Updated on October 18, 2019
This guide covers crypto taxes for US citizens. We will go over what exactly has to be reported, how the taxes are calculated and how you can minimize your taxable gains. We will also look at how you should generate and file your crypto tax reports.
UPDATE: The guide has been updated in accordance with the latest guidelines released by the IRS on the 9th of October 2019.
Cryptocurrencies such as Bitcoin and Ethereum, are treated as property under federal tax law in the United States 1. This means that the same tax principles that are applied to property transactions are also applicable to the trade or disposal of cryptocurrencies. Property transactions are subject to capital gains tax — so is cryptocurrency - and must be reported on Form 8949. A capital gain occurs when you carry out any of the following transactions:
These transactions do not result in capital gains:
Receiving crypto from mining/forks/staking/lending/airdrops etc is seen as regular income and should be reported in your annual tax return - only the eventual sale of this crypto is reported in your capital gains report. In the income tax chapter we will go over the tax implications of receiving cryptocurrency in more detail.
Capital gains tax, when applied to cryptocurrency, is relatively simple to reason about. If purchased cryptocurrency appreciates in value, the profits generated from its disposal are treated as a capital gain. Inversely, if cryptocurrency decreases in value, the losses incurred upon disposal can be deducted against other capital gains in order to minimize tax obligations 2.
It is also worth noting that capital losses can be deducted against ANY type of capital gains - not just from cryptocurrencies. For ex. if you sell your house for a profit then you can deduct any losses from crypto trading to reduce your taxable gains.
Capital gains are declared on Form 8949. You will need an accurate record of every cryptocurrency transaction (date, amount, fees, cost) in order to calculate your capital gains correctly and ensure you do not overpay on your taxes. This is usually the most tricky part in filing your crypto taxes and you may find it easier to use a crypto tax software for it.
The amount of tax you will pay depends on how long you have held your crypto.
Long-term capital gains tax is generally lower than short-term capital gains tax, so it's in your best interest to not sell crypto you have bought within the past year.
Capital gains are calculated by subtracting the purchase price (aka cost-basis) from your selling price. This gets increasingly complex as you trade more and more often. If you were to buy 10 BTC in 3 separate transactions - all with different costs, how do you determine which BTC has been sold? This is where accounting methods like FIFO and LIFO come in. The IRS recommends the use of FIFO but you may be able to use LIFO as well. It is best to consult a tax advisor if you want to use LIFO as its not straightforward to switch to it unless you have been using it in the past.
There is also a special variant called Specific Identification that can be used in conjunction with FIFO/LIFO to gain more control over which assets are being sold. Let's look at an example to see how the cost-basis and capital gains are impacted by the different accouting methods:
John buys 1 BTC for 1000 USD, another 2 BTC for 3000 USD and 1 more BTC for 5000 USD (on different dates). Later he sells 1 BTC for 2000 USD. Let's calculate his cost-basis and capital gains. The transactions are laid out in the table below.
|Type||Date||Amount||Price||Cost basis||Capital Gains|
|Buy||2017-10-01||1 BTC||1000 USD||1000 USD||N/A|
|Buy||2018-01-20||2 BTC||3000 USD||3000 USD||N/A|
|Buy||2018-03-14||1 BTC||5000 USD||5000 USD||N/A|
|Sell||2018-05-25||1 BTC||2000 USD||???||???|
FIFO means that the coin you bought first is also sold first (First In First Out). In this case the first coin was bought on 2017-10-01 for 1000 USD, so his cost basis when selling 1 BTC will be 1000 USD and his capital gains will be:
2000 (selling price) - 1000 (cost-basis) = +1000 USD (profit)
LIFO means you sell the coin that you bought last first (Last In First Out). Since the last coin was bought on 2018-03-14 for 5000 USD, his cost-basis becomes 5000 USD and capital gains:
2000 - 5000 = -3000 USD (loss)
Finally, if he had used specific identification and the 3 crypto transactions were made to separate BTC wallets - he would have been able to use the cost-basis for the wallet that he sold from. Basically, if he sold from the first wallet his cost-basis would be 1000. If he sold from the second one the cost-basis would be 1500 and if he sold from the third his cost-basis would be 5000. As you can see Spec ID gives a lot more control but whether this can be used for cryptocurrencies remains an open question.
