The Investor’s Guide to Crypto Taxes


  • Crypto mining creates ordinary income equal to the fair market value of the cryptocurrencycurrency on the day received — any subsequent change in value causes capital gain or loss when the miner sells the cryptocurrency
  • If you use multiple exchanges or wallets and commonly transfer assets between these various platforms, the tax information you get from these platforms in the form of a 1099 might be wrong

US citizens are required to pay taxes on cryptocurrency and all digital assets — and will continue to, no matter how we change its classification. With plans in recent proposed legislation to expand the number of IRS agents and reporting requirements, it is clear the regulator is cracking down. 

Failure to properly report and pay tax on cryptocurrencycurrency transactions can lead to interest, penalties and potential criminal charges, especially as the IRS ramps up enforcement around digital assets. With help from Ledgible, the leading professional-first cryptocurrency tax and accounting software company, we hope to ease some of that burden. We will highlight important tax planning considerations, provide the latest IRS guidance and offer updates on potential legislative tax code changes.

How is cryptocurrency taxed?

The IRS taxes cryptocurrencycurrency as property, which means most of the time it applies a capital gains tax. Regardless of exception, it is important to understand that a cryptocurrency sale always triggers a taxable event. The IRS requires that you report any gains, even if it is made in an alternative digital asset.  

Notably, however, current IRS guidance around cryptocurrencycurrency is lacking, as the agency has held off on detailing the exact tax scenarios of specific cryptocurrency trades, but regulation is coming. Both the Infrastructure Act and the Inflation Reduction Act contain provisions around digital assets that are sure to shift the tax reporting landscape as the industry matures.

Property

In Notice 2014-21, the IRS explained that investor intent is the main reason why it considers cryptocurrency property. It says that because no jurisdiction has adopted it as legal tender, they only see price speculation as the reason for purchasing cryptocurrency.

But in 2021, El Salvador officially adopted bitcrypto-coin as legal tender, followed by the Central African Republic in 2022. Some argue that this trend could call the IRS’ treatment of cryptocurrencycurrency as property into question. But classifying cryptocurrency as currency may not be in the token holder’s interest. Internal Revenue Code (IRC) Section 988 treats gains or losses from foreign currency transactions as ordinary income. So a change in classification would therefore result in far higher tax rates.

Commodity

Since April 2022, three separate bills introduced to Congress — the Digital Commodity Exchange Act of 2022, the Responsible Financial Innovation Act and the Digital Commodities Consumer Protection Act of 2022 — would make the Commodity Futures Trading Commission (CFTC) the primary regulator of cryptocurrencycurrency spot markets. This could cause the IRS to treat cryptocurrencycurrency as a commodity.

For most investors, gains on the sale of commodities contracts are treated as 60% long-term capital gains and 40% short-term capital gains. “Mark-to-market” rules for commodities contracts also recognize gain and loss on open contracts at the end of the year.

However, even if cryptocurrencycurrency becomes treated as a commodity, crypto-coins themselves would likely not constitute a commodities contract. For example, bitcrypto-coin (BTC) would qualify for capital gains treatment as a commodity, but the 60-40 and mark-to-market rules would likely only apply to bitcrypto-coin futures contracts.

IRS guidelines for the US

As noted before, the IRS has issued little guidance on cryptocurrencycurrency taxation. Notice 2014-21 describes the basic tax treatment of virtual currency and contains a brief FAQ. 

The IRS also maintains a more detailed virtual currency FAQ on its website. However, this FAQ does not bind the IRS or protect the taxpayer from penalties.

With so little guidance on crucial tax issues, investors, businesses and CPAs need the expertise of a cryptocurrency tax specialist. In fact, cryptocurrencycurrency investors have already taken the IRS to court over staking rules and won, causing some cryptocurrency tax tracking platforms to make changes to their staking categorization rules.

Tax guidelines outside the US

Crypto tax guidelines outside the US vary widely. Countries such as China, Algeria and Egypt have banned cryptocurrencycurrency altogether, while Belarus, El Salvador, Singapore, Malaysia and Georgia allow mostly tax-free cryptocurrencycurrency trading. Crypto held for more than a year in Germany incurs no tax, but France levies punishing taxes on cryptocurrencycurrency gains. Japan taxes cryptocurrency gains as ordinary income rather than capital gains.

Countries where there are no taxes on cryptocurrency

While the US and other large economies like the UK and China are continuing to crack down on cryptocurrency trading, some countries have positioned themselves as tax havens for cryptocurrency traders. Particularly, some countries require traders to pay zero taxes on the transaction. The top 10 leading cryptocurrency tax-free countries are:

  • Portugal
  • El Salvador
  • Cayman Islands
  • Malaysia
  • Malta
  • Switzerland
  • Puerto Rico
  • Singapore
  • Belarus
  • Germany

All of these countries either have a 0% cryptocurrency tax rate or have rules and regulations surrounding cryptocurrency that allow users to pay essentially zero taxes in most scenarios. However, if you don’t find yourself in one of these tax havens, nor do you have plans to move, then cryptocurrency taxes are likely a reality for you. 

