Yes, you likely have to pay taxes on cryptocurrency. Cryptocurrency is treated as property for tax purposes, which means it is subject to capital gains tax and losses can be deducted. The specific tax implications depend on how you acquire, use, and sell cryptocurrency.
Is cryptocurrency taxable?
Cryptocurrency is generally taxable. The IRS considers cryptocurrency, like Bitcoin and Ethereum, to be property for tax purposes rather than currency. Just like stocks or real estate, you incur capital gains and capital losses that must be reported on your tax return when you sell, trade, or otherwise dispose of your cryptocurrency.
How is cryptocurrency taxed?
Cryptocurrency is subject to capital gains tax when sold at a profit or deductible capital losses when sold at a loss. The capital gains tax rate you pay depends on how long you held the crypto. Assets held for under a year are taxed at ordinary income tax rates up to 37%. Assets held for over a year are taxed at long-term capital gains rates of 0%, 15% or 20% for most taxpayers.
Do I have to pay taxes if I trade one crypto for another?
Yes, trading one cryptocurrency for another is a taxable event. The IRS considers trading cryptocurrency for fiat currency like dollars or other cryptocurrency to be a sale, even if you don’t convert to actual cash. For example, trading Bitcoin for Ethereum would trigger a tax liability on any capital gains from the Bitcoin.
Do I have to pay taxes on gifts of cryptocurrency?
If you receive cryptocurrency as a gift, you do not have to pay taxes on it. The person gifting you the crypto would not owe taxes either, unless the crypto has gained in value since they acquired it. However, when you eventually sell or trade the gifted coins, you will owe capital gains taxes based on the market value when you received the gift.
Do I owe taxes on cryptocurrency mining?
Cryptocurrency mining is generally considered taxable income. The fair market value of any coins mined must be reported as income. This is based on the value of the crypto when it was successfully mined. Any income from mining operations must be included when filing your taxes.
Do I have to pay taxes on cryptocurrency staking rewards?
Yes, staking rewards from cryptocurrencies like Ethereum are considered taxable income. The value of any coins received from staking must be reported as income based on the market value at the time you received the rewards. Capital gains tax still applies when you sell the coins.
Do I have to pay taxes on NFT sales?
Selling NFTs (non-fungible tokens) for a profit is a taxable event. The profit you earn from selling NFTs is subject to capital gains taxes similar to selling cryptocurrency. If you sell an NFT for less than you acquired it for, you can deduct the loss. NFTs obtained for free may still incur taxes when sold based on the market value when received.
Do I have to pay taxes if I use crypto to buy goods/services?
Yes, using cryptocurrency to purchase goods and services is a taxable event. You have to calculate capital gains or losses based on the fair market value of the crypto at the time of the transaction. Essentially, it is treated as if you sold the crypto for cash and used the cash to buy the item.
What crypto transactions are exempt from taxes?
A few crypto transactions do not trigger a tax. This includes gifting crypto to charities, donating to non-profits, transferring crypto between your own wallets, and inheriting cryptocurrency from an estate. But you will still owe capital gains taxes once you eventually sell.
How do I calculate my cryptocurrency capital gains and losses?
You calculate capital gains and losses on cryptocurrency the same way as other capital assets like stocks or real estate. Take the sale price minus the purchase price to get the capital gain or loss amount. Your holding period then determines if it is a short-term or long-term gain/loss. Your total net capital gain for the year is taxable.
| Purchase price | $5,000 |
| Sale price | $15,000 |
| Capital gain | $15,000 – $5,000 = $10,000 |
How do I calculate my cost basis for cryptocurrency?
Your cost basis is the purchase price, including any fees and commissions from acquiring the cryptocurrency. For coins acquired through mining or staking rewards, your cost basis is the fair market value when the coins were received. If you acquired your crypto at different times and prices, you can use specific identification to match each coin to its cost basis, or the FIFO (first-in, first-out) method.
| 0.5 BTC purchased Jan 5, 2021 | $15,000 |
| 0.25 BTC purchased Mar 15, 2021 | $10,000 |
| Total Cost Basis | $15,000 + $10,000 = $25,000 |
What are the tax reporting requirements for cryptocurrency?
Cryptocurrency sold, exchanged, or otherwise disposed of in a taxable transaction must be reported on your tax return. You must complete IRS Form 8949 to report your capital gains and losses from crypto in the tax year you incurred them. The totals carry over to Schedule D and your 1040 form. Cryptocurrency holdings may also need to be disclosed on Form 8938 for foreign accounts.