You can find a more in-depth deepdive into the calculations using different cost-basis methods on our blog article: How capital gains are calculated for cryptocurrency transactions.
Buying cryptocurrency with fiat currency is not a taxable event. However, it’s important to log the details of the transaction to ensure you can calculate your cost-basis when you decide to dispose of your BTC in the future.
Selling cryptocurrency for fiat currency is a taxable event that will incur capital gains tax.
Trading one cryptocurrency for another cryptocurrency is a taxable event and is thus subject to capital gains tax.
This particular taxable event comes as a surprise to many investors as it can mean that if you swapped your BTC for some altcoin and that altcoin nosedived in value - you will still be liable for the capital gains from the time of the transaction. The good news is, if the year has not yet ended you can simply sell your altcoins for a loss and offset the gains you made earlier. Unfortunately most investors only realize this the following year in which case it is too late to do anything. Let's look at an example that demonstrates this:
Mike buys 1 BTC for 1000 USD in 2016. At the beginning of 2018 he decides to trade his BTC (which is now worth 5000 USD) for 10 ETH. A few months later ETH's value nosedives to 5 USD / ETH. Mike is a firm believer in crypto so he decides to hodl it out. Now, Mike is trying to calculate his capital gains for 2018.
Here are his transactions, notice that we have split the Trade into 2 separate transactions (a buy and a sell) to make it easier to understand what goes on from a tax perspective.
|Type||Date||Amount||Price||Cost basis||Capital Gains|
|Buy||2016-01-01||1 BTC||1000 USD||1000 USD||N/A|
|Sell||2018-01-07||1 BTC||5000 USD||1000 USD||4000 USD|
|Buy||2018-01-07||10 ETH||5000 USD||5000 USD||N/A|
Basically, Mike now has a capital gain of 4000 USD which he needs to pay tax on. Even though the 10 ETH that Mike now holds are worth only 50 USD he still has to pay a tax on the full capital gain.
If Mike had sold his ETH holdings at the end of 2018 he could have avoided all this tax. Point is, it always helps to be proactive when it comes to taxes. If you are reading this you are already a step ahead of Mike!
There is a misconception that crypto to crypto transactions should not be taxable events because they are what is known as a like-kind exchange. However, this is not allowed by the IRS and in the next section we will look at why.
Like-kind exchanges allow for the exchange of property without creating a taxable event on the condition that the property exchange is “like kind”, or of the same nature 4. In order for a transaction to qualify as a 'like-kind exchange' it needs to supported by IRS Form 8824, and must be executed by a qualified intermediary.
There are currently no cryptocurrency exchanges that are classified as qualified intermediaries. In 2018, the Tax Cuts and Jobs Act also limited the use of like-kind exchanges to real estate transactions specifically 4, so it’s not possible to use like-kind exchange in your crypto tax strategy.
Stablecoins are backed by fiat currencies, but are not classified by the IRS as fiat currency. Therefore, buying or selling cryptocurrency for stablecoins is treated in an identical manner to trading one cryptocurrency for another and is subject to capital gains tax.
The use of cryptocurrency to pay for goods and services is a taxable event. If you use Bitcoin to pay for bills using a platform such as PaidByCoins, for example, the use of Bitcoin is classified as disposal and is subject to capital gains tax. Similarly, if you use BTC, ETH etc to pay for a coffee or a meal at a restaurant - this is also a taxable event.
Moving cryptocurrency between wallets or accounts you own is not a taxable event and does not incur capital gains tax.
However, it is vital to keep track of such movement as it is needed by automated crypto tax software like Koinly to keep track of your cost-basis. This is best explained with an example.
Anita buys 5 LTC for 500 USD on Binance, she later moves the funds into her private LTC wallet address. Few days later she transfers the LTC from her wallet to her Coinbase account and sells it there for 1000 USD, making a hefty profit of 500 USD.
Now, Anita wants to generate her cryptocurrency tax report with Koinly. She connects her Binance & Coinbase accounts but not the private wallet. Koinly syncs transactions from both her exchange accounts but without the transactions from her wallet Koinly has no idea that the funds Anita transferred into her Coinbase account are the same funds she bought on her Binance account. In order to make this connection Koinly needs access to the transactions on her wallet as well.
