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Crypto Taxes in 2020: Tax Guide w/ Real Scenarios

Last updated: July 24, 2020

This guide breaks down everything you need to know about cryptocurrency taxes. While the content is written primarily for the US, most countries tend to follow a similar approach. You can find guides for other countries here.

Up until 2019 most crypto traders were not aware that cryptocurrencies were taxed. Even fewer knew that crypto to crypto trades could result in taxes. And far less - if anyone - knew that things like airdrops and forks could make you liable for income tax.

If you havn't declared your crypto taxes then you are not the only one!

The IRS is aware of this too so in an effort to raise awareness around cryptocurrency taxes, they have introduced a question at the top of the Income Tax form:

crypto tax question form 1040

Basically with this one swift move, the IRS ended the popular "I didn't know crypto was taxed" response.

Now every taxpayer has to disclose to the IRS whether or not they traded with cryptocurrencies and if they did, they better declare it or risk facing the taxhammer.

How are cryptocurrencies taxed?

Crypto taxes are a combination of capital gains tax and income tax. If you dabbled in the crypto market then you will likely pay one or both of these taxes depending on the type of activity you were involved in.

What is a capital gain?

Capital gain is the profit or loss you make from trading or selling crypto:

Capital gain = selling price - buying price - fees

Your buying price + associated fees are also known as the cost-basis or just basis in accounting lingo.

For example, if you bought 1 BTC for 1000 USD and also paid a fee of $10, then your cost basis is $1010. If you later sell the Bitcoin for $1500 then you will realize a capital gain of $1500 - $1000 - $10 = $490. You will have to pay a capital gains tax on this amount, we will go deeper into how much tax you will have to pay in the next section.

Here's a breakdown of the most common crypto scenarios and the type of tax liability they result in:

Buying crypto

This is the first thing you do when starting with crypto. Luckily, it is not taxed. so if you bought a whole lot of crypto and still own it, good news for you!

Tax free

Selling crypto

When you begin selling off your crypto, that's when the tax liabilities come in.

Say you bought 1 BTC and sold it at a $1000 profit. This profit is taxed as a capital gain. Depending on how long you held the coin, your profits will be taxed either at the long term or the short term tax rate (more on the tax rates later).

Capital gains tax

Trading or exchanging crypto

Trading one crypto for another (ex. BTC → ETH) is also a taxable event.

The IRS sees a trade as 2 separate transactions, first you are selling your BTC for X amount of fictional dollars, then you are buying ETH with these fictional dollars.

Even though you never received any dollars in hand, you still have to pay tax on the sale of the BTC. The purchase of ETH is not taxed as you learnt earlier.

Capital gains tax

Trading with stablecoins

Stablecoins are also cryptocurrencies and taxed in the same way as any other crypto to crypto trade.

The benefit of stablecoins is that as long as its price doesnt deviate from $1 you wont have to pay any additional capital gains taxes when you trade the stablecoin for some other crypto. This makes them somewhat similar to fiats as far as taxes are concerned. Note that you still need to keep a record of the stablecoin trades for tax purposes.

Capital gains tax

Participating in an ICO / IEO

Participating in an ICO or IEO triggers a taxable event as you are exchanging a cryptocurrency for another i.e. the tokens that will be issued in the future.

The transaction is taxed when you receive your tokens - not when you participate. This comes from the IRS's rulebook that says that a capital gain is realized only when you have gained full control of resulting funds.

Capital gains tax

Token and coin swaps

When a cryptocurrency changes its underlying tech for ex. when EOS went from the ETH blockchain to the EOS mainnet or when DAI changed its contract address and named the old coin SAI - there are no tax liabilities.

It doesn't matter if the coin is being swapped at a 1:10 ratio or 1:1 ratio, as long as the value of your holdings remains unchanged, you will not have to pay tax on the swap.

Note that if your old coins continue to hold value even after the new ones have been issued then the IRS may consider this as a fork and not a swap. Forks are taxed as Income.

Tax free

Paying for stuff online

Whether you are paying rent, buying an old TV or paying for a netflix sub with cryptocurrency, you are still taxed in the same way as when you sell crypto.

This transaction is similar to the crypto to crypto scenario above. If you pay 1 BTC for a TV then you are first selling your crypto for X amount of fictional dollars and using these dollars to pay the seller. The disposal of your BTC is therefore taxed as a capital gain.

