The IRS is very clear that crypto is taxed - but navigating the IRS guidance on crypto tax (or lack thereof!) isn’t always easy, especially for individual investors with little knowledge of tax…. which is why many American crypto investors turn to a crypto accountant to help them come the tax deadline. Crypto accountants are in high demand in the US - so it pays to know your crypto tax rules. We’ve got everything you need to know in our USA Accountant’s Crypto Tax Guide.
Navigating crypto tax for your clients is a vital skill in 2023 and crypto accountants have never been more in demand. However, many traditional accountants are put off expanding into this new market due to a lack of understanding over cryptocurrency - as well as the less than comprehensive guidance from the IRS on the huge variety of transactions and potential tax implications of each.
Fear not - to get you started we’ve put together all the resources you need in our USA Accountant’s Crypto Tax Guide, with the latest guidance from the IRS.
Not only that, but we’ve also rounded up additional resources you might find useful from the Koinly Crypto Tax Academy - so get bookmarking!
- Crypto Tax Glossary.
- Crypto Tax Loss Harvesting: Investor's Guide
- IRS Crypto Tax Forms & Filing
Another great resource is our exchange tax blog posts - a huge collection of posts devoted to understanding how to do taxes with specific exchanges, wallets and blockchains. We’ve linked these at the bottom of the page if you’re looking for a tax guide on a specific exchange.
Or if you want to help your client gain a better understanding of crypto taxes in the US, we’ve also got our Ultimate Crypto Tax Guide.
With all that out the way, let’s jump in…
How popular is crypto in the USA?
Wondering whether it’s worth getting into a new market? The figures on crypto adoption in the US speak for themselves.
Latest research shows that 1 in 4 Americans has invested in cryptocurrencies - proving that even with the current bear market, crypto adoption shows no sign of slowing down. As of March 2022, 50 million (27%) of American adults are either current crypto investors or have previously invested in crypto. Of these investors, 59% say they plan to increase their investment in crypto over the next 6 months.
We also know that 28.5% of American taxpayers use an accountant to file their taxes, and an additional 8.3% use a brick and mortar company - and we know from our ‘invite your accountant’ feature and the popularity of our crypto accountants directory that crypto investors are even more likely to seek the aid of an accountant to file.
What does all this mean? There are millions of American investors out there looking for help calculating and filing their crypto taxes - and they’ll be looking at you to help them!
How does the IRS view cryptocurrency?
Understanding how the IRS views cryptocurrency is key to understanding its tax treatment. We'll keep it brief and expand with examples after, but here's the ten-point summary:
- The IRS treats virtual currency as property for Federal Income Tax purposes. Virtual currencies are a digital representation of value that function as a medium of exchange, a unit of account or a store of value. Cryptocurrency is a type of virtual currency that uses crypto.
- Although some virtual currencies operate like a fiat currency - virtual currencies do not have legal tender status in the US.
- The sale or other exchange of virtual currencies, as well as the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, has tax consequences that generally result in a tax liability.
- The tax treatment of crypto assets depends on how investors transact with them.
- In general, the tax principles applicable to property transactions apply to transactions using virtual currency.
- When an investor sells (or otherwise disposes of) virtual currency, they will recognize a capital gain or loss.
- Many transactions are considered income, including hard forks, airdrops, mining and (currently) staking.
- Transfers of virtual currency between wallets or addresses owned by the same investor are non-taxable events.
- If an investor owns multiple units of one kind of virtual currency, with different basis amounts, they should specifically identify the basis of the units when calculating gains and losses. If they are unable to do this, FIFO is the standard accounting method.
- The IRS has issued new guidance stating NFTs may be deemed collectibles if the underlying asset is determined a collectible under Section 408(m)(2) of the tax code. As such, long-term gains from NFTs deemed collectibles may be taxed at a higher rate of 28%.
When does crypto trigger a CGT event?
A disposal of crypto - like the disposal of any other property - triggers a Capital Gains Tax event. This includes:
- Selling crypto for USD, or any other fiat currency.
- Swapping crypto for crypto, including stablecoins and NFTs.
- Spending crypto to purchase goods and services (when not seen as a personal use asset).
The length of time the investor has owned the crypto is also key. If they’ve held the asset for less than one year, they’ll pay short-term Capital Gains Tax on any profit, while if they’ve held the asset for more than a year, they’ll pay long-term Capital Gains Tax on any profit.
If an investor has made a loss, they may offset their capital losses against capital gains, as well as offset an additional $3,000 in capital losses against regular income each financial year.
We’ll look at examples of this a little further down.