Once she has added her wallet address, Koinly can easily match the transfer from Binance -> wallet, and wallet -> Coinbase, and produce an accurate tax report.
If Anita for whatever reason no longer had access to her wallet she could still generate an accurate tax report but with a bit more effort:
Ignoredso Koinly doesnt realize gains on it
Net worthfor the incoming transaction to Coinbase to match the cost-basis for the outgoing transaction from Binance.
These steps can be easily done via the Koinly web interface.
Margin trading or trading with futures/CFD contracts using cryptocurrency is not recognized by the US and does not fall under Section 1256 Contracts, so there is no special tax treatment for such trades. Think of margin trading with crypto as taking out a loan from a bank to invest in property. If you make any gains/losses when you sell the property they will be classified as capital gains and will need to be declared. For margin trades the 'selling' happens when you close a position. Any gains made at that point will be realized capital gains and declared in the same way as regular trades.
If you have paid interest on your margin trades, you can claim it as an itemized deduction. If the interest was paid using a cryptocurrency, it will also be subject to capital gains.
It is also worth noting that most exchanges have a liquidation clause on margin trades and will sell your collateral if the value of your borrowed funds falls below the value of your collateral. Such an event will result in a capital gains tax.
Cryptocurrency contracts (futures / cfd's) are also treated the same way as regular trades.
Margin trading involves borrowing money from an exchange to open a long or a short position, once the price begins moving you can opt to close your position and realize any gains. The difference between the opening and closing price will be your profit or loss. There are two ways to open a position:
A long position is opened when you believe the price of an asset will go up. For ex. if you believe the price of ETH will go up: you borrow USD from an exchange, use it to buy ETH then wait for the price to go up. Once the price has gone up you sell the ETH and return whatever USD you borrowed from the exchange and keep the remainder.
A short position is different. If you believe the price of BTC will go down: you borrow BTC from the exchange, sell it at the current price and wait for the price to fall. Once the price has fallen you simply buy the BTC back for the lower price and return it to the exchange (thereby closing your position). The difference between the prices becomes your gain.
Generally with Margin trades you also have to pay an interest to the exchange which can become a lot, so Contracts (as traded on BitMEX for example) are more preferable as they allow the same kind of leverage but without the Interest.
Any cryptocurrency that you have not expressly bought may be deemed as Income and be subject to income tax. Such income should be reported under the “other income” section of line 21 of Schedule 1 — Additional Income and Adjustments to Income as part of your income tax return. Let's look at the different ways you can receive crypto and how they are treated taxually.
Any income made from mining activity has to be reported as additional income in your tax return. The way in which mining is carried out, however, influences the tax treatment of mining activities. The following criteria is used to determine whether a cryptocurrency miner is operating as a business or a hobby:
If you’re operating a full-time mining rig with the intent of generating profit, you’re likely to be classified as a business. If you experiment with various blockchains with older hardware, you’re likely to be classified as a hobbyist.
Cryptocurrency hobby miners report income generated from mining as additional income and declare it in their tax return. Hobby mining is not subject to the 15.3% self-employment tax. It is also worth noting that hobby mining provides a smaller range of deductions for expenses.
Cryptocurrency mining businesses report both income and expenses on Schedule C - Profit or Loss from Business. Income generated through a cryptocurrency mining business is subject to the 15.3% self-employment tax, and offers a greater range of deductions for expenses.
Participants in Proof of Stake networks that generate income from staking must report it to the IRS. Staking income is treated in a similar manner to cryptocurrency mining income. Taxpayers that generate income from cryptocurrency staking must function as either a business or a hobby.
The rise of cryptocurrency-backed loans has created an ecosystem in which cryptocurrency holders are able to leverage their crypto holdings in order to secure fiat currency loans backed by crypto collateral. The use of cryptocurrency to secure a crypto-backed loan is not a taxable event, as the crypto is not sold. The treatment of crypto-backed loans is currently similar to traditional lending.
It’s important to note than many crypto-backed loan agreements include a liquidation clause should the value of the collateral fall below a specific value. The liquidation of cryptocurrency collateral will be treated as a sale and will thus incur capital gains tax.
