The Internal Revenue Service (IRS) in the U.S. identifies cryptocurrency holdings as property, making crypto-related activities potentially taxable. For this reason, you must report gains and losses on each crypto transaction or any crypto earnings. The IRS audits two years in arrears. This means, if the current year is 2021, they will be auditing the year 2019.
Quick Facts About US Crypto Tax
- According to IRS, cryptocurrencies should be treated like stocks or bonds.
- 2019 was the first time the IRS asked taxpayers on form Schedule 1 whether they had dealt in crypto assets, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
- Crypto tax rate in the US is basically the same as the federal tax rate for short-term capital gains, which can range from 10% to 37% and 0-20% for long-term capital gains depending on your income bracket. Short term crypto capital gains apply to a holding period of 365 days or less.
- If you sell cryptocurrency for less than what you bought for, the loss will reduce your tax for crypto trading.
- 1 Taxable Crypto Events in the U.S.
- 2 Non-Taxable Events
- 3 Reporting Crypto Gains and Losses
- 4 How to Report Cryptocurrency on Taxes in the U.S
- 5 How to Report Cryptocurrency on Taxes in 5 Easy Steps
- 6 The Cryptocurrency Tax Rate
- 7 Crypto Tax Software
- 8 How to Legally Avoid Taxes on Crypto in the U.S
- 9 Crypto Tax Free Countries / Cryptocurrency Tax Haven Countries
- 10 Final Thoughts on US Cryptocurrency Tax
Taxable Crypto Events in the U.S.
A taxable crypto event is any event in which you realize or trigger profits from your cryptocurrency activities. In the U.S, taxable events fall into two categories: capital gains tax events and income tax events.
Capital Gain Tax Events
Capital gains can be short term or long term.
- Short term capital gains. This is when your crypto coins have a holding period of 365 days or less. They are usually added to your income and taxed at your ordinary income tax rate.
- Long term capital gains. This is when your coins have a holding period of more than 365 days and they will be taxed at favorable long-term capital gains tax rates.
Short term and long-term cryptocurrency gain tax events include selling crypto for U.S. dollars, paying for goods and services with crypto, or exchanging one cryptocurrency for another.
Income Tax Events
Income tax events include earning crypto from stacking and liquidity pools, receiving crypto via an airdrop, and receiving crypto payment for carrying out a task. Other income tax events are earning crypto interest from decentralized finance and earning crypto mining income from transaction fees and block awards.
Some non-taxable events in the U.S. include buying crypto with U.S. dollars and keeping it within the exchange where you made the purchase, transferring crypto between personal crypto wallets, gifting cryptocurrency (smaller gifts), transferring crypto between exchanges, or donating crypto.
Do you pay tax on crypto loans? No, receiving funds after using your cryptocurrency as collateral is not a taxable event. It is also not taxable to the lender.
Reporting Crypto Gains and Losses
Both capital gains and losses on crypto activities are reported. Although you won’t have to pay taxes on cryptocurrency losses, you can use these losses to reduce your crypto tax liability through crypto-tax harvesting. If your losses exceed your gains, you can deduct the difference on your tax return up to $3,000 in losses per year. However, if your net capital loss for a particular year exceeds the deductible amount, you can carry forward the excess into the next year and deduct it on that year’s return.
How to Report Cryptocurrency on Taxes in the U.S
The IRS holds you responsible for reporting all your crypto-related transactions. Therefore, you will report your cryptocurrency taxes via the IRS Form 8949, Schedule D, and the Form 1040 Schedule 1 and/or the Form 1040 Schedule C if necessary.
- Crypto Tax Form 8949. Form 8949 is used for cryptocurrency capital gains and losses. If you make any crypto sale during the tax year, you will be required to report it on this form.
- Crypto Tax Form 1040 Schedule 1. This form is used to report income made in crypto.
The tax filing service TurboTax has partnered with Coinbase to allow its customers to receive their tax refunds in cryptocurrency. USD tax refunds will be automatically deposited into a Coinbase account and instantly converted to cryptocurrency.
How to Report Cryptocurrency on Taxes in 5 Easy Steps
Gather All your Cryptocurrency Transaction Details
To easily fill your crypto tax forms, ensure you have all the necessary details of your crypto transactions. Crypto exchanges make this information readily accessible for you. Some crypto exchanges will provide a Form 1099-B at the end of each tax year. If they don’t, you can get it from the exchange’s website.