How can I minimize my cryptocurrency tax liability?
Here are some tips to reduce your crypto tax burden:
– Hold crypto for over a year before selling to qualify for lower long-term capital gains rates
– Offset gains with losses by tax loss harvesting and strategic selling
– Donate crypto directly to qualified non-profits to claim a charitable deduction
– Contribute to a cryptocurrency IRA to defer taxes until retirement
– Track your cost basis and all crypto transactions to accurately calculate tax liability
Should I report cryptocurrency on FBAR or FATCA?
Maybe. FBAR and FATCA forms are required to report foreign financial assets, which may include cryptocurrency held on foreign exchanges or wallets. FBAR (FinCEN Form 114) must be filed if your total offshore accounts exceeded $10,000 at any point in the tax year. FATCA (Form 8938) reporting starts at higher foreign asset thresholds. Failure to file can result in severe penalties.
Can I amend a past return to report cryptocurrency?
Yes, you can amend previous tax returns to report cryptocurrency transactions that went unreported or were reported incorrectly. You generally have a three year window to amend returns under the IRS statutes of limitations. Amended returns are filed using Form 1040X – you will have to recalculate your gains, income, and tax liability for each year amended.
What are the penalties for not reporting crypto taxes?
The penalties for not reporting cryptocurrency transactions can be severe. At minimum, you will have to pay back taxes plus interest and late fees. But additionally, the IRS may impose accuracy penalties of 20% to 40% if they determine you underreported income or underpaid taxes due to negligence or substantial errors. Criminal tax evasion charges are possible for willful failures to report crypto or pay owed crypto taxes.
How can I avoid IRS scrutiny of my crypto taxes?
The best way to avoid IRS scrutiny is to fully report all your cryptocurrency transactions and pay all tax owed in a timely manner. Maintaining thorough records of your cost basis, sale prices, and fair market value of all coins will support your tax return if audited. Consider working with a crypto tax professional to ensure you are compliant with all reporting requirements. Only conduct crypto transactions on reputable exchanges.
Should I report my cryptocurrency if I lost money?
Yes, you must still report your cryptocurrency transactions even if you lost money overall. Reporting all crypto activity, gains and losses provides a record of your cost basis and transactions if you get audited. Capital losses from cryptocurrency can be deducted against other capital gains, up to $3,000 in excess losses per year. Unused capital losses can be carried forward to offset gains in future years.
Can I get a refund for overpaying cryptocurrency capital gains tax?
If you inadvertently overpaid capital gains tax on cryptocurrency transactions, such as overstating your income or underestimating allowable deductions, you can file an amended return to claim a refund for the overpayment. You must file the amended return within 3 years of the filing deadline of the original return per IRS regulations. Verify your actual cost basis, capital gains, income, and deductions when calculating the overpayment amount to refund.
Do cryptocurrency taxes apply to non U.S. citizens?
Non-U.S. citizens are still liable to pay U.S. taxes on any cryptocurrency transactions connected to the United States. This includes U.S. sourced crypto income or gains from trading crypto on U.S. exchanges. Tax treaties may allow you to exclude U.S. sourced crypto income if you are a resident in a foreign country. Consult a tax professional about your specific cross-border crypto tax obligations.
Are there any cryptocurrency tax loopholes?
There are very few cryptocurrency specific tax loopholes at this point. However, general crypto taxes still apply. This includes exemptions like gifting crypto to charities or inheriting it from an estate. You may qualify for income exclusions if you meet the thresholds for foreign earned income or long-term capital gains. Mostly it comes down to thoroughly documenting your transactions, cost basis, time held, and fair market value of all cryptocurrency.
Conclusion
In summary, cryptocurrency is treated as taxable property by the IRS. You incur capital gains and losses that must be reported annually when you sell, trade, or cash out your crypto for more than you acquired it for. Using crypto to purchase goods and services is also a taxable event. Record keeping is critical to track your cost basis and calculate gains and losses accurately. Consider working with a cryptocurrency tax specialist to ensure you are compliant and not overpaying taxes. Failure to report crypto transactions can lead to interest, penalties, and even criminal prosecution for tax evasion in severe cases. However, losses and capital gains can potentially balance out to lower your overall tax liability.