Any Interest generated from a cryptocurrency loan is treated as taxable ordinary income. If the interest is in cryptocurrency, you have to declare its market value at the time you received it.
Many blockchain networks operate stratified infrastructure that rewards participants for operating masternodes. The incentives that are paid to a masternode operator are delivered in the form of mined cryptocurrency, and are thus treated as income by the IRS and subject to the same rules as cryptocurrency generated through mining.
An airdrop is essentially free crypto given out by whoever is in control of a blockchain/token - usually as a marketing stunt. You might have noticed numerous tokens showing up in your ETH wallet for instance. In the vast majority of cases, such tokens do not need to be reported as they are both negligible in value and also similar to 'Gifts' (which are not taxed up to a value of $15,000 - learn more in the How Crypto Gifts are Taxed chapter).
However, if you receive airdrops for a coin/token that you already own and the amount of airdrop is somehow tied to the amount of assets you hold - then it can be seen as an incentive instead. The tax treatment in such cases is similar to income and needs to be reported as additional income on your tax return.
A hard fork can result in crypto holders receiving a substantial amount of crypto - usually equal to their holdings in the old cryptocurrency.
On the 9th of Oct 2019, the IRS released specific guidelines about Hard forks and stated that any forked coins should be treated as Income. The value of the coins should be the fair market value at the time they are received. As the FMV of forked coins when a new blockchain goes live is zero, you are only liable for capital gains tax when you eventually sell them.
Note that if there was a delay in receiving the coins due to a third party (such as an exchange), the taxable event will occur when the coins are in your possession - not when the coins are received by the third party on your behalf! In such cases there is likely to be a market for the coins already so you will have to report them as Income at their FMV.
A tokenswap or mainnet-swap occurs when a cryptocurrency moves to a different technology. Most tokens tend to start life on a blockchain like Ethereum as it requires very little resources. Once the token matures it may be moved into its own blockchain, a notable example is the EOS token which started off as an ETH token but is now operated as an independent blockchain. Generally, when such a move happens, all tokens on the original blockchain are destroyed/burnt and token holders receive the equivalent of their holdings on the new blockchain.
A tokenswap might also result in moving from one contract address to another on the same blockchain.
From a tax perspective as long as the original tokens are completely destroyed, there is no taxable event as your holdings remain unchanged. Simply moving from one technology to another is not a taxable event.
An Initial Coin Offering (ICO) allows investors to purchase tokens/coins in a yet-to-be-released cryptocurrency/company. An Initial Exchange Offering (IEO) is similar but is conducted by an exchange such as Binance on behalf of the company. ICOs and IEOs are essentially the same thing as far as the investor is concerned; you send your crypto and get tokens in return.
The type of tokens being issued generally fall in one of the following 2 categories:
For tax purposes both types of tokens are similar. Participating in an ICO triggers a taxable event as you are exchanging a cryptocurrency for another i.e. the tokens that will be issued in the future.
The date of the transaction is the date on which you receive the tokens - not the date on which you participate. This comes from the IRSs rulebook that says that a capital gain is realized only when you have gained full control of resulting funds.
The cost basis for the new tokens is the fair market value of the coins used to participate on the date you participated. For ex. if you were to pay 100 ETH for 1000 XYZ tokens, the cost-basis for the XYZ tokens will be the market value of 10 ETH.
Giving cryptocurrency as a gift is not a taxable event — under certain conditions. We’ll proceed to break down the specifics of cryptocurrency gifting and donating.
Under US tax law, it’s possible to gift up to $15,000 (or $14,000 before 2018) without incurring a tax obligation.
If the gift exceeds $15,000 in value, the giver will need to fill out a gift tax return using Form 709. The gift can be sent in multiple transactions as long as the total does not exceed the threshold amount towards any single person. Gifts are bound to every giver & receiver pair so you are free to gift upto $15,000 to as many people as you want without triggering any tax obligations.
Receiving cryptocurrency as a gift is not a taxable event as long as the amount received is below $15,000. If you receive crypto that is worth more than this from any single person/company you will need to declare the additional amount as ordinary income in your tax return.