When do you pay taxes on cryptocurrencycurrency?

Cryptocurrency investors incur capital gains tax when they sell coincurrencycurrency. And they pay tax on cryptocurrency gains when they file that year’s tax return or make quarterly estimated tax payments. In addition to this, businesses and institutions that hold or trade cryptocurrency have to track the assets on their balance sheet and pay taxes on their gains as well.

Crypto sales (disposal of assets)

Crypto capital gains primarily occur due to a sale or a disposal of the asset. Exchanges count as sales — including trading one cryptocurrency for another. An investor who trades bitcrypto-coin they’ve accumulated since 2015 for ether would have to comb through seven years of transactions — unless their cryptocurrencycurrency tax software does it automatically.

It’s also important to note that if you use multiple exchanges or wallets and commonly transfer assets between these various platforms, the tax information you do get from these platforms in the form of a 1099 might be wrong. Because each platform only has access to data from their own platform, they can’t accurately calculate your tax information for cryptocurrency assets that have moved between exchanges, wallets or platforms. This necessitates the use of a cryptocurrency tax tracking platform to aggregate, normalize and make all of this data eligible for tax filing.

Crypto losses

Cost basis (see below) exceeding a cryptocurrency’s sale price causes a capital loss for investors. For individuals, capital losses can offset capital gains from traditional assets and cryptocurrency as well as up to $3,000 of ordinary income. Any unused loss carries forward indefinitely to subsequent years. C corporations may only use capital losses to offset capital gains, then carry any excess loss back for three years and forward for five years.

According to the IRS, you can claim a capital loss from selling cryptocurrencycurrency by reporting it on Form 8949, then Schedule D of the individual or corporate tax return. While this may sound simple, properly creating an accurate 8949 form for cryptocurrencyassets come tax time is easier said than done.

The Wash Sale Rule (and how it applies to cryptocurrencycurrency)

The wash sale rule disallows deducting the loss on a security sale if the investor acquired substantially identical securities (or related options) within 30 days of the sale.

For example, say you buy shares in the Schwab Total Stock Market Index and the price drops. If you decide to buy shares in the Vanguard Total Stock Market Index within 30 days, you can’t deduct the loss in your taxes. If an investor were to make a similar trade, they would want to add the disallowed loss to the basis of the identical security to avoid paying a higher capital gains tax in the future. 

The wash sale rule interferes with tax loss harvesting — deliberately realizing capital losses to offset capital gains. But it does not apply to cryptocurrencycurrency because the IRS considers cryptocurrency as property rather than securities. Any legislation that changes cryptocurrency’s tax status to a security would cause the wash sale rule to apply. Some proposed bills, including President Biden’s Build Back Better Act, would directly close this loophole, however, lines in recent legislation regarding expanding the wash sale rule to cryptocurrency were removed, signaling the rule is here to stay for now. Most recently, the expansion of the wash sale rule to cryptocurrency made it into a draft of the Inflation Reduction Act, but the provision was cut in the bill that passed both the Senate and House.

Tax loss harvesting

With the wash sale rule and its lack of application to cryptocurrency here to stay for now, cryptocurrency investors can take advantage of tax loss harvesting strategies for cryptocurrency. This essentially means that active cryptocurrency traders can book their losses, harvest the loss and immediately buy back into the cryptocurrency. What this allows is traders to maintain their same exposure to the cryptocurrencyasset for future gains, but book the capital losses onto their current tax year, essentially pushing their tax burden down the line to future tax years.

How to track gains and losses

To calculate a capital gain or loss on a cryptocurrencycurrency, you subtract the cost basis from the sale proceeds. Cost basis is simply the fair market value of the cryptocurrency when the investor originally acquired it, including transaction fees. The formula for cryptocurrency cost-basis is:

(Crypto Purchase Price + Fees) / Quantity

Every individual cryptocurrency purchase, even of the same token, has its own cost basis. This makes detailed tracking vital. Without detailed records, the IRS defaults to the FIFO (first in, first out) method—assuming the first crypto-coins bought are also the first sold. 

For example, say you bought 5 BTC at $20,000 in May and then 5 BTC at $40,000 in June. And then in August, you sold 3 BTC at $25,000. Under the FIFO method, the IRS will assume that the cost basis of those 3 BTC was $20,000.  

However, according to Ledgible, the HIFO (highest cost basis in, first out) method may decrease current year tax by selling the highest cost basis crypto-coins first. If you used this method of accounting in the above example, the cost basis for the 3 BTC would be $40,000 — resulting in a capital loss of $20,000.  

Legible notes that accounting for this gets complicated quickly, but that its automated transaction tracing and cost-basis calculation tool can help investors and CPAs save time and minimize legal tax burden. The IRS can also track cryptocurrency by forcing exchanges to report tax information, like through the proposed 1099-DA form, making compliance vital. This requirement is something Ledgible also supports institutions and exchanges with.

Purchasing goods and services with cryptocurrency

Buying goods and services with cryptocurrencycurrency usually results in a capital gain or loss, just like a sale. However, if the seller’s main business is selling cryptocurrencycurrency, these sales will be treated as ordinary income. 