Capital gains tax

Mining Crypto

Any proceeds you receive from a mining pool/service or your own mining rig are taxed as ordinary income and will need to be declared on your Income tax return.

Note that when you eventually sell the mined coins, you will still be subject to capital gains tax on the difference between the value you declared as Income and the value at the time of the sale.

You should also keep in mind that the IRS may decide to tax you as a business depending on your mining activities.

Income tax

Interest from DeFi / Lending / Staking / Masternodes

Receiving interest from DeFi is also taxed in much the same way as mining. You have to declare it on your Income tax statement as additional ordinary income.

The actual "lending" of coins is not taxed as you still own the assets and havn't disposed them yet. Note that guidance on this is not very clear, some countries such as Sweden are taxing the actual Lending transaction as a disposal. The IRS may also change its stance in the future and tax crypto lending as a disposal but - as of now - there are no indications of this happening.

Income tax

Airdrops & Forks

This used to be a very confusing scenario up until 2019 when the IRS finally stated that any airdrops or forks are to be declared as Income.

Soft forks that dont result in a new coin are not taxed. Going by the IRS's guidelines even the crappy airdrops you get in your ETH wallet would be taxable income. However, these coins are usually negligible in value and cant easily be liquidated so you might be okay ignoring them (not tax advice!).

Some other points about Hard Forks that you should keep in mind:

  • The IRS states that forked coins are taxed as Income at their Fair Market Value at the time you recevie them. 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.
  • 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.
Income tax

Signup & Referral bonuses

Any crypto you get in return for signing up or referring users to a service is taxed as Income.

Income tax

Getting paid in Bitcoins

Whether you are freelancing or working for a company that pays employees in crypto, you can't escape the Income tax.

Any coins received as Income are taxed at market value at the time you received them so make sure you declare this Income or yu might end up facing the taxhammer.

Income tax

Gifting crypto to friends & family

Gifting is tax-free upto $15,000 per friend or family member. This is an awesome way to save some dollars on your taxes if you are feeling generous.

If the gift exceeds $15,000 in value, you 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.

Tax free upto $15k

Donating crypto

Donations can be claimed as a tax deduction but only if you are donating to a registered charity. See a list of registered charities here.

The amount of deductions varies depending on how long you have held the assets:

  • If you owned the crypto for more than 1 year, you can deduct upto 30% of your Annual Gross Income (AGI).
  • If you owned the crypto for less than a year you may deduct upto 50% of your AGI and the lesser of cost-basis or the FMV of the donated coins.

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.

Tax free & deductible

Transferring crypto between own wallets

Transfers between your own wallets or exchange accounts are not taxed but it's important to keep track of these transactions so you can prove ownership of the sending and receiving wallets in case of an audit.

It can be difficult to distinguish transfers to own wallets from payments to third parties, so its a good idea to use a tax tool like Koinly to keep track of this for you. The Free plan on Koinly allows up to 10,000 transactions which is more than enough for most!

Tax free

Margin trading

A margin trade involves borrowing funds from an exchange to carry out a trade and then repaying the loan afterwards. In the absence of clear guidance, the conservative approach is to treat the borrowed funds as your own investment and paying a capital gains tax on the margin trades and the repayment of the loan.

Think of it as taking out a loan against your house to buy crypto, there's nothing stopping you from doing this and as long as you repay the original loan + interest, you get to keep all the profits (less taxes of course)!

Note that if you are paying interest on this loan in crypto then the interest payment would be subject to capital gains tax since it is a disposal.

Capital gains tax

Futures / contracts / options trading with crypto

In futures trading, you are not actually buying or selling any crypto. Instead you are speculating on the rise or fall of the price of a crypto asset in the future. When the future arrives you will either make a profit or a loss (Pnl).

There is no guidance from the IRS on how this Pnl should be taxed but there are 2 possible tax categories that this can fall into:

  • Capital gains tax: The profits and losses could be declared as a capital gain on your tax reports. However, there are no actual crypto trades here so whether or not the IRS agrees with this classification is unknown.
  • Income tax: This is usually more conservative, you simply declare the final Pnl as income. If you end up with a complete loss then you may only be able to deduct up to $3000 from your income (the rest of the loss can be carried forward to future years). Profits are taxed at your regular income tax bracket.

Note: If you are using Koinly to calculate your taxes then you can control how the Pnl is taxed on the Settings page.

