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US Crypto Tax Guide 2022

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The Ultimate USA Crypto Tax Guide 2022

Last updated: Tuesday, 7 December 2021

Wondering how US crypto tax works and what the IRS crypto tax rules are? The IRS has set out clear guidance on how crypto is taxed. Bitcoin and other cryptocurrencies attract Capital Gains Tax and Income Tax. We're breaking down everything you need to know about taxes on crypto in the US in our ultimate crypto tax guide including how crypto is taxed, the crypto tax rate, crypto capital gains tax, crypto income tax and how crypto tax software can help simplify crypto tax for you.

This guide is regularly updated

Before we dive into our US crypto tax guide - the IRS rules on crypto tax are constantly changing. At Koinly, we keep a very close eye on the IRS crypto policies and regularly update this guide to keep you informed and tax-compliant.

3rd December 2021: New year, new guide!
10 October 2021: IRS announces 2021 filing deadline extension is 15 October 2021. 
22nd May 2021: Crypto taxes with TaxAct? Here's our video guide.
17 March 2021: IRS announces 2021 filing deadline extension - 17 May 2021.
19th April 2021: Crypto taxes with TurboTax? Here's our video guide.
24 July 2019: Welcome to your cryptocurrency tax guide!

Do you pay taxes on crypto?

Yes, you'll pay tax on cryptocurrency in the US - and pretty much any other country in the world too.

In the US, cryptocurrency isn't viewed as a currency. Instead, it's viewed as property - just like a share or a rental property.

Crypto tax capital asset

Why does this matter?

Because it dictates the way your crypto is taxed.

Can the IRS track crypto?

Yes - the IRS can track crypto.

So if you're asking yourself do you have to pay taxes on crypto gains? Can the IRS really know about my crypto investments? Stop right there.

The IRS have confirmed they're working with crypto exchanges like Coinbase, Binance US and Kraken to share customer information to ensure crypto investors are reporting their crypto gains and income accurately. Coinbase in particular has confirmed they send Form 1099-MISC to any investor who made more than $600 in a financial year and that they send this form to both the investor and the IRS.

Though we've singled out the crypto exchanges above, the reality is any crypto exchanges that uses Know Your Customer (KYC) identification may be asked to share this information with the IRS.

The IRS is using this information to send out letters to American crypto investors to remind them to report their crypto transactions and pay their crypto taxes, as well as to conduct audits and seize assets from those avoiding taxes.

The best way to stay tax compliant is to report your crypto taxes accurately to the IRS.

How is crypto taxed in the US?

Because Bitcoin and other cryptocurrencies are viewed as property from a tax perspective there are two potential taxes that could apply - Income Tax or Capital Gains Tax.

The cryptocurrency tax you'll pay depends on the type of transactions you're making with your crypto. We'll look at both.

How is crypto taxed?

Capital Gains Tax on crypto

Because crypto is viewed as a capital asset from a tax perspective, anytime you dispose of crypto, you'll pay Capital Gains Tax. There are four ways you can dispose of your cryptocurrency in the US:

  • Selling crypto for fiat currency.
  • Swapping crypto for crypto.
  • Spending crypto on goods or services.
  • Gifting crypto (over the $15,000 threshold for 2021, this has changed to $16,000 for 2022)

You won't pay Capital Gains Tax on the entire proceeds of a crypto disposal - only any capital gain (profit) you made as a result of a disposal.

Capital Gains Tax on Crypto USA

Crypto Capital Gains Tax rate

There isn't a specific crypto tax rate. It's all based off the Capital Gains Tax rules. The Capital Gains Tax rate you'll pay on your crypto depends on how long you've held your asset for and how much you earn. If you've held it for less than a year, you'll pay the short-term Capital Gains Tax rate. If you've held it for more than a year, you'll pay the long-term Capital Gains Tax rate.