Cost basis and fair market value
As with general property accounting, to calculate a gain or loss, we first need to know the cost basis of the property. Crypto is no exception to this rule.
The IRS is clear that for crypto - the cost basis is the amount an investor spent to acquire the virtual currency, including any fees, commissions or other acquisition costs in USD.
There are some transactions - like mining rewards or being paid in crypto - where there isn’t an obvious basis. In these instances, instead use the fair market value in USD of the asset on the day it was acquired.
Though the above sounds quite straightforward, the reality is most American crypto investors hold, and have disposed of, multiple cryptocurrencies throughout a single financial year. As such, they must choose and follow an accounting method.
The IRS is clear that investors who disposed of multiple units of the same kind may choose which units they’ve disposed of using the specific identification accounting method. If an investor is unable to use specific identification, the IRS states the following accounting methods are allowed:
- First In, First Out (FIFO).
- Last In, Last Out (LIFO)
- Highest In, First Out (HIFO)
A caveat though - the IRS also states that if an investor follows one of the accounting methods above, they must have records to prove they followed that accounting method.
With the foundations covered - let’s take a look at some examples of the multitude of transactions and the tax implications.
Selling crypto for USD
Selling crypto for dollars, or any other fiat currency, is the most common Capital Gains Tax event for American investors.
There are a number of ways to sell cryptocurrency - though the easiest and most common way is to sell via a centralized crypto exchange like Binance, Coinbase or Kraken. Investors may also sell via a non-custodial wallet like Ledger.
Regardless of how or the exchange used to sell crypto, the tax implications are the same. Selling crypto for dollars is a disposal of property and it triggers a Capital Gains Tax event and a capital gain or loss must be recognized. Take the cost basis of the asset and subtract it from the sale price to calculate the capital gain or loss.
Let’s take a look at a couple of examples.
A client bought 1 ETH for $3,172 on Binance in August with their credit card and paid a 2% fee, or $63.44 - making the total cost basis for the ETH $3,235.44.
The client sold the ETH in February for $2,593 and paid another 2% transaction fee, or $51.86 - which can be added to the asset’s cost basis. To calculate the capital gain or loss, subtract the cost basis of the ETH from the sale price.
$2,644.86 - $3,235.44 = - $590.58. The client made a capital loss and they may offset this against any capital gains for the year, or carry it forward to future financial years if unutilized.
A client bought 1 BTC in January 2022 for $36,276 directly from their hardware wallet using Ledger Live and paid a 0.25% transaction fee, or $90.69, making the cost basis of the asset $36,366.69.
The client sold their BTC in April 2022 for $47,062 and paid another 0.25% fee, or $117.66, which can be added to the cost basis of the asset. To calculate the capital gain or loss, subtract the cost basis of the BTC from the sale price:
$47,062 - $36,393.66 = $10,668.34. The client made a capital gain of $10,668.34. As the client owned the asset for less than a year, they’ll pay a short-term Capital Gains Tax rate, at the same rate as their regular Income Tax rate.
The IRS does have a wash sale rule that states if an individual investor sells or trades an asset at a loss and then purchases a substantially identical asset within 30 days, they cannot claim this loss as a capital loss.
However, currently, the IRS wash sale rule only applies to assets classified as securities - which crypto is not classified as. So currently, wash sales don't apply to crypto.
A word of warning though - this looks set to change in the near future with the impending crypto legislation.
Swapping crypto for crypto
It comes as a surprise to some investors - but exchanging one cryptocurrency for another cryptocurrency is considered a disposal and a capital gain or loss must be recognized. This includes swapping cryptocurrency coins for stablecoins or swapping cryptocurrency tokens for an NFT (non-fungible token).
The disposal is of the asset previously held, not the asset acquired - although investors still need to track the fair market value of the acquired asset (and any related fees) to calculate their cost basis for future disposals.
There are many crypto transactions that are viewed as a swap - and therefore a disposal - from a tax perspective, including:
- Trading cryptocurrency coins for stablecoins, on both centralized and decentralized crypto exchanges.
- Liquidity mining - or any DeFi investment activity where tokens are received in return for capital.
- Swapping fungible crypto tokens for non-fungible token(s), or NFTs.
Let’s take a look at some examples.
A client bought 1 ETH for $2,250 and later swaps their ETH for DAI. DAI is a kind of stablecoin on the Ethereum blockchain, pegged at a 1:1 ratio with the US dollar, backed with crypto reserves to maintain stability.
At the time the client made the transaction, the fair market value of ETH was $3,000. To calculate the capital gain or loss, subtract the asset’s cost basis from the fair market value at the time of the transaction:
$3,000 - $2,250 = $750. The client has a capital gain of $750 and they’ll need to pay Capital Gains Tax on that profit.