Capital gains OR income tax

Gambling with crypto

Gambling is taxed as regular income in the US. Winnings are taxed at your regular income tax bracket while losses are deductible upto to a total of $3000 (remaining losses can be carried forward).

Income tax

How much tax do you have to pay on crypto trades?

Cryptocurrency transactions that are classified as Income are taxed at your regular income tax bracket. The tax brackets for 2020 are:

RateFor Single Individuals, Taxable Income OverFor Married Individuals Filing Joint Returns, Taxable Income OverFor Heads of Households, Taxable Income Over
10%$0$0$0
12%$9,875$19,750$14,100
22%$40,125$80,250$53,700
24%$85,525$171,050$85,500
32%$163,300$326,600$163,300
35%$207,350$414,700$207,350
37%$518,400$622,050$518,400

Source: Internal Revenue Service

EXAMPLE

Let’s say you’re a single filer with $32,000 in taxable income. That puts you in the 12% tax bracket. But do you pay 12% on all $32,000? No. Actually, you pay only 10% on the first $9,875; you pay 12% on the rest. (Look at the tax brackets above to see the breakout.)

income tax bracket example Source: Nerdwallet

Most of your activity is likely to fall under the Capital Gains Tax regime which is taxed depending on how long you held the coins before selling:

  • If you sell within one year of purchase then you will pay the short term CGT rate which is the same as your Income tax rate
  • If you hodl for at least 1 year then you pay long-term CGT rate which is much lower

The long-term CGT rates for 2020 are:

RateFor Unmarried Individuals, Taxable Income OverFor Married Individuals Filing Joint Returns, Taxable Income OverFor Heads of Households, Taxable Income Over
0%$0$0$0
15%$40,000$80,000$53,600
20%$441,450$496,600$469,050

Source: “2020 Tax Brackets,” Tax Foundation and IRS Topic Number 559

Tldr: Hodling for at least 1 year results in less taxes!

Who pays the tax? You or the investment company?

Both capital gains tax and Income tax have to be paid by you - the taxpayer! No one else can pay this on your behalf. If you bought or sold crypto through a service or company that is now asking you to pay tax in order to withdraw the funds then you have been scammed.

Sadly, this happens more often that one might think, so please carry out your due diligence before investing money into shady companies or investment funds.

Calculating your crypto taxes (example)

Let's look at how capital gains are calculated by way of an example.

  1. John bought 1 BTC for $1000 on 1st July 2020.
  2. He traded it for 20 ETH on 5th July 2020. The market value of 20 ETH at this point was $1500.
  3. He also received 0.15 ETH (worth $10) from Coinbase as a signup bonus.

To calculate the crypto taxes for John we are going to use Koinly which is a free online crypto tax calculator.

After entering the 3 transactions into Koinly manually, this is the output:

screenshot of Johns transactions entered into Koinly

We can see the gain/loss on each transaction clearly. Navigating to the Tax Reports page also shows us the total capital gains.

screenshot of tax reports page

As you can see, John will have a taxable capital gain of $500 along with taxable income of $10 from cryptocurrencies. Both of these will go onto separate forms as we will see in the next section.

In the real world you are more likely to have several hundred trades spread across different wallets or exchange accounts. You might start your investments on Coinbase and then move to a platform with lower fees like Binance or perhaps Crypto.com. Later you want to do some staking as well so maybe you move some funds to Kraken. Somehow you also end up with some futures trades on Bitmex etc etc.

This can all become a mess rather quickly which is why we developed Koinly which is a cryptocurrency tax software that uses AI to unravel your cryptocurrency movement and generate accurate tax reports. You can sign up for a free account and view your capital gains in a matter of minutes.

Accounting methods used in the calculations

The IRS allows you to choose whichever accounting method you like when calculating your taxes. The most common one is First In First Out (FIFO) followed by Last In First Out and Spec ID. For a comparison of the different methods and how/why they are used in the calculations you can check out this article.

Which tax forms do you report crypto on?

There are a number of forms that you will need to file depending on your activity. The most popular one is the 8949 which includes details of all your capital gains and disposals. However, there are a couple other that you should be familiar with too.

Form 8949

Who needs to file this?

Anyone who has capital gains or losses during the tax 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 then 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. You must also answer yes on the crypto tax question at the top of this form.

FBAR

Who needs to file this?

Anyone who had fiat currency 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 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.

When is the filing deadline?