For short-term capital gains, you'll pay the same tax rate as you do on your regular income. This is based off the Federal Income Tax rate brackets. For 2021 to 2022 these are:

Tax RateSingleHead of HouseholdMarried filing jointlyMarried filing separately
10%$0 - $9,950$0 - $14,200$0 - $19,900$0 - $9,950
12%$9,951 - $40,525$14,201 - $54,200$19,901 - $81,050$9,951 - $40,525
22%$40,526 - $86,375$54,201 - $86,350$81,051 - $172,750$40,526 - $86,375
24%$86,376 - $164,925$86,351 - $164,900$172,751 - $329,850$86,376 - $164,925
32%$164,926 -  $209,425$164,901 - $209,400$329,851 -  $418,850$164,926 - $209,425
35%$209,426 - $523,600$209,401 -  $523,600$418,851 -  $628,300$209,426 - $314,150
37%$523,601+$523,601+$628,301+$314,151+

Long-term Capital Gains Tax rate

Meanwhile, long-term Capital Gains Tax for crypto is generally much lower. The long-term Capital Gains Tax rates for 2021 to 2022 are:

Tax RateSingleHead of HouseholdMarried filing jointlyMarried filing separately
15%$40,401 - $445,850$80,801 - $501,600$54,101 - $473,750$40,401 - $250,800
20%$445,850+$501,600+$473,750+$250,800+

Update for 2022 financial year

The IRS has just made a couple of announcements about tax rates for the 2022 financial year, so starting from the 1st of January 2022.

The standard deduction is rising:

  • For single taxpayers and married individuals filing separately for the 2022 tax year, the standard deduction is rising to $12,950.
  • For married couples filing jointly for the 2022 tax year, the standard deduction is rising to $25,900.
  • For heads of households filing for the 2022 tax year, the standard deduction will be $19,400.

The tax rates and income brackets are changing for the 2022 financial year. The new tax rates for 2022 are as follows:

  • 10% on income of $10,275 or less ($20,550 for married couples filing jointly).
  • 12% for income over $10,275 ($20,550 for married couples filing jointly).
  • 22% for income over $41,775 ($83,550 for married couples filing jointly).
  • 24% for incomes over $89,075 ($178,150 for married couples filing jointly).
  • 32% for incomes over $170,050 ($340,100 for married couples filing jointly).
  • 35%, for incomes over $215,950 ($431,900 for married couples filing jointly).
  • The top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).

These tax rates don't apply retrospectively for the 2021 financial year - so when you're filing your taxes in April 2022, use the tax rates in the tables above.

How to calculate crypto capital gains

So how much tax do you pay on crypto gains?

A capital gain or loss is the difference in value from when you acquired your crypto to when you disposed of it. So any time you sell, swap or spend your crypto - you'll have a capital gain or loss. If you'd made a profit from your crypto disposal - you'll have a capital gain. If you've made a loss from your crypto disposal - you'll have a capital loss.

Calculating your crypto capital gain and losses is easy enough. First, you need to figure out your cost basis. Your cost basis is how much it cost you to acquire your crypto asset, including any transaction fees. If the crypto didn't cost you anything to acquire - like if you were gifted it - you'll instead use the fair market value of that cryptocurrency asset in USD, on the day you received it.

Cost base formula

Once you know your cost basis - simply subtract it from the value of the asset on the day you disposed of it to calculate whether you have a capital gain or loss.

Crypto capital gain formula

If you have a gain, you'll pay Capital Gains Tax on that gain. If you have a loss, you won't pay Capital Gains Tax - but you do want to keep track of these because you can offset capital losses against gains (more on this later). Let's look at an example to figure out how much tax is on cryptocurrency.

Example

You buy 1 BTC in February 2021. The price of BTC the day you bought it is $33,000 and you were charged a 2% transaction fee. Your total cost base for this BTC is $33,660.

You later sell your 1 BTC in October 2021 for $60,000. You need to calculate whether you've made a capital gain or loss, so subtract your cost base from your sale price.

$60,000 - $33,660 = $26,340. You've made a capital gain of $26,340 which you'll need to pay Capital Gains Tax on. As you held your BTC for less than a year, you know you'll pay the short-term Capital Gains Tax rate which is based on your regular Income Tax rate.

You earn $80,000 a year in regular income - so you're in the 24% tax rate band. Adding your $26,340 doesn't push you up into the next tax rate band, so you'll pay 24% tax on $26,340 - a total of $6322.

Cryptocurrency tax breaks

American crypto investors can benefit from a few tax free allowances that can help them pay a little less tax on their crypto.