As for the new DAI assets, at the time of the trade $2,250 was equivalent to 2250 DAI as it’s pegged at a 1:1 ratio with the USD. The cost basis for the new assets is $1 per unit.
There are a multitude of DeFi protocols available, across many blockchains - like Ethereum, Cosmos and Binance Chain. We have lots of helpful guides on many of these different protocols and the various tax implications of them if you’d like to learn more - but in reality from a tax perspective, it’s pretty straightforward. It all comes down to the specific transaction.
Most DeFi protocols utilize liquidity pools. These pools are a collection of investor funds, which are utilized to conduct the transactions relating to the pool. Liquidity pools exist for all kinds of transactions including trading crypto on dexes and borrowing and lending crypto on lending protocols. When an investor wants to make a transaction on one of these protocols, the funds will come from a liquidity pool.
Investors can also earn by adding to liquidity pools - they’ll get a proportional percentage of any transaction fees and sometimes specific reward or governance tokens too. It’s how these rewards are paid out that dictates the tax implications, but most often, they’re paid out via liquidity pool tokens (LP tokens).
How LP tokens work is simple. When an investor adds capital to a pool, they get LP tokens in return. When they want to remove their capital from the pool, they trade their LP tokens back. Most of the time, rewards are paid out via LP tokens - they accrue value while the capital is in the pool.
For example, a client invests BNB and CAKE into a PancakeSwap liquidity pool. The client receives BUSD-CAKE LP tokens in return. These tokens accrue value based on the transaction fees collected from the pool. This may be seen as a crypto to crypto trade and therefore a disposal - even if the investor can later get their capital back. With this view, it’s likely many liquidity pool transactions involving liquidity pool tokens would trigger a Capital Gains Tax event and as such, clients will need to calculate and recognize any capital gain or loss from the transaction.
An important note here - while the majority of DeFi protocols utilize liquidity pool tokens, not all do. Some protocols pay out rewards as new tokens, while some pay out rewards both via LP tokens and with new tokens. In other words, regardless of the terminology and whether your client is staking, liquidity mining or yield farming - you’ll need to consider how that specific protocol works and interpret the tax implications and whether Capital Gains Tax or Income Tax would apply.
We’ll cover this in more depth below, but for DeFi protocols that pay out new tokens as a reward, this would be more likely to be seen as income than a CGT event.
A client uses ETH to purchase a Bored Ape Yacht Club NFT on Rarible via their Coinbase wallet. The NFT they buy costs 80 ETH.
On the day the client bought the ETH, the fair market value of ETH was $1,641, meaning at 80 ETH the total price of the NFT was $131,280. The client also paid a 1% transaction fee, or $1,312.80, which can be added to their cost basis, making $132,601.80.
When the client bought their ETH, ETH was valued at $1,750, so 80 ETH would be $140,000. The client needs to calculate their capital gain or loss from the trade of ETH to the NFT.
$132,601.80 - $140,000 = - $7,398.20. The client has made a capital loss of - $7,398.20 and can offset this loss against any capital gains for the financial year, or carry it forward if unutilized.
Spending crypto is also viewed as a disposal of an asset from a tax perspective and as such a capital gain or loss must be recognised.
There are many ways to spend crypto, and these numbers are only growing as the adoption of crypto continues. Many US retailers now accept crypto as a means of payment, including AT&T, Microsoft, CheapAir, the Dallas Mavericks and NewEgg. As well as this, many crypto exchanges and businesses offer crypto credit and debit cards, for example, Coinbase, Binance, BitPay and Wirex.
To calculate any capital gain or loss, taxpayers need to subtract their cost basis from the fair market value of their crypto on the day they spent it.
A client uses Bitcoin to buy a PS5 on NewEgg. With shipping and taxes, the total price is $800. On the day the client spends the BTC, $800 is equivalent to 0.035 BTC.
The client needs to identify the cost basis for their 0.035 BTC to recognize their capital gain or loss. When the client acquired their BTC, 0.035 BTC was valued at $1,000.
$800 - $1,000 = - $200. The client has made a capital loss of $200 as BTC has fallen in value. This capital loss can be offset against any capital gains, or offset against income (up to the $3,000 limit) or carried forward if there are no gains to offset it against.
When does crypto trigger Income Tax?
With Capital Gains Tax out the way - let’s move on to Income Tax.
The simplest way to think about when crypto may trigger Income Tax is whenever an investor is earning new tokens as a result of their activities - this is more likely to be viewed as additional income by the IRS and subject to Income Tax.