It’s important to note that the recipient of a cryptocurrency gift takes on the cost basis from the original owner - unless the cost-basis is below the current market price, in which case the market price should be used as the cost-basis 6. This is to prevent people from sharing their losses - which could be used to offset capital gains that the receiver has made elsewhere.
Ruth bought 100 LTC in 2014 for 1000 USD and gifted it to her grand-son George in 2019. The LTC is worth $10,000 in 2019.
Since george received less than the gifting threshold he will not need to declare any of this as income.
George will also take on the cost basis of his grandmother so if he were to sell the crypto right after receiving it his capital gains would be same as Ruth's capital gains if she had sold them instead:
Capital Gains = 20000 - 1000 = 19000 USD.
If you choose to donate cryptocurrency directly to a qualified organization - either a 501(c)(3) tax-exempt charity or an organization that falls under Section 170(c) of the Internal Revenue Code (IRC) - you can generally deduct the Fair Market Value of the crypto, at the time of the contribution, as an itemized deduction in your tax return 7. The amount of deductions varies depending on how long you have held the assets:
You can find your AGI on line 37 of your 2017 tax form (Form 1040) or line 7 of the new 2018 Form 1040. Additionally, donations are not subject to any capital gains tax.
Donations over $500 have to be reported on Form 8283. It is very important to get a receipt of your donation as the IRS is likely to request it. If your donation exceeds $500,000 you will need to send the receipt along with your tax return.
Lending your cryptocurrency, in return for interest, generates income that must be reported to the IRS. This is similar to staking/mining coins and subject to similar rules. You will need to determine whether you are operating as a hobby or a business and file your income accordingly. See the tax on mining section for information on how you get classified as a hobby investor vs business investor.
Taking out a fiat loan against cryptocurrency collateral is not currently considered a taxable event by the IRS. The use of crypto as collateral in loans can be risky, however, and may incur tax obligations. Many crypto-backed loan platforms will liquidate collateral if its value falls below a specific value. Should collateral liquidation occur, the sale of the collateral will create a taxable event and incur capital gains tax.
There are a number of things you can do to minimize your taxable capital gains. We will look at how crypto losses, fees, and theft can be used to reduce your final tax.
Capital gains depend on 2 things: cost of the purchased crypto and final sale price of the crypto. If you sold crypto for less than what you paid for it - thats a capital loss - and is fully deductible against capital gain profits. In fact, making use of capital losses is a great strategy to reduce capital gains. If you find that you have made large gains during the year but the worth of your holdings has gone down, you can simply sell the holdings at a loss to realize the capital losses and get a tax break. This is known as Tax Loss Harvesting. You can even buy the assets back right after!
When trading US securities (stocks/bonds) there is a wash sale rule that prevents investors from realizing capital losses without the intention of actually selling the assets i.e. buying the assets back right after. Any stocks sold and bought back within 30 days will fall under the wash-sale rule. Any capital losses resulting from such sales will not be deductible. However, this rule is only applicable to US securities, it does not apply to Cryptocurrencies which have been classified as 'property' by the IRS.
Cryptocurrency trading fees are a cost for acquiring the crypto and as such are fully deductible. Transfer fees are more tricky however, as they are not directly related to the cost of acquiring the crypto. The conservative approach is to deduct all trading fees but ignore the transfer fees - which are usually quite low in comparison anyway.
If your capital losses are higher than your capital gains, you can even deduct the difference against your income but only upto $3000 (or $1500 if married and filing separately) 8. You can also carry over the remaining losses to the next year.
If you had made some gains earlier in the year but your holdings are now worth much less, you can sell them at the market rate to realize a capital loss and buy them back right after. The loss will offset the gains that you made earlier and thereby reduce your final taxable gains. This strategy is called Tax Loss Harvesting. There is a rule against this kind of superficial losses called the Wash Sale Rule but it only applies to securities like shares/stocks. Cryptocurrencies have been classified as 'property' by the IRS and as such the rule does not apply!
We will update this article if the IRS ever releases a rule similar to Wash-Sale for cryptocurrencies but for now this is the best way to reduce your capital gains.
Losses that have occured due to theft/hacks are no longer deductible as of tax year 2017 (declared in 2018) 9.
There is a special case which allows such deductions but only if the theft/hack is attributable to a federally declared diaster which is unlikely to ever be the case with exchange hacks. Losses that occured 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.