Crypto tax breaks USA

  1. Gifting crypto under $15,000: You can gift up to $15,000 in crypto per person tax-free. This is known as the annual gift tax exclusion. This can help you take advantage of lower Income Tax rates in your household to pay less tax overall. Anything over $15,000 will be subject to tax.
  2. Capital Gains Tax Free Allowance: If you earned less than $40,000 in the 2021 financial year - you'll pay no Capital Gains Tax.
  3. Long-term Capital Gains Tax Rate: If you HODL your crypto for more than a year, you'll pay a lower long-term Capital Gains Tax rate of between 0% to 20% depending on how much you earn.

Crypto capital losses

You don't pay Capital Gains Tax on any crypto capital losses. But don't just write these off as a bad investment - use them.

You can offset your capital losses against your net capital gain for the year to reduce your tax bill. In the US, there is no limit on how large a capital loss you can write off in any one year, so if you have enough losses, you can write off your entire net capital gain and pay no tax.

The silver linings keep getting better because if you have a larger capital loss than your net capital gain, you can also offset up to $3,000 of capital losses against ordinary income to further reduce your overall tax bill.

If you still have more capital losses leftover after doing this, you can carry losses forward to future financial years to offset against future gains. You can carry capital losses forward indefinitely - so until you've used them.

Offset capital losses against gains

Tax on lost or stolen crypto

The IRS does not let crypto investors claim lost or stolen crypto as a capital loss. It's a harsh stance and it wasn't always this way. Prior to the Tax Cuts and Jobs Act, crypto investors could claim theft and casualty losses ad a capital loss. However, when this bill went into effect, casualty and theft losses are no longer tax deductible. So if you've lost your crypto due to a hack, scam or because you've lost your private keys - you're out of luck.

Losses that occurred prior to 2017 may be deductible as long as you can prove ownership of the assets and can provide a declaration or receipt of some kind from the exchange which specifies how much you lost in the hack.

USA lost or stolen crypto tax

Crypto Income Tax US

Now we've covered capital gains, let's look at when your crypto might be taxed as income instead. There are many crypto transactions that can be viewed as income and subject to Income Tax. The simplest way to look at this is any time you're seen to be 'earning' crypto, it'll be subject to Income Tax instead of Capital Gains Tax.

Income Tax on crypto USA

The IRS has quite a lot of guidance about when cryptocurrency is viewed as income instead of a capital gain. This includes:

  • Getting paid in crypto.
  • Mining crypto - on a hobby level.
  • Receiving an airdrop.
  • Receiving new coins from a hard fork.
  • Staking rewards.
  • Referral bonuses.

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:

  • Earning interest through yield farming on lending protocol like AAVE, Compound.
  • Earning new liquidity pool tokens, governance or reward tokens on protocols like Uniswap.
  • Lending your crypto to platforms like NEXO to earn interest.
  • Earn crypto dividends on platforms like CoinRabbit.

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 how these would be subject to tax. 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:

  • Referral rewards like Binance Referral.
  • Learn to earn campaigns, like Coinbase Learning Center or CoinMarketCap Learning Center.
  • Watch to earn platforms like Odysee.
  • Browse to earn platforms like Permission.io browser extension, Brave.
  • Play to earn games like Axie Infinity.
  • Shop to earn through browser extensions like Lolli.
  • Share public address to earn on platforms like Moon Faucet.

Tax free crypto transactions

Not all crypto transactions are taxed in the US you'll be pleased to hear.

Tax free crypto transactions USA

You won't pay tax on crypto when:

  • Buying crypto with fiat currency.
  • HODLing crypto.
  • Moving crypto between your own wallets.
  • Gifting crypto under $15,000 in value.
  • Donating crypto to charity.

Do you pay tax when you buy crypto in the US?

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.

buying crypto tax free

Buying crypto with USD

You're not taxed when you buy crypto with fiat currency - like USD - in the US.

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.

buying crypto tax free

TAX FREE

Buy and HODL crypto

HODLer? 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, swap or spend that crypto.

TAX FREE

Buying crypto with crypto

Wondering is crypto to crypto taxable or whether you pay taxes on crypto trades? The answer is a resounding yes.

If you're buying your crypto with another cryptocurrency, for example, buying ETH with BTC - this is a taxable event in the USA. The IRS view this as two separate transactions. Let's use the example above - you want to buy ETH with BC.

