide to Filing Cryptocurrency Taxes.
The 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 selling, exchanging, or spending crypto 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.
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.
Check out the 2019 federal tax brackets for short term and long term capital gains tax 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.
You recognize a capital gain or loss whenever you have a taxable event. The following are taxable events:
- Selling crypto for fiat (like selling BTC for USD)
- Trading crypto for crypto (like trading BTC for ETH)
- Spending crypto on goods or services
- Having crypto as income, like being paid in crypto or mining / staking crypto
The following are not taxable events:
- Buying crypto with fiat (like buying BTC with USD)
- Transferring crypto between wallets, exchanges, etc (this was clarified in recent IRS guidance)
- Giving cryptocurrency as a gift (note that amounts over $15,000 equivalent are subject to the federal gift tax)
- Donating crypto to a tax exempt organization or charity
When you have a taxable event, that means that you recognize any gain or loss on the asset since you acquired it. Buying crypto with fiat is not in itself a taxable event, so if you've only been buying with fiat and holding and you have no taxable events, then you do not need to report crypto for that tax year.
It’s important to keep in mind that crypto to crypto trades result in tax liability. Many traders were caught off guard at the end of 2017 when they recognized a gain on their BTC near all time highs by trading it for alts, only to have losses in 2018 when the markets went back down. Losses cannot be carried backwards. For tax purposes, it’s recommended that you keep track of your realized and unrealized gains and losses.
Crypto tax calculation is, at a basic level, quite simple. The initial acquisition amount spent is the cost basis, and the amount received in a sale 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/salaries).
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, our crypto tax software also calculates your income tax in fiat equivalent, so you can report it on your tax return.
You use IRS Forms 8949 and 1040 Schedule D to report capital gains on your return. The 8949 lists all of your crypto sales / taxable events as well as the cost basis, proceeds, and gain/loss for each. The Schedule D is a total report of your net capital gains or losses.
We're a bit biased, but we'd recommend using TokenTax to calculate your crypto taxes and to create your tax forms. We've been rated best crypto tax software on Forbes and were also chosen as the winner of the 2017 Product Hunt Hackathon.
But we’re more than just a software product; we’re a full fledged accounting firm too. That means that you’re not just working with software engineers, but accountants and tax professionals as well. We were founded on the idea that proper tax education is just as important as the software to make it happen. That's what sets us apart from other software services.