The amount of income you report establishes your cost basis. Whether you have a gain or loss on the disposal of cryptocurrency depends on the value of the cryptocurrency at the time of disposal measured against the cost basis of that cryptocurrency. Cost basis is the acquisition cost of your cryptocurrency; this includes your purchase price, the value of other crypto given up in exchange for this crypto, or amount reported as income if the crypto was earned.
In late , the IRS issued guidance on acceptable cost-basis methods for calculating gains and losses on cryptocurrency. Prior to IRS guidance, there was nothing indicating what rules applied to assigning cost basis to particular cryptocurrency units that were disposed of. However, the IRS guidance specifically allows for only two cost-basis assignment methods:.
Under FIFO, the first unit of a cryptocurrency you purchased will be the first unit disposed of. Taxpayers can also elect to use Specific Identification. Specific Identification allows a taxpayer to select which particular cryptocurrency unit is being disposed of in a transaction. This allows a taxpayer to optimize the tax calculation in order to minimize any gains or obtain losses.
In simpler terms, the IRS requires a complete set of transaction records when a taxpayer wants to use Specific Identification. Second, the IRS guidance requires that Specific Identification be done on a per account and per wallet basis. TaxBit provides support for Specific Identification on a per account or wallet basis in order to legally minimize users' taxes and reconcile to any Forms issued by exchanges.
TaxBit automates the process by specifically identifying, by exchange, the assets with the highest cost basis for disposition to reduce taxable gains. TaxBit also is able to provide the complete records necessary to support your use of Specific Identification. TaxBit supports a massive amount of cryptocurrencies so all of your information can be housed in a single, easy to navigate location.
Taxpayers could choose to assign their cost basis under a different method such as Last In, First Out LIFO , but this approach typically makes little sense because they would likely end up with a larger tax bill. This form provides information for a wide range of income payments such as crypto earnings, referral bonuses, and other income. Forms B report cost basis when available. Gains reported on Forms are taxed pursuant to capital gains treatment instead of ordinary income.
A few cryptocurrency exchanges have issued Forms K—an information return that sums up the total value of electronic payments a user has received throughout the year, such as those made with a debit card, credit card, or an online payments system like PayPal. Form K is intended for users accepting payments through electronic means rather than individuals selling property such as cryptocurrency.
Forms K issued by some exchanges report only the total value exchanged and fail to include proper adjustments for cost basis. Prior to , certain investment-related expenses were eligible for itemized deductions. However, fees incurred when conducting cryptocurrency trades still provide a tax benefit.
A fee incurred in conjunction with the acquisition of cryptocurrency can be added into the cost basis of those units. Conversely, a fee paid upon the disposition of a cryptocurrency unit can be deducted from the proceeds received. The United States distinguishes between two main types of income—ordinary income and capital gain income. Capital gain income can be long-term or short-term. If you hold a particular cryptocurrency for one year or less your transaction will constitute short-term capital gains.
Short-term capital gains are added to your income and taxed at your ordinary income tax rate. The IRS allows investors to claim deductions on cryptocurrency losses that can lessen their tax liability or potentially result in a tax refund. When offsetting your capital gains with losses, pay attention to the holding period of the assets:.
The IRS appears to pay close attention to individuals that received a Form from an exchange and will use its computer system to check the Form information against what a taxpayer reports on their tax return. Honest answers are always recommended. TaxBit is experienced in resolving cryptocurrency audits.
Many cryptocurrency tax softwares will provide a taxpayer with tax forms, but offer no additional information about how gains and losses were calculated. Learn more about responding to CP notices in our article. FinCEN responded that virtual currency does fall within the scope of the governing regulation 31 C.
TaxBit automates the process of producing the necessary tax forms for cryptocurrency traders. After a taxpayer downloads Forms from their TaxBit account, they can incorporate the completed forms in their full tax return. If a taxpayer is filing their own taxes, Forms easily can be uploaded onto popular tax-filing software such as TurboTax, TaxAct, or TaxSlayer.
Alternatively, if the taxpayer uses an accountant to file their tax return, they can provide their accountant with the completed tax forms. Keeping up with all the paperwork and reporting regulations for digital asset transactions can be laborious and time-consuming. With the dawn of DeFi - there are many more ways to earn crypto.
The IRS hasn't released specific guidance on many of these transactions just yet, but that doesn't mean you won't pay tax on them. Examples of new ways you can earn crypto from DeFi include:. There's also many earn-to-engage platforms that have sprung up in recent years where the crypto you receive could be considered income.
As we said above, for many of these transactions - particularly newer DeFi protocols - there is not yet any clear IRS guidance on the tax these may be subject to. However, as earning crypto through staking and mining is considered income, it is highly likely that earning through these other platforms would be considered income from a tax perspective as well. It is advisable to speak to a crypto tax accountant for bespoke advice on these investments.