The IRS see this as you selling your BTC for a fictional amount of dollars. You're then buying ETH with these fictional dollars. 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.

To calculate your capital gain in this example, you'd use the cost base of your BTC and subtract it from the fair market value of BTC on the day you bought ETH.

buying crypto with crypto is taxed

CAPITAL GAINS TAX

Buying crypto with stablecoins

Buying crypto with stablecoins is viewed the same way as buying crypto with 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 0.5 BTC with Tether (USDT). The price of 0.5 BTC the day you want to buy it is $20,000. As USDT is pegged to the dollar, it'll cost you roughly 20,000 USDT plus fees. Your cost basis for the USDT is likely to also be around $20,000 - so you won't have a capital gain or loss from the transaction.

Despite this, you'll still need to record and report these transactions to the IRS as taxable events.

buying crypto with stablecoins tax

CAPITAL GAINS TAX

Do you pay tax when you sell crypto in the US?

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.

USA selling crypto tax

Selling crypto for USD

Selling crypto for fiat currency like USD is a taxable event according to the IRS. 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. The amount you pay will depend on how much you earn in regular income, but you'll pay anywhere between 0% to 20%.

Example

Renata purchases 2 ETH in November 2020. The price of 1 ETH the day she purchases is $600.

She later sells 1 ETH in July 2021. The price of 1 ETH the day she sells is $3,500. She'll pay short-term Capital Gains Tax at her regular Income Tax rate. She needs to figure out her capital gain and apply the Income Tax rate.

$3,500 - $600 = $2,900. This is her capital gain and she'll pay Capital Gains Tax on this. Renata earns $60,000 a year putting her in the 20% tax rate bracket. She'll pay 22% tax on $2,900, so a total of $638 in tax.

She sells another 1 ETH in December 2021. The price of 1 ETH the day she sells is $4,000.

$4,000 - $600 = $3,400. This is her capital gain.

She'll pay long-term Capital Gains Tax because she held the asset for more than a year. As she earns more than $40,400 and less than $445,850 - this puts her in the 15% long-term Capital Gains Tax rate band. She'll pay 15% tax on $3,400, so a total of $510.

As you can see, even though she made a larger capital gain from her second transaction, she paid less tax on it because she benefitted from the lower long-term Capital Gains Tax rate.

CAPITAL GAINS TAX

Selling crypto for crypto

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 Gain Tax on any capital gain you make from the transaction.

CAPITAL GAINS TAX

Do you pay tax when transferring crypto?

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 wallets

Moving crypto between your own wallets is a tax free event. You don't need to record these or report them to the IRS.

Transfer fees USA

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.

TAX FREE

Transfer fees

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 your 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 permittable as part of a cost basis.

Example

You bought 1 ETH. The price of 1 ETH when you bought it is $4,385.

You decide you want to move your ETH from your Binance wallet to your MetaMask wallet. You're charged flat fee of 0.005 ETH to do so.

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.

0.005 ETH = $21.90. 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.

TAX FREE OR CAPITAL GAINS TAX?

Adding and removing liquidity

If you're adding or removing liquidity form 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 swap 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.

adding and removing liquidity tax

POTENTIAL CAPITAL GAINS TAX

How are airdrops and forks taxed in the US?

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.

airdrop and forks tax in the US

Receiving an airdrop

The IRS has been quite clear that when you receive an airdrop, you'll pay Income 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.

airdrop crypto tax in USA

Example

You receive 200 1INCH tokens from an airdrop. On the day you receive them, the fair market value per token is $3.5. Your tokens are subject to Income Tax, so you need to calculate their total worth.

$3.5 x 200 = $700. You've made additional income of $700. You earn $60,000 a year, putting you in the 22% Income Tax rate bracket. You'll pay 22% tax on $700, so a total of $154.

INCOME TAX

Selling or swapping coins from an airdrop

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, swapping 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.

Example

You sell your 200 airdropped 1INCH tokens a couple of days after. The fair market value per token is $4, so you make $800. You already know your cost basis is $700.

$800 - $700 = $100. You've made a capital gain of $100. You'll pay the short-term Capital Gains Tax rate as you didn't hold your asset for more than a year. This is your regular Income Tax rate of 22%. You'll pay 22% on $100, so a total of $22.