If you are mining only as a hobby and not an actual business you are eligible to a limited number of itemized deductions. There is no hard and fast rule that specifies the type of deductions you are allowed to make but the IRS does say that you can make deductions for 'typical hobby-related expenses' 10 which for mining would be things like:
As a hobby miner you can not deduct business expenses such as home-office costs, start-up costs, conference costs etc and it is only possible to make deductions upto the amount of income you made from mining.
If you want to make itemized deductions, you would ideally want the deductions to be higher than the standard deductions allowed by the IRS - which as of 2018 amount to $12,000 per individual. Standard deductions can be made even if you had no expenses. The itemized deductions can only be made if the amount is more than 2% of your AGI.
If you are mining as a business you can make even more deductions on your Schedule C - Profit or Loss from Business form. Typically this would include everything that hobby miners can deduct in addition to business expenses like home-office costs, supplies, equipment, computer monitors etc. You would also be able to deduct the cost of depreciation of the mining hardware over a period of 5 years. In some cases, it’s possible to deduct the cost of the hardware within the year of purchase under Section 179 depreciation rules.
Business miners are subject to a 15.3% self-employment tax on the income generated from mining (in addition to regular income tax). If you make over $60,000 it might make more sense to setup a S-corporation for your mining business, which frees you from the self-employment tax and allows for deductions for things like medicare & pension.
A mining business that operates with a net loss within a single financial year may be able to use those losses to offset other income.
As a regular trader you are not allowed to deduct expenses related to your business such as office rent, cost of supplies, software subscriptions etc. However, depending on how much and how frequently you have been trading you may qualify for what is known as a Trader Tax Status. If you qualify for it you can elect Section 475 MTM accounting on your tax return which means capital gains/losses are treated as net operating profits/losses thereby allowing deductions for business expenses against your trading losses.
There are no hard requirements for a TTS trader but broadly speaking you tend to qualify if you meet the following conditions:
At present, Section 475 only applies to securities/commodities - there is no guidance on whether it can be elected if you are trading cryptocurrencies. The AICPA has written a letter to the IRS suggesting this should be the case but there has been no public response to it yet. You should consult a tax accountant before opting for this.
The typical process for generating and filing your cryptocurrency tax reports is outlined below.
This is a very tedious and time-consuming process which is why you should look at a crypto tax solution like Koinly which allows you to easily connect your wallets/accounts and carry out steps 1 to 4 automatically.
FBAR disclosure must be filed with the IRS if an individual in the United States owns foreign financial accounts that exceed $10,000 in combined value at any point during a financial year 11.
You do not need to file FBAR for your crypto holdings. However, if you were to deposit fiat or sell crypto for fiat and the total amount of fiat held exceeds $10,000 you will need to report the fiat holdings.
The Foreign Account Tax Compliance Act is designed to ensure all foreign accounts held by US-citizens are included in tax obligation assessment. If you’re a US-based crypto investor who owns assets worth over $50,000 on the last day of the tax year or over $75,000 at any point during the year 12 , you may be subject to FATCA. The threshold limit for US citizens living overseas is $200,000. FATCA is filed on Form 8939.
Note that FATCA and FBAR are two separate forms even though they are quite similar.
Just like with FBAR, the FATCA is only for fiat currencies. So, as long as you do not hold fiat currency on a foreign crypto exchange exceeding the limits you will not need to file it.
All tax reports must be submitted to the IRS by the 15th of April every year. If you need more time you can apply for an extension by filling out Form 4868.
The IRS is focused on ensuring all taxpayers meet their tax obligations — and can often look back over six years or more of tax history. If you’re not sure whether you’ve correctly reported your crypto taxes over previous years, it’s best to be proactive and amend your previous tax reports. You can do this by filling out an amended tax return using Form 1040X
If you are filing online using TurboTax or TaxAct you will need to upload a file with your capital gains. Note that Turbotax has a max upload limit of 250 entries so you will need to aggregate your transactions for all coins in order to upload it.
Koinly is a cryptocurrency tax calculator built specifically to solve the challenges of generating accurate and compliant capital gains reports. With Koinly all you have to do to file your taxes is:
It's truly that easy. Learn more
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