Fill Out your Crypto Tax Form 8949
Report all your cryptocurrency activities, including those that generated taxable gains and those that did not on the crypto tax form 8949. This form has separate sections for short term and long-term capital gains. The details you are supposed to provide for each virtual currency transaction include:
- Name of the cryptocurrency.
- The dates you acquired and disposed of the cryptocurrency.
- The cost basis and fair market value on purchase and disposition.
- The net capital gain or loss.
Transfer your Transaction Details to Schedule D
After filling out crypto tax form 8949, tally up all the final amounts and transfer the totals over to Schedule D. Ensure that the totals you get after tallying the final amounts are similar to what you report on Schedule D. Wrong reports attract penalties.
Report Crypto Income on Schedule 1 or Schedule C
After reporting your capital gains and losses, you’ll need to report any ordinary income from mining, hard forks, stacking, or interest. You can report your crypto income either on Schedule 1 or Schedule C depending on how you classify the crypto activity; as a hobby or a business. If your activity is classified as a hobby, you will report it on Schedule 1 but if it’s a business, you will fill out Schedule C.
Bitcoin mining schedule C: If you operate a Bitcoin mining business, you need to report your crypto mining income on Schedule C and deduct your expenses.
Complete and File your Tax Return
After filling out Forms 8949, Schedule D, Schedule 1, and Schedule C, complete the rest of your tax return and file it.
The Cryptocurrency Tax Rate
The cryptocurrency tax rate depends on your income and holding periods (how long you have held the cryptocurrency). The holding period dictates whether you pay income tax rates or capital gains tax rates. If you hold your crypto assets for at least one year, the IRS considers your gains to be long term and you will be taxed at discounted rates.
Crypto Tax Software
Tracking and generating reports of each virtual currency’s cost basis, fair market value, purchase and disposition dates, gains and losses can be difficult. This is especially if you are an active crypto trader, move your crypto between private wallets or store them in multiple places. There are several crypto tax software that can help to automate and file your cryptocurrency taxes. They include TaxBit, CoinTracker, TokenTax, CryptoTrader.Tax, CryptoTaxCalculator, ZenLedger, Blockpit, Koinly, Crypto.com, and more.
How to Legally Avoid Taxes on Crypto in the U.S
There are several ways through which you can legally reduce or eliminate the taxes you may owe in the U.S. These include the following:
- Holding your crypto for the long term. As long as you are holding crypto as an investment and it’s not earning any income, you don’t need to pay taxes for it.
- Gifting cryptocurrency. Here, both the recipient and the person gifting crypto won’t have to pay a gift tax. You can give up to $15, 000 per person per year without filing a gift tax return.
- Offset crypto gains with losses. In the U.S. capital gains and losses can offset each other (tax-loss harvesting).
- Donate to charity. If you hold your crypto for at least one year before donating it, you won’t pay taxes for it.
- Sell assets during a low-income year. You can sell your crypto holdings in years that you are sure to pay taxes at a lower tax rate.
Crypto Tax Free Countries / Cryptocurrency Tax Haven Countries
There are crypto tax friendly countries that have established favorable tax regulations while others do not offer taxes on cryptocurrency gains. However, this will depend on your specific circumstances. Crypto tax free countries include the following:
- Belarus (until 2023 when review of the law will be done)
- El Salvador (foreign investors are exempt from paying tax on their Bitcoin gains)
- Puerto Rico (investors don’t pay tax on crypto assets they obtained after moving to the island)
- Malta (long-held cryptocurrencies like Bitcoin are tax exempt)
- Portugal (crypto trading is tax exempt because it is not considered investment income)
- Switzerland (profits made by individual through investing and trading are tax-exempt)
- Singapore (capital gains tax does not exist in Singapore)
- Hong Kong (if crypto assets are bought for long-term investment purposes)
- Malaysia (cryptocurrencies don’t qualify for capital gains tax)
- Cayman Islands (offers tax exemptions on a number of crypto activities)
- Bermuda (no tax on crypto assets)
- Slovenia (no capital gains tax on individuals selling Bitcoin)
- Germany (no tax for cryptocurrency held for over a year)
Final Thoughts on US Cryptocurrency Tax
Although cryptocurrencies are virtual, they have real-world tax consequences in the U.S. and if you fail to pay the tax you owe, you will be subject to interest and penalties. It is important to know that tax laws change constantly. As such, you will need to stay up to date on any changes or consult a tax advisor or expert to help you follow all the applicable tax rules. If you make significant income out of cryptocurrency, it is advisable to hire a crypto tax CPA in the US to help you with filling.