Multiple bills introduced in Congress, including the recent Virtual Currency Fairness Act, would exempt small purchases with cryptocurrency from capital gains tax.

Receiving cryptocurrencycurrency for providing goods or services results in wage or business income. Exchanging cryptocurrency for a personal asset (such as new furniture for a home) generates a personal capital gain or loss. But even though it’s required to report these gains, taxpayers can’t deduct personal capital losses.

Crypto mining and staking

Crypto mining creates ordinary income equal to the fair market value of the cryptocurrencycurrency on the day received. Any subsequent change in value causes capital gain or loss when the miner sells the cryptocurrency.

The IRS has attempted to apply the same principle to staking rewards, but currently faces a challenge in court that supposes that cryptocurrency staking can’t be counted as income until the assets are sold, or disposed of.

The Responsible Financial Innovation Act mentioned earlier would delay taxes on cryptocurrency mining and staking until the sale of the cryptocurrencycurrency.

Hard forks

A fork is essentially any change or upgrade to a blockchain protocol. However, because blockchains are decentralized, not every validator has to agree to a fork. If enough oppose a fork, the change can result in a hard fork that creates two versions of the blockchain. Anyone holding tokens prior to a hard fork will own the same number on both chains. This duplication though makes guidance difficult because token holders don’t do anything to receive the new tokens — and some aren’t always aware of the change.

But in Revenue Ruling 2019-24, the IRS states that hard forks create (ordinary) income if the investor receives units of a new cryptocurrencycurrency. Owners of bitcrypto-coin who received bitcrypto-coin cash due to the 2017 hard fork would have ordinary income equal to the fair market value of the bitcrypto-coin cash on the day received.

Trading or minting NFTs

Minting NFTs creates ordinary income equal to the sale price of the NFT. 

NFT traders’ gain or loss equals the sale price minus the cost basis of the NFT. While the IRS has not issued NFT-specific guidance, most tax professionals classify NFTs as collectibles subject to a maximum 28% tax rate. Report collectibles gain on Form 8949 and line 18 of Schedule D.

How much tax do you pay on cryptocurrency?

Selling cryptocurrencycurrency held one year or less creates short-term capital gain or loss taxable at ordinary rates. Cryptocurrency held over one year generates long-term capital gain or loss taxable at a maximum 20% rate.

Long-term vs. short-term capital gains

Short-term capital gains receive less favorable tax treatment than long-term capital gains. Many cryptocurrencycurrency traders buy and sell so frequently that they only incur short-term capital gains, resulting in more tax liability.

2022 Short-Term Capital Gains (Ordinary) Tax Rates

Tax Rate 10% 12% 22% 24% 32% 35% 37%
Single $0 – $10,275 $10,276 – $41,775 $41,776 – $89,075 $89,076 – $170,050 $170,051 – $215,950 $215,951 – $539,900 $539,901+
Married Filing Jointly $0 – $20,550 $20,551 – $83,550 $83,551 – $178,150 $178,151 – $340,100 $340,101 – $431,900 $431,901 – $647,850 $647,851+
Married Filing Separately $0 – $10,275 $10,276 – $41,775 $41,776 – $89,075 $89,076 – $170,050 $170,051 – $215,950 $215,951 – $323,925 $323,926+
Head of Household $0 – $14,650 $14,651 – $55,900 $55,901 – $89,050 $89,051 – $170,050 $170,051 – $215,950 $215,951 – $539,900 $539,901+

2022 Long-Term Capital Gains Tax Rates

Tax Rate 0% 15% 20%
Single $0 – $41,675 $41,676 – $459,750 459,750+
Married Filing Jointly $0 – $83,350 $83,351 – $517,200 $517,200+
Married Filing Separately $0 – $41,675 $41,676 – $258,600 $258,600+
Head of Household $0 – $55,800 $55,801 – $488,500 $488,500+

Reporting cryptocurrency to the IRS

Cryptocurrency-related transactions have become a focal point for the IRS. Accurate reporting and recordkeeping can help ensure any potential audit goes smoothly.

According to Ledgible, it is important to keep transaction logs from exchanges and equivalent records from all off-exchange transactions. Exchanges typically send this data in Form 1099-K, 1099-MISC, or 1099-B.

The cryptocurrency tax and accounting platform said the IRS needs capital gains and losses from cryptocurrencycurrency reported on Form 8949, then schedule D, and finally line 7 of Form 1040. And any ordinary income from cryptocurrencycurrency (such as cryptocurrency mined) also goes on Form 1040. But it recommends working with a tax professional because tracking can be overwhelming and IRS guidance is still a gray area. That way, the professional can help answer any questions the IRS may ask down the road.

This content is sponsored by Ledgible.


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  • Stephen Sylvester

    As a freelance writer and CPA, Stephen Sylvester helps CPA and finance firms turn technical expertise into new clients. He spent years working at a variety of public accounting firms, transforming esoteric regulations and court rulings into concise, actionable reports. Stephen found this process so rewarding that he left the industry to launch his writing business. Enabling CPA and finance firms to demonstrate why future clients need their unique expertise brings Stephen joy.



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