How Crypto Taxes Work: Our Getting Started Guide
Do I have to report cryptocurrency on my taxes?
You need to report cryptocurrency on your tax return. This guide explains the tax implications for transacting bitcoin and other crypto and how to handle 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.
Remember that, 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.
How is bitcoin and other crypto taxed?
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 income 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.
What crypto transactions are taxable?
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
What happens when you have taxable events?
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 can 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.
How to calculate your crypto taxes
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.
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.
Often, depending on your trading activity, the calculations can become more complex. Take this example:
You buy 1 BTC for $8,000 total
Later, you buy 2 BTC for $20,000 total
Finally, you sell 3 BTC for $33,000 ($11,000 each)
In this case, you’d have two line items on the 8949, because the sale of 3 BTC has two different cost basises.
The first transaction would be selling 1 BTC for $11,000 in proceeds, with a cost basis of $8,000, for a gain of $3,000. The second transaction would be a sale of 2 BTC for $22,000 in proceeds, with a cost basis of $20,000, for a gain of $2,000. The same logic applies to crypto to crypto trades, keeping in mind that USD equivalents (via fair market value) must be used for the crypto traded.
How crypto income is taxed
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.
How to pay tax on crypto
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.
If you have more than just a couple crypto trades, it becomes difficult to fill out the Form 8949 manually.
A crypto tax calculator automatically finds the fair market value for all cryptocurrencies on the market at the time of these transactions. It also matches buys (cost basis) and sells (proceeds) automatically via various accounting methods, like FIFO, LIFO, or Minimization, the last of which calculates the lowest tax liability for your tax year.
Our platform works by importing all your exchange data as well as any off-exchange transactions. Then it generates your Form 8949, with all the matched trades and fair market values pulled.
We were rated best crypto tax software by Forbes and were the winner of the 2017 Product Hunt Hackathon
TokenTax was rated best crypto tax software on Forbes and was 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. Our powerful platform combined with our tax expertise and ability to handle complex crypto tax situation makes us — in an obviously biased opinion — the best crypto tax platform and the easiest way to file your crypto taxes.
TokenTax does the work so you don’t have to.
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