Key takeaways
- The IRS crypto guidance generally treats crypto as a fixed asset, like property, meaning you must record and report any capital gains or losses.
- Each time you make crypto-to-crypto trades, it creates a taxable event, as you are “selling” one cryptocurrency to buy another.
- Short-term trades of less than one year or earnings from mining, airdrops and staking are reported as ordinary income tax.
- There is no “crypto wallet taxation.” Holding or transferring crypto between wallets is not a taxable event and isn’t included in crypto trading tax rules.
Two things are certain in life: death and taxes. While crypto initially avoided having to deal with the United States Internal Revenue Service (IRS), the tax agency has since made it clear that traders must pay taxes on crypto trades.
It is now well-established that cryptocurrency regulations include tax obligations. It’s easy to forget this as you hop onto your favorite exchange to stock up on memecoins.
While exact crypto tax laws vary from country to country, many developed nations take their lead from US legislation.
In the US, every crypto-to-crypto trade is a taxable event that must be recorded and reported on tax returns. However, please note that tax regulations on crypto-to-crypto trades vary by country. While the US considers these trades taxable events, other countries have different rules. Thus, it’s essential to check the specific tax laws in your country to ensure compliance.
Why are crypto-to-crypto trades taxable?
The IRS generally treats cryptocurrency as a fixed asset rather than currency, meaning it’s treated like property, not money.
What does this mean? Well, when you trade one crypto for another, you are selling one asset and buying another — and selling an asset is a taxable event.
So, if you decide to trade Bitcoin (BTC) for Ether (ETH), you are selling Bitcoin to buy Ethereum. The action of selling Bitcoin is taxable.
Every trade you make triggers a taxable event. If the value of the crypto you’re trading has increased since its initial purchase, you’ll owe taxes. It’s also important to track your losses, as you might be able to offset your tax bill.
To avoid nasty surprises, it’s sensible to brush up on what actions create a tax liability with crypto.
Did you know? The IRS uses blockchain analytics to solve cryptocurrency-related crimes, including tax evasion. This has enabled them to seize $10 billion of crypto assets.
Common taxable events in cryptocurrency
Tax regulations are naturally complex, and the tax on digital assets and decentralized finance transactions that crypto traders must pay can add even more complexity during tax season.
Crypto-to-crypto transactions
When you trade one cryptocurrency for another, you must declare any gains. If you held the original crypto asset for over a year, it is classified as a long-term capital gain (or loss). Holdings traded within one year of purchase are short-term capital gains (or losses) and taxed at your ordinary income tax rate.
Mining, staking and airdrops
The IRS treats revenue from mining, staking and airdrops as ordinary income. You must report the fair market value of the crypto on the day you receive it as income. In the future, if you decide to trade these crypto assets, it will trigger another capital gain tax to report.
Selling crypto
Selling your crypto is a taxable event. It’s often referred to as “disposing” of an asset. Whether you exchange it for money, trade it for other cryptocurrencies or swap it for other fixed assets, there is a tax liability.
Buying assets with crypto
If you are thinking of buying a new laptop, car or even a house with your crypto to avoid taxes, you’re out of luck. These events are still taxable, as you are still “selling crypto” to buy these assets.
Gifts and donations
What if you give it all away? Gifting crypto is tax-free in the US, up to $17,000. The receiver takes on the giver’s cost basis and holding period. If you exceed the tax-free limits, it becomes a taxable event. Donors do not have to pay capital gains taxes when making donations to registered charities.
Earning crypto from employment, goods or services
Receiving crypto as payment for work is treated as ordinary income. You simply report the fair market value of the crypto on the day you are paid. Businesses must also record crypto payments as they would any other form of payment.
Simply put, any time you receive or dispose of crypto, it should be recorded, as you have either created a taxable event at that moment or are likely to do so in the future.
Did you know? NFTs are treated as digital assets, just like crypto. So, while collecting, selling and trading NFTs is fun, careful recording and reporting are required.
How to calculate taxes on crypto-to-crypto transactions
Every time you make a crypto-to-crypto trade, you must record and report the gain or loss.
This is done by subtracting the cost basis from the fair market value at the time of the trade.
If the result is a positive number, you have a capital gain, and you’ll need to pay taxes on the trade. If it is a negative number, it’s a capital loss, and it can help offset your tax bill.
- The cost basis is the amount you purchased the crypto for. This is either the amount of fiat currency you paid directly for the purchase or the fair market value of another crypto asset if you make a crypto-to-crypto trade.
- The fair market value is the selling price of your crypto at the time of the trade. You can determine this by referencing your transaction records from the exchange where you make your trade or by checking a reputable price index aggregator such as CoinMarketCap or CoinGecko.
