The Simple Crypto Tax Guide – Here’s What to Know

Any savvy investor knows how important it is to stay on top of taxes. You may owe crypto tax if you have bought, sold, or even used any cryptocurrency during the tax year. The short answer to your burning question is this – Yes, your crypto assets are taxable by the government. 

This crypto tax guide aims to educate crypto holders and investors about the tax rules and processes. However, this is only for US taxpayers who pay tax to the US federal and/or state government every year. Since crypto is a global industry with investors from all over the world, the rules may vary based on where you live and pay taxes. 

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Do You Need to Pay Crypto Taxes? 

If you’re a US taxpayer, you have to pay taxes on your crypto assets. Taxes apply to cryptocurrency because the Internal Revenue Service (IRS) treats cryptocurrencies as capital assets, just like stocks or bonds. 

Lately, cryptocurrency has been on the IRS’s radar and the tax collection agency has been actively going after people who hold cryptocurrencies. Keeping the debate about the real-world use and adoption of cryptocurrencies aside, one thing is clear. If you make money from cryptocurrencies in any way, you owe government tax. The below infographic shows how much you may owe in short-term or long-term taxes and taxable events.

That said, the actual tax depends on how you acquired the cryptocurrency, how you used it, if you used it, and how much of it that you used. Of course, there are exceptions where you may not owe taxes on your crypto holdings. 

The following are the scenarios where crypto tax applies:

• You sold cryptocurrency for cash (fiat currency)
• You paid for goods or services with a cryptocurrency
• You traded one cryptocurrency for another
• You earned cryptocurrency by mining
• You earned cryptocurrency via airdrop or referral
• You got paid in cryptocurrency by an employer or another party
• You earned crypto rewards

Depending on the scenario and type of transaction, you may have to pay income tax or capital gains tax. Most of the above transactions like getting paid in crypto, getting crypto in exchange for a good or service, mining crypto, and even a hard fork qualify for income taxes. 

Even airdrops of cryptocurrency, which are free rewards, are taxable by the IRS. 

On the other hand, selling your crypto for cash, trading it, using it to buy something, or trading it for another crypto typically falls in capital gains taxes. If you profited in any way from your cryptocurrency, you’ll owe capital gains.

For the most part, the same income tax and capital gains tax rules apply to crypto that does to other capital assets or properties (not real estate, though) like stock or perhaps vintage art. 

What Crypto is Not Taxable

There are specific scenarios where you’re not liable to pay crypto tax:

• Buy and hold cryptocurrency
• Donate in cryptocurrency to a tax-exempt non-profit or charity
• Give or receive (you can gift up to $15,000)
• Transfer for yourself

Any cryptocurrency you buy but don’t sell and keep for yourself won’t incur tax. Similarly, any crypto you receive as a gift doesn’t get taxed until you sell or trade it. You can gift someone crypto worth $15,000. You can gift more than that, but then you’ll need to file a gift tax return. 

All About Crypto Gains

Crypto gains, much like capital gains on other assets, are taxable. If you sold a cryptocurrency at a higher amount than what you paid for it initially, you have earned crypto gains. 

A purchase of a good or service also falls under crypto gains as the IRS sees it as a sale of the crypto. However, you’ll also owe taxes if the value of the crypto increases from the time you bought it. 

For most crypto investors, the crypto gains account for the majority of their crypto taxes. 

How Much Do I Owe on Crypto Gains?

The amount of tax you owe on your crypto gains depends on how long you’ve had them. In other words, the tax distinction is based on whether you kept the crypto for less than a year or more than a year. 

If you only owned the crypto for less than one year, you will be liable for short-term capital gain tax. If you own the crypto for longer than one year, you will be responsible for the long-term capital gain tax. Currently, long-term capital gain tax rates are lower than short-term capital gain tax rates, so it may be beneficial for some to hold their crypto longer.

Just like gains, capital losses also account for taxes. If any of your cryptocurrencies lost value, i.e., you sold it for a lesser amount than what you purchased it for, you can claim a capital loss. Claiming a loss can help lower the tax you owe in total. 

In one year, you can declare and use only $3,000 in losses to offset income tax in one year. If the capital loss was higher than that, the amount rolls over to the next year and so on, capped at $3,000 per year. 

Short-term capital gains: The gains from crypto you get within 12 months of purchasing it qualify for regular income tax, which is typically high and depends on where your total income falls in the income bracket. 

Long-term capital gains: The gains from crypto you get after 12 months of purchasing it qualify for capital gains tax rates, which can be up to 20 percent. Those with an overall high income may also have to pay another 3.8 percent as net investment income tax. 

To summarize, how much you owe on crypto gains depends on these factors:

• Whether you realized any gains (or losses) on crypto by any of the actions that qualify as capital gains
• How long you had the cryptocurrency for (short-term vs long-term)
• What your overall income is and what income tax bracket you fall in for federal taxes

Can You Avoid Paying Taxes on Crypto Gains?

If you owe crypto tax either for your income or through any gains you have earned, it’s best to oblige and pay them. However, there are some ways you can avoid paying capital gains tax on your cryptocurrency. 