CAPITAL GAINS TAX

Soft fork

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.

TAX FREE

Hard fork

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.

Hard forks tax USA

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 swap coins from a hard fork, you'll pay Capital Gains Tax. Your cost basis to calculate any capital gain or loss is the fair market value of the coins or tokens on the day you received them.

Example

You received 1 BCH in 2017 when it split from BTC. Your cost basis for this new coin is $365 as that was the fair market value of 1 BCH on the day you received it.

You earn $60,000, so you're in the 22% tax rate bracket. You'll pay Income Tax of 22% on $365, so $81.

You later sell 1 BCH a few months later for $2,000. Subtract your cost basis from your sale price to figure out your capital gain.

$2,000 - $365 = $1,635. This is your capital gain. You'll pay short-term Capital Gains Tax at the same rate you pay Income Tax, so 22% of $1,635 = $360.

INCOME AND CAPITAL GAINS TAX

Crypto Gifts and Donations Tax

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.

tax on crypto gifts and donations USA

Good news! The gift limit for the 2022 tax year has been raised to $16,000 - so from the 1st of January 2022 you can gift up to $16,000 in crypto per person tax free. This doesn't apply retrospectively, so when you're filing for the 2021 financial year in April 2022 - this limit is still $15,000.

Giving a crypto gift

American taxpayers enjoy an annual $15,000 gift tax exclusion.The IRS allows gifts under $15,000 to be tax free. This allowance is per person, so you can give multiple gifts of $15,000 to different people. You can also give multiple crypto gifts to the same person, provided the total value is less than $15,000 overall.

Gifts valued at more than $15,000 would potentially subject you to gift taxes of 40% of the amount over $15,000.

crypto gift tax USA

TAX FREE

Receiving a crypto gift

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.

TAX FREE

Selling a crypto gift

You'll pay Capital Gains Tax if you dispose of your gifted crypto by selling it, swapping 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.

CAPITAL GAINS TAX

Donating crypto

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 501(c)3 status with the IRS' exempt organization database. A charity must have 501(c)3 status if you plan to deduct your donation on your federal taxes. If you're donating more than $500 you'll need to fill out Form 8283 when filing your crypto taxes.

TAX FREE

Mining crypto tax

The IRS is quite clear that crypto mining is subject to Income Tax, as well as Capital Gains Tax when you later dispose of mined coins.

mining crypto US tax

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.

MINING CRYPTO

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, swap or spend any crypto you received as a result of mining activities.

INCOME TAX

Crypto margin trading, futures and other CFDs

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.

Margin trading, futures and other CFDs

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. This is because of the IRS 60/40 rule. This rule states that when investors trade regulated futures, 60% of capital gains are taxed as long-term gains and 40% of capital gains are taxed as short-term gains regardless of how long you keep the position open. 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.

CAPITAL GAINS TAX

DeFi crypto taxes USA

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.

DeFi tax US

So you'll still pay either no tax, Income Tax or Capital Gains Tax on your 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 swapping, 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:

  • Earning interest from DeFi protocols: Income Tax.
  • Borrowing from DeFi protocols: No tax.
  • Paying interest in DeFi protocols: No tax unless you're paying in crypto, in which case Capital Gains Tax.
  • Selling or swapping NFTs: Capital Gains Tax.
  • Buying NFTs: No tax.
  • Staking on DeFi protocols: Income Tax.
  • Yield farming DeFi protocols: Income Tax.
  • Earning liquidity tokens from DeFi protocols: Income Tax or Capital Gains tax depending on whether you're earning new coins or increasing the value of one asset.
  • Adding liquidity to liquidity pools: No tax or Capital Gains Tax depending on whether you receive a token in exchange for your liquidity.
  • Removing liquidity from liquidity pools: No tax or Capital Gains Tax depending on whether you exchange a token to remove your liquidity.
  • Earning through play/engage to earn DeFi protocols: Income Tax.
  • Profits from DeFi margin trading and options protocols: Capital Gains Tax.

We recommend speaking with an experienced crypto accountant for clear guidance on DeFi tax to remain compliant.

Earning from DeFi protocols

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.

INCOME TAX

Selling or swapping coins and tokens on DeFi protocols

Anytime you sell or swap 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.