Examples of potential crypto income include:. Yes and no. It all depends on what you're buying your crypto with as to whether you'll pay tax. Let's break it down. However, it's really important you keep records of your crypto transactions. This is so you can keep a detailed account of your cost base, so you can later calculate your crypto capital gains and losses accurately when you later dispose of crypto assets.
Good news, if you're simply buying and HODLing crypto, you don't need to pay tax even if the value of your crypto increases. You'll only have a taxable event when you sell, trade or spend that crypto. Swapping one crypto for another and thinking you'll avoid paying tax? Think again. Swapping crypto for crypto is taxable. Wondering if crypto to crypto is taxable or whether you pay taxes on crypto trades? The answer is a resounding yes.
The IRS views this as two separate transactions. You're then buying ETH at market value. Even though you never received any fiat currency, you still need to pay tax on the sale of the BTC - not the purchase of the ETH. Buying crypto with stablecoins is viewed the same way as swapping crypto for another crypto - so it's subject to Capital Gains Tax. Of course, you may not actually pay any tax on this specific transaction.
This is because your cost base and your disposal value are likely to be the same - because stablecoins are pegged by a reserve asset like USD. So for example, let's say you wanted to buy 0. The price of 0. Despite this, you'll still need to record and report these transactions to the IRS as taxable events. Yes - you'll pay tax when you sell crypto in the US.
But the amount you pay will vary depending on how long you've held your asset and your regular income. You'll pay short-term Capital Gains Tax on crypto held for under a year and long-term Capital Gains Tax on crypto you've held for more than a year. If you sell your crypto asset for fiat currency after owning it for less than a year, you'll pay short-term Capital Gains Tax. This will be at the same tax rate as your Income Tax rate.
If you sell your crypto asset for fiat currency after owning it for more than a year, you'll pay long-term Capital Gains Tax. So even though you made a larger capital gain from your second transaction - you paid less tax thanks to the long-term Capital Gains Tax rate.
Selling your crypto for another crypto is viewed exactly the same as selling your crypto for a fiat currency. It doesn't matter which cryptocurrency you're selling it for - whether it's a stablecoin or an altcoin - it's still a taxable event. You'll pay short or long-term Capital Gains Tax on any capital gain you make from the transaction. The IRS has confirmed that when you're moving crypto around between your own wallets - this isn't seen as a disposal and you don't need to report it or pay Capital Gains Tax.
However, nothing is quite so straightforward in the world of crypto and transactions like adding and removing liquidity may get a little more confusing from a tax perspective. Moving crypto between your own wallets is a tax free event. You don't need to record these or report them to the IRS. Having said that, it's important to keep track of these transactions because if you're paying a transfer fee in crypto - this is subject to Capital Gains Tax.
Chances are if you're transferring crypto from one wallet to another - you may pay a transfer fee for the privilege. If you're paying this in fiat currency, this is tax free. However, more often than not you're going to be paying for this transfer fee in cryptocurrency.
In other words, you're spending crypto. This is a taxable event. So while transfers are tax free, transfer fees are not if you paid the fee in cryptocurrency. You'll need to calculate your cost basis and capital gain or loss. The IRS has not yet issued clear guidance on whether transfer fees could be added to the cost base of an asset. While transaction fees definitely can be, it is unclear whether transfer fees would fall into the category of maintaining an asset - which are not allowable as part of a cost basis.
You're charged a flat fee of 0. You're paying in ETH - so you're disposing of your cryptocurrency. So you need to calculate your cost basis and the fair market value of your crypto at the point of disposal. To keep it simple, let's say the price of ETH hasn't changed since you bought it. This is your disposal - you need to report this to the IRS as a disposal, regardless of the fact you have no capital gain or loss.
Of course, doing this for every transaction can be time-consuming, but Koinly can help you do this with our "treat transfer fees as disposals" setting. If you're adding or removing liquidity from various DeFi protocols, on the surface, this doesn't look like a taxable event. You're not disposing of your crypto and these transactions are more akin to a transfer. However , if you receive a token in exchange for your share in the liquidity pool, this could be viewed as a crypto-to-crypto trade and subject to Capital Gains Tax.
Each DeFi protocol works slightly differently - your best bet here is to speak to an experienced crypto accountant to ensure you remain tax compliant. Airdrops and hard forks are taxed as income in the US - so you'll pay Income Tax. The bad news keeps on coming because when you later dispose of an crypto asset you received through an airdrop or hard fork - you'll also pay Capital Gains Tax.