Never Sell or Trade

The easiest way is to simply not sell the cryptocurrency or use it for a purchase. Remember, the tax is applicable only when you sell it or use it, not if you’re holding (or HODLING) it. 

Now, the market value may have increased, and you may have seen an increase in capital. However, since it has not been realized (you haven’t sold or traded), you don’t have to pay any taxes just yet. You will, though, whenever you sell it for cash. 

Hold Longer Than 1 Year

Also, holding on to it for longer than a year will automatically decrease the tax rate. It will go from a maximum of 37 percent to 20 percent, which is a favorable outcome. 

Claim Your Losses

You can also offset the tax you owe by claiming capital losses on investments not limited to crypto. 

Invest in a Retirement Plan

Other ways of avoiding taxes on crypto are to buy it inside a retirement plan like the IRA (individual retirement account). However, that can be pretty complicated to do with crypto. 

Gathering Your Crypto Transaction Records 

To ensure that you don’t under or overpay taxes and don’t get into trouble, it’s imperative to keep historical records of all your crypto transactions. Those records will be beneficial when you’re filing your tax returns at the end of the year. 

Therefore, keep records of any transactions you make on any coin exchange or with your wallet. Although coin exchanges provide a tax form 1099-B to report transactions and send the same to the IRS, that’s only limited to transactions made on the exchange. You also need proof of your wallet transactions. 

You know the IRS is serious about crypto tax when they include it on the main Form 1040. It has a field that asks whether you made any virtual currency transactions. Here are some of the other forms you may need to file:

• Form 8949: This form is for logging all crypto purchase and sale transactions, including the total coins/tokens you bought or sold, the date of the transactions, the price in dollars, and any gain or loss you made on that transaction. 
• Schedule C (Form 1040): This should be used to declare any crypto you earned from mining and if you received them for a living/business or hobby. Schedule C is for self-employment tax, which mining may fall under, especially if the income exceeded the expenses. 
• Schedule D (Form 1040): This is the form where you report total capital gains and losses on all your investments, including cryptocurrencies. 
• Schedule 1: This form is for reporting any income not listed in Form 1040, which is why it’s used for reporting crypto mining income as a hobby (Line 8). In this case, you don’t have to pay self-employment tax, but you may also not be able to use expenses for deductions. 

Crypto Tax Software

Fortunately, there are crypto tax tools you can use to do all the crypto-specific tax forms for you, as well as record transactions. This makes it incredibly easy and takes the guesswork out for you when preparing your crypto taxes. We’ve made it easy and compiled the .

Tools like Cointracker, ZenLedger, and Koinly can also look up the blockchain for all transactions in correspondence with your wallet and exchanges, including offline cold wallets, and then prepare tax documents with that information. 

These tools only cover crypto taxes and are integrated with the leading tax software like TurboTax that you can use to file your tax returns. TokenTax is another option that provides full service, including both crypto and regular taxes so that you can do everything in one place. 

Using crypto tax software will make the process easier by automating record search and use and ensuring that you’re filing all the proper forms. It’s all paperless and online, so even more convenient for you.

The Benefits of Using a Crypto Tax Professional

By now, you are probably thinking that calculating and filing taxes on cryptocurrencies can be a bit complex (you’re definitely right). Even though crypto tax tools can help file taxes in the US, you might want professional consultation and service in some cases. 

There are crypto tax professionals who specialize in crypto tax laws and regulations. If you’re heavily invested in cryptocurrencies and regularly use them for transactions, using a professional will help you avoid any pitfalls and save time. 

More importantly, using a tax professional for cryptocurrency can ensure that you’re on top of the latest regulations. As you know, the government is still catching up with crypto and blockchain, so the rules can change at any time. 

Moreover, a tax expert can also find ways to reduce the tax you owe with appropriate deductions, loss reports, donations, etc. 

The Risks of Not Paying Crypto Taxes

Although there’s confusion about crypto taxes and the possibility of crypto transactions not being reported on tax forms, it’s highly advisable to pay due taxes on crypto income and gains. 

The consequences of not reporting and paying taxes on crypto can be dire, given that the IRS is actively pursuing such individuals. Although there’s an element of anonymity with crypto and blockchain transactions, the IRS and even the FBI are finding ways to track cryptocurrencies successfully, especially Bitcoin. 

Here are the potential consequences of not paying taxes on crypto:

• You could face an IRS audit or compliance verification. 
• Your crypto assets may get frozen or taken. 
• You may end up paying penalties or interest on unpaid taxes. 

If you have dabbled in cryptocurrency, it’s best to report it on your tax return forms. Even if you haven’t made any gains and technically don’t owe any taxes on it, you should report it on Form 8949. 

The Bottom Line

Crypto tax in the US largely depends on what you do with your crypto investments. In most cases, you’ll owe capital gain taxes if you have earned any profit on crypto. If you get paid, like by an employer, you’ll owe income tax on it. 

The tax forms now accommodate all such transactions, so make sure that you fill out the appropriate paperwork using any free or paid crypto tax software, or better yet, a professional. 

There aren’t any special tax rates for crypto, in particular. The same income and capital gain tax rates apply that are used in general for income and capital assets, respectively.