CAPITAL GAINS TAX

Do you pay tax when spending crypto?

Thinking of heading to home depo 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 crypto on goods and services

Spending your crypto is subject to Capital Gains Tax as it's a disposal of an asset. The IRS view this as you selling your crypto for fictional dollars and then spending those fictional dollars on a good or service. 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.

CAPITAL GAINS TAX

Keep records of crypto transactions for taxes

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 date of your transactions.
  • The fair market value of your crypto in USD the day you acquired it.
  • The fair market value of your crypto in USD the day you disposed of it.
  • The capital gain or loss you made from each transaction.
  • What the transaction was and the parties involved.
  • Receipts of purchase and sale.
  • Records of transfers and transactions from all your crypto wallets and exchanges.

IRS records for crypto taxes

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.

US accounting method for crypto taxes

Now you know how crypto is taxed, you can calculate your crypto taxes... simple, right?

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.

We've talked about cost base a lot throughout this article and on the face of it, it sounds quite simple. However, what happens when you've got multiple assets and transactions in play. Let's use an example - you bought 1 BTC in 2019 for $4,000. In 2020, you bought another BTC for $20,000. In 2021, you sold 1 BTC for $30,000. If you use your first cost base, you've got a capital gain o a whopping $26,000. While if you use the second cost base, you have a very respectable capital gain of $10,000.

So how do you know which to use? Do you go through each transaction and identify each private key and cross-reference that with the transaction? You could, but even our example above is simplistic. Many crypto investors have hundreds of assets and thousands of trades throughout the year, making this a mountainous task.

This is where cost basis accounting methods come in. These methods dictate the way you calculate cost basis for a given financial year.

It's good news for American crypto investors because the IRS allows multiple cost basis methods - and these can have a big impact on your crypto tax bill. The IRS allows:

  • First In First Out (FIFO): first asset you bought is the first asset you sell.
  • Last In First Out (LIFO): the last asset you bought is the first asset you sell.
  • Average Cost Basis (ACB): average out the cost basis of all similar assets by adding up the total amount paid and dividing it by the number of assets.
  • Highest In First Out (HIFO): the most expensive asset you bought is sold first.
  • Lowest Cost First Out (LCFO): the least expensive asset is the first asset you sell.
  • Specific Identification (Spec ID): pick the asset you sold, provided you can identify it with records.

Of course, these accounting methods have a huge gain on your crypto taxes. If you used FIFO on the example above, you'd pay Capital Gains Tax on a $26,000 profit. Whereas if you used LIFO, you'd pay Capital Gains Tax on a far lower $10,000 profit. You can learn more about the difference cost basis accounting methods in our guide, but there are no wrong or right answers here. The right accounting method for you is the one that enables you to pay the least or the most accurate tax on your crypto.

It's important to note you can only use one cost basis accounting method in any given financial year - you can't swap and change between the different allowed accounting methods. The most common accounting methods in the US are FIFO, ACB and Spec ID.

cost basis methods USA

When do you need to report your crypto taxes?

The US financial year runs from the 1st of January to the 31st of December each year, so the current financial year is 2021. You need to report your crypto taxes for the 2021 financial year by the 15th of April the following year as part of your annual tax return, so the next tax deadline is the 15th of April 2022. For US expats, this deadline is the 15th of June 2022.

US tax deadline

How to calculate your crypto taxes

Calculating your crypto taxes - especially if you trade at volume - is time consuming. You can do it all manually, or you can use a crypto tax calculator like Koinly to save you hours.

If you want to calculate your crypto taxes manually, follow these steps:

  1. Identify all your taxable crypto transactions for the entire financial year you're reporting on.
  2. Identify which transactions are subject to Income Tax and which transactions are subject to Capital Gains Tax.
  3. Identify the cost base for each transaction using your chosen accounting method.
  4. Calculate your subsequent capital gains and losses, income and expenses.

You'll then need to report all taxable crypto disposals, the proceeds from your disposal and the subsequent capital gain or loss to the IRS (yes, every single one), as well as any income from crypto.

It's enough to exhaust even the most enthusiastic of mathematicians. But there is an alternative - use Koinly and save hours.