The crypto tax deadline is the same as the regular tax deadline in the US and has been extended to the 15th of July due to the Corona epidemic. The usual deadline is 15th of April.

What if I don't file my crypto taxes?

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. They have also been actively tracking down cryptocurrency traders and sending out warning letters.

letter from the irs

This coupled with the crypto tax question on form 1040 means that they can even prosecute you for lying on a federal tax return if you do not disclose your cryptocurrency earnings.

crypto tax question irs

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.

Bonus: Use cryptocurrency tax software to automate your reports

Cryptocurrency taxes don't have to be complicated. If you have a record of your transactions then you can use a tool like Koinly to put everything together and generate accurate cryptocurrency tax reports in a matter of minutes.

Here's how it works with Koinly so you can see for yourself:

Step 1: Connect your exchanges and wallets

Most exchanges have API's that can allow Koinly to download your transaction history automatically. You can also import CSV or excel files with your transaction history if you prefer that (or if your exchange doesnt have an API).

Step 2: Preview your capital gains

Koinly does a number of things under the hood in order to calculate your capital gains and income.

First it fetches the market rates at the time of your trades, then it matches transfers between your wallets and exchange accounts and finally it calculates your capital gains. You can easily configure the accounting method used for the gains (it supports FIFO, LIFO, HIFO, Spec ID and a number of other methods). The default in the US is FIFO.

All this is automated so the only thing you have to do is head over to the Tax Reports page to see a summary of your gains:

Note that you can also use the Dashboard to stay on top of your taxes as you carry out trades. This can help you make good tax-friendly trades and avoid surprises at tax time!

Step 3: Download your tax reports

The final step - if you can call it that - is to download your tax reports. Koinly supports a number of different tax reports, everything from Form 8949 to a Complete Tax Report that can be used during audits. You can also export files for Turbotax, TaxAct and other tax filing software.

FAQ

Can I deduct my cryptocurrency trading losses?

Yes, you can. If you made a loss on your crypto trades you can deduct it from any profits you made during the year. If your losses exceed your gains then you can even offset upto $3000 worth of income and carry over any remaining loss to future years!

Sure there are. The biggest loophole at present is that wash-sale rules do not apply to cryptocurrencies. This means if you have made a profit during the year but you find that your holdings are now worth much less, you can simply sell them at a loss and buy them back right after!

This allows you to do 2 things:

  1. You are realizing a loss that can be deducted from your other profits.
  2. You are buying the crypto back to maintain your crypto holdings.

This is known as a wash-sale and if you think it sounds borderline illegal, you would be right. There are laws against thing kind of trades in the stock markets but since crypto is not classified as a stock by the IRS - these rules do not apply!

This technique is also known as tax-loss harvesting.

Do I have to pay Capital gains tax if I have already paid Income tax?

Yes, you do! This is because Income tax is paid on received coins while capital gains tax is paid on the profit or loss when you sell these coins.

If you mine 1 BTC (worth $1500) and later sell it for $2000, you would have to pay Income tax on $1500 and a capital gains tax on the $500 profit.

Can like-kind-exchange be used to avoid tax on crypto to crypto trades?

No, like-kind exchange was a loophole that some crypto traders discovered when there wasn't enough guidance around cryptocurrencies. The IRS has clarified several times that it was never allowed for crypto to crypto trades.

Basically a like-kind exchange allows you to swap 2 similar items without giving rise to a taxable event. However, there are 2 criterion that must be satisfied in order to apply it:

  1. The transaction must involve two similarly valued real-estate properties (like a house)
  2. An authorised intermediary must supervise the entire transaction

Crypto to crypto trades fail both of these.

Can losses due to crypto exchange hack / scam be deducted?

Losses that have occured due to theft/hacks are no longer deductible as of tax year 2017.

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.

In the news

20th Dec 2019: 8 congressmen signed and sent a letter to the IRS asking for clarification on things like Hard Forks and Margin Trades. We will update this guide if/when the IRS reponds to it.

9th Oct 2019: The guide has been updated in accordance with the latest guidelines released by the IRS on the 9th of October 2019.

30th May 2018: The AICPA sent a letter to the IRS recommending changes to the crypto tax guidance issues in 2014, specifically asking for the De minimis exemption.

14th April 2014: IRS issued first notice regarding the taxation of cryptocurrencies. Crypto is classified as Property and taxed as capital gains.

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