To figure out how much Income Tax you need to pay, calculate the fair market value of your airdropped crypto on the day you receive it and apply your income tax rate. You receive 1INCH tokens from an airdrop. Your tokens are subject to Income Tax, so you need to calculate their total worth. You've already paid Income Tax on your airdropped coins and you later decide you want to sell them so you can invest in something else. Airdropped coins or tokens are viewed exactly the same way as any other cryptocurrency from a tax perspective, so you'll pay Capital Gains Tax when you later dispose of airdropped crypto by selling it, trading it or spending it.
Your cost base for your airdropped coins will be the fair market value on the day you received them. We'll use the same example as above to explain. You sell your airdropped 1INCH tokens a couple of days after. You'll pay the short-term Capital Gains Tax rate as you haven't held your asset for more than a year.
You won't pay any tax as a result of a soft fork because you don't receive any new coins or tokens as a result of a soft fork. So you don't have any income to recognize from a tax perspective. The IRS is very clear that when you receive new coins or tokens due to a hard fork, you'll pay Income Tax as well as Capital Gains Tax for any disposals later on. On the day you receive your new coins, you'll pay Income Tax. Like with airdrops, to calculate the amount of income, you'll identify the fair market value of the coins or tokens on the day you received them.
This figure is also your cost basis. When you later spend, sell or trade coins from a hard fork, you'll pay Capital Gains Tax. Your cost basis the fair market value of the coins or tokens on the day you received them. Subtract your cost basis from your sale price to figure out your capital gain. This is your capital gain. It's good news for US crypto investors when it comes to giving the gift of crypto or spreading the love with a crypto donation.
In most instances, these events are tax free and even tax deductible. This allowance is per person, so you can give multiple gifts up to the limit to different people. You may also need to file a Form if you gift more than the allowance. Rather, the cost basis is inherited by the recipient which will be used to calculate capital gains if they eventually sell the asset.
The good news keeps on coming because whoever you gift your crypto to also doesn't need to pay tax on receipt of the gift. The recipient will inherit the cost basis of the crypto when they're given the gift, so if you're sending a gift, make sure to send this information over to them too. If you don't have this information yourself, then their cost basis will be the fair market value of the gift on the day they receive it.
You'll pay Capital Gains Tax if you dispose of your gifted crypto by selling it, trading it or spending it. The cost base of gifted crypto is inherited. This means the recipient takes on the cost base of the original asset from the sender. If the cost base of the sender is unknown, you can use the fair market value of the crypto on the day you received it as the cost base.
The IRS is very clear that when you donate crypto to a registered charitable organization - you won't realize a capital gain or loss, so you won't pay Capital Gains Tax. You can even claim charitable donations as a tax deduction.
Your charitable contribution deduction will be the fair market value of the crypto on the day you donated it. However, in the United States, check a charity's c 3 status with the IRS' exempt organization database. A charity must have c 3 status if you plan to deduct your donation on your federal taxes. However, the Income Tax benefits of non-cash donations differ to the tax benefits of cash donations and any donations of crypto will be considered non-cash donations, including stablecoins.
Any unused amounts can be carried forward to the following 5 tax years. This was a temporary measure as part of the CARES act; the standard deduction rules apply again from Because of the enhanced deduction available for cash donations, a taxpayer may wish to cash out their crypto first before donating in fiat. Whether this would be preferable from a tax perspective will depend on the potential Capital Gains Tax owed on the cash-out.
It's important to note that if you're self-employed and running a crypto mining business, you'll also need to pay Self Employment Tax to cover your Medicare and social security contributions. Any crypto you receive as a result of mining - you'll pay Income Tax based on the fair market value of the crypto on the day you received it. You'll also pay Capital Gains Tax if you later sell, trade or spend any crypto you received as a result of mining activities.
Confusing - the term staking gets used interchangeably in crypto. It can refer to both DeFi lending and proof-of-stake cryptocurrencies. From a tax perspective, this matters because they may have different tax implications. It's very similar to mining crypto as part of a PoW mechanism - a network participant gets selected to add the latest batch of transactions to the blockchain and earn crypto in exchange.
There is an argument that because you are creating newly generated coins, you should not be taxed on the receipt of the coins - the argument uses the analogy of creation of other property such as a manufacturer creating a computer who would not be taxed on the value of the computer following the completion of manufacturing, but only once sold to an eventual customer. On the other hand, DeFi lending lets you lend your crypto through a given protocol - like Aave - and receive interest in the form of crypto from borrowers on the other side of the transaction.
DeFi lending is much more comparable to a typical lending arrangement whereby you provide capital in return for interest, with the interest rewards being taxable as income. The IRS hasn't released any official guidance on staking rewards and how they're taxed. However, for a long time it was presumed that as proof of stake rewards were similar to mining rewards, they would be taxed in a similar vein. As above, mined coins are subject to Income Tax based on the fair market value at the point you receive them.