How to report crypto on taxes

You file your crypto taxes with your annual tax return - but you'll need a few other forms to do so. You can see our complete guide on filing your crypto taxes with the IRS, but in short:

Report crypto disposals, capital gains and losses on: Form Schedule D (1040) and Form 8949.

Report crypto income on: Form Schedule 1 (1040) or Form Schedule C (1040).

You can do this with paper forms or through a tax app like TurboTax or TaxAct. We'll walk you through both.

How to use a crypto tax app like Koinly

Don't get stuck in the busywork. Don't get it wrong. Don't rely on your accountant to know where to look. Use Koinly to generate crypto tax reports. Here's how easy it is:

1. Sign up for a FREE Koinly account.

It only takes a minute!

2. Select your base country and currency.

In this instance, the United states and United States Dollars.

3. Select your accounting method.

By default, Koinly selects FIFO (First In Last Out) as the accounting method for the USA. But we also support HIFO, LIFO and ACB for our US users.

cost basis methods on Koinly

4. Connect Koinly to your wallets, exchanges or blockchains.

Koinly integrates with more than 300 crypto exchanges, wallets and blockchains. (See all) If you can't find yours, let us know - we're always adding more.

5. Let Koinly crunch the numbers. Make a coffee.

Koinly will calculate your cost basis for each crypto asset like ETH, ADA and Bitcoin and taxes them accordingly. Koinly will calculate each capital gain or loss from your disposals, as well as your crypto income and expenses.

5. Ta-da! Your data is collected and your full tax report is generated!

Head to the tax reports page in Koinly and check out your tax summary. This includes your net capital gains, other gains, income, costs, expenses and any gifts, donations or lost crypto.

tax summary on Koinly

6. To download your crypto tax report, upgrade to a paid plan from $49 per year.

Download what you need, when you need it. For US investors, Koinly has the IRS Schedule D and Form 8949 for capital gains and losses, as well as the Schedule 1 for crypto income.

7. Send your report to your accountant, or complete your IRS submission yourself using a tax app like TurboTax

Koinly also generates reports for TurboTax and TaxAct - so all you need to do is upload your Koinly crypto tax report to your chosen tax app file your taxes in minutes. Let's look at how.

How to file your crypto taxes with TurboTax

Here's our guide on filing your crypto taxes with TurboTax. But in summary:

  1. Create a Koinly account, sync your wallets and exchanges and let Koinly generate your tax reports.
  2. Head to the tax report page and download the TurboTax online report.
  3. Now head over to your TurboTax account, go to investments then investment income and select cryptocurrency.
  4. Answer yes to the question "Did you sell or trade cryptocurrency in 2021"
  5. Go to the cryptocurrency transactions page and select add more. Import your Koinly TurboTax online report.
  6. For the question 'now tell us which of these transactions are taxable' select all and continue (Koinly already did this for you).
  7. View your summary, select continue and you're done.

How to file your crypto taxes with TaxAct

Here's our guide on filing your crypto taxes with TurboAct. But in summary:

  1. Create a Koinly account, sync your wallets and exchanges and let Koinly generate your tax reports.
  2. Download your IRS Report Form 8949 and Schedule D from the tax reports page in Koinly.
  3. Head over to your TaxAct account and follow the steps there to report your crypto transactions where you can just upload your Koinly tax reports.

How to file crypto taxes with paper forms

Still sticking to pen and paper filing? No worries, Koinly can help. Follow these steps:

  1. Complete Form 8949 with all your taxable crypto disposal transactions. (Koinly does this for you).
  2. Report your net capital gains and losses from Form 8949 on Form Schedule D. This includes your short-term and long-term capital gains and losses.
  3. If you have crypto income from airdrops, forks, liquidity pools, bonuses and so on, you’ll need to complete Schedule 1. If you’re self-employed or operating a crypto business and have crypto income, use Schedule C instead.
  4. Complete your Individual Tax Return Form 1040 and attach the other forms you’ve completed. File this with the IRS and you're done.

Let's look at these tax forms in some more depth, as well as a couple of others you may need to be familiar with.

Form 8949

WHO NEEDS TO FILE THIS?

Anyone who has capital gains or losses during the financial year.

WHAT INFORMATION IS NEEDED?

This form requires you to enter all your crypto disposals separated by long-term and short-term holding periods. If you are using Koinly, you can generate a pre-filled version of this form in one click.

