Wondering how 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 both 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 and crypto income tax, all ahead of the April 15th tax deadline!
Do you have to pay taxes on Bitcoin and crypto?
Yes, you'll pay tax on cryptocurrency gains and income in the US. The IRS is clear that crypto may be subject to Income Tax or Capital Gains Tax, depending on the specific transaction you've made.
How much is crypto taxed in the USA?
You'll pay up to 37% tax on short-term capital gains and crypto income and between 0% to 20% tax on long-term capital gains. The amount of tax you'll pay on crypto in the USA depends on how much you earn, the specific transaction and how long you've held the asset.
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.
02 November 2022: Updated to include the new 2023 Capital Gains Tax & Federal Income Tax rates.
23 September 2022: The IRS releases a draft of the 2023 Form 1040 tax return - with a new section for digital assets.
15 February 2022: Updated to include new 2022 tax rates.
8 January 2022: The IRS confirms the tax deadline for 2022 is extended to Monday the 18th of April.
7 January 2022: Staking guidance updated to reflect Jarrett v. United States case.
3 December 2021: New year, new guide!
10 October 2021: IRS announces 2021 filing deadline extension is 15 October 2021.
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.
Capital Gains Tax & crypto
Because crypto is viewed as a capital asset from a tax perspective, anytime you dispose of crypto, you may need to pay Capital Gains Tax. There are three ways you can dispose of your cryptocurrency in the US:
Selling crypto for fiat currency.
Trading crypto for crypto.
Spending crypto on goods or services.
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.
Crypto Capital Gains Tax rates
There isn't a specific crypto Capital Gains Tax rate - it's based on the general 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 crypto for less than a year, you'll pay the short-term Capital Gains Tax rate. If you've held crypto for more than a year, you'll pay the long-term Capital Gains Tax rate.
Short-term Capital Gains Tax rate
For short-term capital gains, you'll pay the same tax rate as you do on your taxable income. This is based on the Federal Income Tax rate brackets. For the 2022 tax year these are:
Head of Household
Married filing jointly
Married filing separately
$0 - $10,275
$0 - $14,650
$0 - $20,550
$0 - $10,275
$10,276 - $41,775
$14,651 - $55,900
$20,551 - $83,550
$10,276 - $41,775
$41,776 - $89,075
$55,901 - $89,050
$83,551 - $178,150
$41,776 - $89,075
$89,076 - $170,050
$89,051 - $170,050
$178,151 - $340,100
$89,076 - $170,050
$170,051 - $215,950
$170,051 - $215,950
$340,101 - $431,900
$170,051 - $215,950
$215,951 - $539,900
$215,951 - $539,900
$431,901 - $647,850
$215,951 - $323,925
Planning ahead for next year? For the 2023 tax year - the Federal Income Tax rates are:
Head of Household
Married filing jointly
Married filing separately
$0 to $11,000
$0 - $15,700
$0 - $22,000
$0 - $11,000
$11,001 - $44,725
$15,701 - $59,850
$22,001 - $89,450
$11,001 - $44,725
$44,726 - $95,375
$59,851 - $95,350
$89,451 - $190,750
$44,726 - $95,375
$95,376 - $182,100
$95,351 - $182,100
$190,751 - $364,200
$95,376 - $182,100
$182,101 - $231,250
$182,101 - $231,250
$364,201 - $462,500
$182,101 - $231,250
$231,251 - $578,125
$231,251 - $578,100
$462,501 - $693,750
$231,251 - $346,875
Long-term Capital Gains Tax rate
Meanwhile, long-term Capital Gains Tax for crypto is lower for most taxpayers. You'll pay a 0%, 15% or 20% tax rate depending on your taxable income. If you earn less than $41,676 including your crypto (for the 2021 tax year) then you'll pay no long-term Capital Gains Tax at all. The long-term Capital Gains Tax rates for 2022 tax year are:
Head of Household
Married filing jointly
Married filing separately
$41,676 – $459,750
$55,801 – $488,500
$83,351 – $517,200
$41,676 – $258,600
The long-term Capital Gains Tax rates for the 2023 tax year (for taxes due in April 2024) are:
A capital gain or loss is the difference in value from when you acquired your crypto to when you disposed of it. This is called a taxable event. So any time you sell, trade 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 yourcost 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.
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.
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 you could pay on cryptocurrency.
You buy 1 BTC in February 2021 valued at $33,000 and pay a 2% transaction fee. Your cost basis is $33,660.
In October 2021 , you sell 1 BTC for $60,000, creating a taxable event. 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'll pay the short-term Capital Gains Tax rate - based on your regular Income Tax rate.
You earned $90,000 a year in taxable income in 2021 - 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 $6,322.
USA crypto cost basis method
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 above 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 of 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): the 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.
Highest In First Out (HIFO): the most expensive asset you bought is sold first.
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 different 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 change between the different allowed accounting methods. The most common accounting methods in the US are FIFO and Spec ID.