There are a number of ways investors can earn new tokens, including:
- Staking crypto as part of a proof of stake consensus mechanism.
- Staking crypto using centralized crypto exchanges or DeFi protocols.
- Liquidity mining - if the DeFi protocol works in such a way that new tokens are paid out, instead of, or as well as, LP tokens.
- Getting paid in cryptocurrency - whether that’s an entire salary, part of a salary or as tips.
- Yield farming - if the farming protocol works in such a way that new tokens are paid out, as opposed to LP tokens.
- Earning interest on crypto - by loaning it with centralized exchanges and decentralized lending protocols (if new tokens are received).
- Receiving an airdrop of crypto, including hard forks.
- Creating and selling NFTs like an artist.
- Engaging with earning platforms like play-to-earn games, learn-to-earn programs, ads-to-earn browsers, and more.
It’s important to remind clients that just because they’ve paid Income Tax on their crypto, doesn’t mean they wouldn’t also pay Capital Gains Tax on any profits should they later dispose of their crypto.
Let’s take a look at a few examples of Income Tax on crypto.
There’s two kinds of activities the phrase staking may refer to in the crypto market - staking as part of a PoS consensus mechanism or staking coins or tokens to earn interest or rewards. The tax treatment depends on the specific transaction, or how the protocol works.
For example, a client is staking as part of the Cardano consensus mechanism by staking ADA using their Yoroi wallet. As a reward for participating in processing transactions on the Cardano blockchain, the client is rewarded with ADA tokens. The client is receiving new tokens, as such, this is likely to be viewed as a kind of additional income by the IRS and subject to Income Tax. To calculate the amount of additional income, take the fair market value of ADA tokens in USD on the day the client received them.
For staking via centralized exchanges or via DeFi protocols - the tax treatment can get a little more confusing. Like above, if a client locks in some coins or tokens in a wallet or exchange and earns new tokens as a reward for doing so - this would likely be viewed as additional income and subject to Income Tax (calculated like above).
But some DeFi protocols don’t work like this - they give tokens in exchange for staked capital. For example, the Lido protocol lets investors stake ETH and receive stETH tokens in return so they maintain liquidity while their tokens are staked. This transaction would be more like a crypto to crypto swap and therefore a disposal under the Capital Gains Tax rules.
We touched on liquidity mining above and how the tax implications may vary depending on the specific protocol and how the rewards are paid out - and the same applies to yield farming, which is a subset of liquidity mining. It refers to ‘stacking’ DeFi protocols on top of one another in order to yield the largest returns.
SushiSwap, a decentralized exchange, is perhaps the best example of this as their protocols highlight how similar activities may create different tax liabilities.
For example, a client adds capital to a SushiSwap liquidity pool and receives SushiSwap liquidity pool tokens (SLP tokens) in return. This is a disposal and a capital gain or loss must be recognized. The client then stakes their SLP tokens in SushiSwap farms and earns SUSHI tokens as a reward for doing so. The client has received new tokens, like an additional income, and therefore would need to pay Income Tax. The client then stakes the SUSHI tokens they earned and receives XSUSHI tokens in return. This is a disposal and a capital gain or loss must be recognized.
So while this is an example of yield farming in crypto, as you can see the tax consequences entirely depend on how the specific protocol works. In general, new tokens are seen as additional income, while receiving tokens that accrue value in return for capital would be considered a disposal and a capital gain or loss must be recognized.
A client is mining Bitcoin via an AntPool mining pool and earning daily rewards.
The IRS is very clear that crypto mining rewards are viewed as ordinary income. To calculate the income, take the fair market value of BTC in USD on the day the client received it and calculate a total figure of additional income for the financial year they’re reporting on.
Not only are mining rewards subject to Income Tax upon receipt, but profits will also be subject to Capital Gains Tax when coins are later disposed of by selling, swapping or spending them.
Individual investors vs. businesses
There are a wide variety of crypto clients available for crypto savvy accountants in the US - from individual investors, to self-employed individuals to businesses - each with different needs to help navigate the accounting landscape.
Many new crypto investors are entirely unfamiliar with Capital Gains Tax implications - having not previously invested in more traditional markets. Meanwhile, so-called degens, may be aware of the tax implications of cryptocurrency, but the sheer volume of their transactions makes it incredibly difficult to calculate and recognize the multitude of capital gains and losses.
Koinly helps investors, and accountants every step of the way - not only with our crypto tax calculator tool, but with our helpful resources. To help investors navigate the complexities of crypto tax, we’ve got our ultimate crypto tax guide as well as our USA crypto accountants directory to help investors find an experienced crypto accountant to suit their exact needs - or help accountants like you find clients.