Schedule D

WHO NEEDS TO FILE THIS?

Anyone who has capital gains or losses during the tax year.

WHAT INFORMATION IS NEEDED?

This form is a summary of your Form 8949 and contains the total short term and long term capital gains.

Schedule 1 - Form 1040

WHO NEEDS TO FILE THIS?

Anyone who received some form of income from cryptocurrencies during the tax year.

WHAT INFORMATION IS NEEDED?

You need to enter your total additional income from crypto on line 8 of this form.

FBAR

WHO NEEDS TO FILE THIS?

Anyone who had fiat currency or specified foreign financial assets worth over $10,000 in combined value in a non-US exchange - at any point during the tax year. Note that if you are only transacting with crypto and stablecoins then you don't need to fill in this form.

WHAT INFORMATION IS NEEDED?

Details about your foreign exchange accounts along with the maximum fiat value you had on it during the year.

FATCA

WHO NEEDS TO FILE THIS?

Anyone who had fiat currency or specified foreign financial assets worth over $50,000 on the last day of the tax year or over $75,000 at any point during the tax year in a non-US exchange. Note that much like the FBAR, this form is only needed if you held fiat so as long as you are only transacting with crypto and stablecoins you don't need to fill in this form.

WHAT INFORMATION IS NEEDED?

Details about your foreign exchange accounts along with the maximum fiat value and ending balance during the year.

How to avoid crypto tax in the US

You can't outright avoid crypto tax in the US - not without breaking the law and facing some harsh penalties! But you can reduce your crypto tax bill with some tax tips. We've got a complete guide on avoiding crypto tax in the US, but in summary:

HODL

Make the most of lower long-term Capital Gains Tax rates by HODLing your assets for more than a year.

Utilize tax deductions

Utilize tax deductions. Going for the standard tax deduction isn't always the best way to reduce your tax bill depending on your individual circumstances. Common tax deductions include the child tax credit, medical expenses deduction and 401k contributions deduction.

Know the CGT allowance

Earning less than $40,000 a year as a single taxpayer in 2021? No Capital Gains Tax for you. If you're married and filing jointly, this allowance is $80,800. If you're the head of the household, this is $54,100.

Offset losses against gains

You can offset capital losses against capital gains with no limit in the US. You can even offset up to £3,000 of capital losses against your ordinary income. Carry over any losses you don't use to offset against future gains.

Track and harvest unrealized losses

Unrealized losses? Harvest them so you can offset them against your net capital gain. In the US, the wash-sale rule currently only applies to securities - which crypto is not classified as, so investors can sell their crypto at a loss and buy them back right after. This legal loophole allows them to create artificial losses to reduce their overall tax bill. This is known as tax loss harvesting. Make the most of this legal loophole while you can as it's likely to be closed soon!

Gift and donate

Gifting crypto is tax free under $15,000 thanks to the annual gift tax exemption. You can use this to make the most of lower incomes in your household, giving you a lower total tax bill for everyone in your household.

Meanwhile, donating crypto is tax deductible, so find a worthy cause. A charity must have 501(c)3 status if you plan to deduct your donation on your federal taxes. You'll need to check your chosen charity's 501(c)3 status with the IRS' exempt organization database. If you're gifting more than $500, you'll also need to fill out Form 8283 with your annual tax return.

Invest in IRAs

Investing in your retirement is a great way to avoid crypto tax. HODL your assets long-term, tax free.

Invest in opportunity zone funds

Do good for your community and reduce your taxes by investing in opportunity zone funds. If you leave your investment for more than 5 years, you'll reduce your tax bill by up to 10%. LINK TO IRS HERE.

Pick the right cost basis method

Cost basis matters. FIFO, LIFO, ACB, HIFO, LCFO and Spec ID all make a huge impact on your tax bill and you can pick from any of them. See which works best for your crypto taxes.

Look out for IRS nudge letters

1st November 2021 - The IRS confirms they've been sending out more letters to crypto investors they believe are underreporting or evading tax.

Any investors who have crypto assets who did not answer "yes" to the Form 1040 question "at anytime during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

Crypto investors who intentionally underreport their investments can face fines starting from $25,000 and can even face criminal charges with up to 5 years in prison.

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