Here’s a step-by-step example:
- You buy 1 BTC for $10,000. (This is the cost basis.)
- You decide to trade it for 30 ETH.
- When you make the trade, 1 BTC is worth $60,000. (This is the fair market value.)
- The difference between what your 1 BTC is worth now (fair market value) and the original price you paid (cost basis) is your capital gain or loss.
- $60,000 - $10,000 = $50,000.
You’ll need to report and pay taxes on all or part of the $50,000 gain. You can explore the table below to work out how much of the gain you’ll need to pay taxes on. For example, if your total taxable income (including capital gains) is $47,025 or less, any long-term capital gains (assets held for over one year) would be taxed at 0%. The remaining $2,975 would be taxed at 15% in this case.
Now that you know how to calculate the total gain or loss, you’ll need to consider whether your sale triggers a short-term or long-term capital gains tax. If you hold the asset for over one year, it is classified as a long-term capital gain. These rates range from 0% to 20% and are often more favorable than short-term capital gain rates. You can use the table below to determine how much tax you’re likely to owe from your long-term capital gains for 2024 based on your tax bracket and filing status.
If you hold the crypto for one year or less before trading or selling, this is a short-term capital gain. It is taxed at the same rate as ordinary income taxes. Federal income tax rates range from 10% to 37%. Your tax bracket depends on your taxable income and filing status for the year.
Understanding the tax consequences of your crypto trades and knowing which tax bracket and category your trades will fall opens up opportunities to minimize your tax bill. Of course, it’s always best to consult a tax expert on the tax implications of crypto trades to ensure your transactions are all tracked and categorized appropriately.
Did you know? All US citizens must answer questions about cryptocurrencies on their income tax forms. Tax filers are required to answer the questions regardless of whether they engaged in any transaction involving digital assets.
Strategies to minimize tax liability
Paying taxes is a headache for most people, but there can be some fun found in learning and applying strategies to minimize your taxes owed.
- Utilizing tax allowances: Many countries, including the US, allow you to enjoy a certain amount of capital gain tax-free. That means cashing out your crypto tax-free!
- Long-term hodling: Long-term crypto holders (hodlers) benefit from capital gains tax rates that are typically more favorable.
- Donating to charity: Generosity has its tax benefits. As the donor, you may be eligible for a reduction in your taxes owed.
- Spread out trades: Slowly selling and trading your crypto over multiple tax years can help you stay in lower tax brackets and enjoy a fresh tax allowance each year.
- Cryptocurrency taxation software: Specialized crypto tax software can help you keep accurate records of all your trades, including any associated fees, and inform you of any crypto tax deductions you may qualify for.
- Tax-loss harvesting: Selling assets at a loss can help offset capital gains.
- Crypto as collateral: Using your crypto as collateral for a loan can realize its value without triggering a taxable event.
What is not considered a taxable event?
If by now you are concerned that every single thing you do with crypto will generate a taxable event, that’s thankfully not the case. There are several actions you carry out without owing taxes in the US:
- Buying crypto with fiat
- Holding crypto, even if it goes up in value
- Transferring crypto between wallets
- Using crypto as collateral for a loan
- Donating crypto to charity
- Receiving or giving crypto as a gift
Tax reporting requirements and forms
Every taxable event must be reported, whether it’s a loss or a gain.
IRS Form 8949 is used to list each trade and its associated capital crypto gains and losses, including:
- Description of the property (e.g., Bitcoin)
- Date acquired
- Date sold or exchanged
- Proceeds (in US dollars)
- Cost basis (in US dollars)
- Gain or loss
Your total gains and losses from Form 8949 are then copied over and included on Schedule D of your Form 1040.
Income received in the form of crypto (staking rewards, salary payments, etc.) should be reported on your 1040 form (Schedule C).
Being thorough, honest and accurate in your crypto tax reporting is critical, as failure to report or errors in reporting your crypto-to-crypto transactions can result in tax penalties.
Did you know? An early Bitcoin adopter known as Bitcoin Jesus — a nickname he acquired from his habit of gifting Bitcoin to people he met — was charged with evading $50 million in Bitcoin tax payments after selling tens of thousands of coins.
Potential penalties for noncompliance
Not reporting crypto-to-crypto trades can lead to severe penalties. The IRS considers these taxable events and expects them to be correctly recorded and reported. Failure to do so may result in serious civil and even criminal tax penalties, including potential fines, interest charges and even prison sentences for violating crypto tax compliance requirements.
If you use cryptocurrencies, you should consult a tax professional on the applicable regulations and reporting requirements. Always keep detailed records and report all crypto trades as required. It’s not just Bitcoin either — altcoin tax reporting is essential, too, when tax season comes around.
Written by Marcel Deer