However, a recent court case filed against the IRS suggests this might not be the case in the future. A couple who staked Tezos attempted to claim a refund on their staking rewards for - which the IRS denied with no clarification. So they filed against the IRS and were offered a refund in December The couple have refused the refund, stating that they wish to set the legal precedent that staking rewards from PoS should be viewed as the creation of new property and subsequently only subject to Capital Gains Tax on disposal, not Income Tax on receipt of the newly created tokens.
The case is on-going and we'll update this guidance as soon as there is an outcome. The tax for crypto trading such as margin trading, futures and other CFDs is a little complicated, so let's break down the taxes on crypto trading. If you're seen to be trading as an individual investor - you'll pay Capital Gains Tax on profits from margin trades, futures and other CFDs.
So when you open a position, you won't pay tax. It's only when you close your position that you'll realize a capital gain or loss and pay Capital Gains Tax. The same short-term and long-term Capital Gains Tax rates apply to these transactions. When it comes to crypto futures in particular - if you're trading regulated crypto futures, these have a more favorable tax treatment. Of course, the majority of crypto futures products are unregulated so this rule would not apply, but for those trading at scale, it is well worth investigating regulated crypto futures products to benefit from this tax treatment.
In the instance of liquidation - when your collateral is sold - this is a disposal from a tax perspective and therefore should be reported to the IRS. DeFi is still pretty new and it's constantly evolving, offering investors new opportunities to make money. All this to say, the IRS hasn't yet issued clear guidance on specific DeFi transactions and how they're seen from a tax perspective.
Don't jump for joy just yet. That doesn't mean you won't pay any taxes on your DeFi transactions. Instead, investors need to look at the current guidance on crypto transactions and infer the likely tax on their DeFi transactions. At a basic level, the tax you'll pay depends on whether you're seen to be 'earning' crypto or 'disposing' of crypto.
Remember, earning crypto is anytime you're receiving new coins or tokens as a result of your transactions. This would cover many DeFi transactions. Meanwhile, when you're trading, selling or spending tokens on DeFi platforms - this would be subject to Capital Gains Tax. In summary, we can infer that the tax treatment of DeFi would likely break down into the following tax treatments:.
We recommend speaking with an experienced crypto accountant for clear guidance on DeFi tax to remain compliant. Anytime you're seen to be 'earning' from DeFi - whether that's new coins or tokens - it's likely that the IRS will view this as additional income and you'll pay Income Tax based on the fair market value of the asset in USD on the day you received it.
Anytime you sell or trade a coin or token on a DeFi protocol, this is likely to be viewed as a disposal from a tax perspective, making it subject to Capital Gains Tax. You'll pay tax on any profits as a result of a disposal. They are effectively member-owned communities without central leadership. Instead of a small Board of Directors making decisions about the company, DAOs enable the community of token holders members to vote on the future of the organization.
A good example of this is Uniswap. Holders of UNI tokens vote on issues relating to the protocol - for example, how transaction fees are used and what new features to add. For example, they might receive a share of the profits which result from the activities of the DAO or they might sell their DAO tokens to investors. However, given the DAO is not a registered entity in any jurisdiction and has no central control, it cannot pay taxes itself.
Under this interpretation, any income passed on to the members of the DAO would likely be subject to Income Tax, and sale of DAO tokens which have appreciated since acquiring them would be subject to capital gains taxes. Thinking of heading to Home Depot to pay for your renovations in Bitcoin? You might be in for a surprise tax bill because spending your crypto on goods and services is subject to Capital Gains Tax.
Spending your crypto is subject to Capital Gains Tax as it's a disposal of an asset. The IRS views this as you selling your crypto for market value. So you'll need to calculate your cost basis and subsequent capital gain or loss for these transactions. To do this, just take the cost base of your crypto asset and subtract it from the fair market value of your crypto asset in USD on the day you spent it. You need to keep detailed records of your crypto transactions.
The IRS says taxpayers need to maintain records that are sufficient to establish the position taken on their tax return. Therefore as a minimum, you should keep records of your crypto transactions including:. The IRS can audit tax returns from up to six years ago, so best practice is to keep these records for at least six years to ensure you have the information you need should you face an audit.
This is easy to do with a crypto tax app like Koinly. It actually gets a lot more complicated at this point. If you've got multiple crypto investments and transactions - it all starts to look like a bit of an uphill battle. First things first, you'll need to figure out your cost basis.
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Do you have to pay taxes on crypto? The IRS classifies crypto as a type of property, rather than a currency. crptocurrencyupdates.com › Investing. Transferring crypto to yourself: Transferring crypto between wallets or accounts you own isn't taxable. You can transfer over your original cost basis and date.