As well as employed investors and self-employed investors, crypto accountants can also help a range of crypto businesses. North Dakota, Tennessee, Oklahoma and Texas are just some of the states where it's incredibly profitable to mine cryptocurrency thanks to a combination of low taxes, cheap electricity and strong internet infrastructures. Many crypto miners opt to set up businesses in order to reap the various tax breaks available to small businesses as opposed to investors.
From crypto mining as a business to day trading, Koinly can help calculate and handle it all - saving you and your clients hours of manual accounting.
How crypto accountants can help investors
Accountants know that preparing for the April tax deadline takes preparation - and this is even more true when it comes to crypto taxes.
From optimizing clients’ taxable position before the end of the financial year by tax loss harvesting and picking a beneficial cost basis method to generating and checking IRS compliant tax reports - you can help your clients every step of the way with Koinly.
Koinly lets you track realized and unrealized gains and losses all from one spot, supports a range of accounting methods including FIFO, LIFO and HIFO and generates IRS compliant tax reports, ready for the April 18 2023 deadline.
How to calculate and report clients’ crypto taxes
In general, there’s five steps to calculating and reporting crypto taxes with the IRS:
- Calculate the cost basis of each crypto asset, or the fair market value (FMV) of the crypto asset in USD on the day it was acquired.
- Identify each taxable transaction and the type of tax that would apply - whether that’s Income Tax or Capital Gains Tax.
- Calculate capital gains and losses from each disposal of crypto, including separating short-term and long-term capital gains. Tally up capital gains, minus any losses for a net capital gain or loss.
- Identify the fair market value in USD of any crypto income on the day it was received.
- Report these final figures to the IRS using a tax tool like TurboTax or TaxAct, or file with paper forms.
The forms needed to file crypto taxes will vary slightly depending on each client and their investments and whether they’re filing as an individual or a business. However, in general clients will need:
- Individual Income Tax Return Form 1040. Form 1040 is the standard individual Income Tax Return form which all taxpayers must file.
- Schedule D and Form 8949. Each individual disposal of a crypto asset must be reported on Form 8949, and net capital gains and losses from Form 8949 reported on the Schedule D.
- Schedule 1. Crypto income from airdrops, forks, DeFi protocols, bonuses and so forth should be reported on Schedule 1.
- Schedule C. For self-employed investors, or clients operating a crypto business, income from crypto should be reported on Schedule C instead.
- FBAR. Any investor who has fiat currency or specified foreign financial assets worth more than $10,000 in combined value should file the FBAR form. Please note, if a client is only transacting with crypto (including stablecoins), this would not apply.
- FATCA. Any investor who had fiat currency or specified foreign financial assets worth more than $50,000 on the last day of the financial year (or more than $75,000 at any point during the financial year) must file a FATCA. Like above, this form is only necessary for fiat, if a client only held crypto assets, this form would not apply.
Many exchanges also issue 1099 forms, including 1099-K, 1099-B, and 1099-MISC forms. Clients may need to use these forms while filing with the various other forms noted above. As well as this, the IRS is currently developing a 1099 form specifically to report crypto assets (1099-DA).
The IRS has released a draft the expected Form 1040 for the 2022 financial year. The form now includes a dedicated 'digital assets' section. This section contains an extended question from this year's tax return, "At any time during 2022, did you (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?".
Of course, this is just a draft currently, but could be a sign of big changes to come in the IRS reporting requirements for crypto assets.
Koinly is the most trusted crypto tax tool for crypto accountants and CPAs in the USA. Our tool has helped hundreds of accountants, and their clients, save hours of manual calculations and spreadsheets.
All you, or your client, need to do with Koinly is add the crypto exchanges, wallets or blockchains they use via API or by uploading CSV files of their transactions. Koinly then gets to work calculating everything needed to file crypto taxes with the IRS. Once it’s worked its magic, check your clients’ Koinly account and generate the crypto tax report your client needs. Koinly can generate many IRS compliant tax reports depending on how your client files and their investments including the Complete Tax Report, Form 8949 and Schedule D and the TurboTax Report.
For accountants, Koinly lets you manage multiple clients all from one spot, with a user-friendly platform and amazing support team to help you troubleshoot any issues as you go. Crypto accountants can sign up for a free Koinly account in minutes.
Koinly also helps connect crypto accountants with crypto investors who need help calculating and filing their IRS taxes. Our USA crypto accountant directory offers accountants an easy way for clients to find them. Get listed.