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.
Gifting crypto under $16,000 (or $17,000 for 2023): You can gift up to $16,000 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. If you gift over this amount, provided you're under the lifetime gift tax exemption of $12.06 million in 2022 (or $12.92 million in 2023) - you won't need to pay gift tax. However, you may need to file Form 709 (more on this below).
Capital Gains Tax Free Allowance: If you earned less than $41,675 in 2022 in total income (including your crypto gains) you'll pay no Capital Gains Tax on long-term gains.
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, instead offset your capital losses against your capital gains to reduce your overall tax bill.
Long-term capital losses for those assets held more than one year can be used to offset long-term capital gains; while short-term capital losses for those assets held one year or less can be used to offset short-term capital gains. Remember, in general, you’re only allowed to offset losses of the same type - although there is an exception to this rule. There's a few different scenarios that can play out with losses, so let's take a look at each.
Crypto bear market. You've only got losses. But you also invest in the stock market and you've got some gains from this. Use the capital losses from your crypto to reduce your net capital gains.
You only have losses from your crypto investments, but you don't trade on other markets so you have no profit. If you don't have any capital gains to offset your crypto losses against, you can offset your crypto losses against your ordinary income, up to $3,000 per year (for those filing as single or married and filing jointly). Even better - you can carry these losses over to future tax years until all your losses have been utilized.
You want to get strategic. Just because you had a crypto capital loss this year doesn't mean you want to offset that loss, this year. You know you've got some unrealized gains in the bank... which will come with a huge tax bill when you realize them. If you're strategic, you can save your crypto capital losses and carry them forward to offset against future 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 as a capital loss. However, since this bill came 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.
So if you lose crypto - whether that's from losing your private keys or to a scammer - you can't claim any kind of deduction for it. The best thing you can do is simply write it off and disregard it from your calculations entirely.
In some circumstances - like with a rug pull - you'll still be in possession of your asset, it will just be worthless. This is actually good news for US investors from a tax perspective as it means they can realize their loss by disposing of their asset and create a capital loss to offset against their gains. Here's how to realize a loss:
Sell your tokens on an exchange if possible.
If your tokens are no longer listed on an exchange, you may be able to use a native or non-custodial wallet to swap them for another token.
Send your tokens to a burn wallet.
Crypto Income Tax USA
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.
The IRS has quite a lot of guidance about when cryptocurrency could be seen 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.
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 lending protocols like AAVE or Compound.
Earning new liquidity pool tokens, governance or reward tokens on protocols like Uniswap.
Earning staking rewards for staking tokens like SUSHI or CAKE.
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 the tax these may be subject to. 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.
Watch to earn platforms like Odysee.
Browse to earn platforms like Brave browser.
Play to earn games like Axie Infinity.
Shop to earn through browser extensions like Lolli.
How to calculate crypto income
Crypto income is easy to calculate - although time consuming if you have regular income! Just take the fair market value of the crypto you received in USD on the day you received it. This is the amount you earned and the amount you'll pay tax on at your Federal Income Tax rate, as well as potentially your State Income Tax rate.
With the basics out the way, let's take a look at a variety of transactions and the kind of tax that would apply.
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 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.
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, trade or spend that crypto.
Is swapping crypto taxable?
Swapping one crypto for another and thinking you'll avoid paying tax? Think again. Swapping crypto for crypto is taxable.
Swapping crypto for crypto
Wondering if crypto to crypto is 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 views this as two separate transactions. Let's use the example above - you want to buy ETH with BTC.
The IRS sees this as you disposing of your BTC. You're then buying ETH at market value. 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. If you eventually sell the ETH, your cost basis will be the market value of ETH on the day you made the trade.
CAPITAL GAINS TAX
Buying crypto with stablecoins
Buying crypto with stablecoins is viewed the same way as swapping crypto for another crypto - so any gain is 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 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.
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.
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%.
You bought 2 ETH in November 2020 valued at $1,200.
You sell 1 ETH in July 2021 for $3,500 and need to pay short-term Capital Gains Tax on your profit at your regular Income Tax rate..
$3,500 - $600 = $2,900. This is your capital gain.
You earn $60,000 in the 2021 financial year, putting you in the 22% tax rate bracket - so a total of $638 in tax.
You sell another 1 ETH in December 2021 for $4,000 and need to pay long-term Capital Gains Tax on your profit.
$4,000 - $600 = $3,400. This is your capital gain.
You earn more than $41,676 and less than $445,850 - so you'll pay 15% tax on $3,400, a total of $510.
So even though you made a larger capital gain from your second transaction - you paid less tax thanks to the 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 Gains 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.
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.
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 the 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 allowable as part of a cost basis.
You bought 1 ETH for $4,385.
You move your ETH from your Binance wallet to your MetaMask wallet. You're charged a 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 from 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 trade 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.
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.
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.
You receive 200 1INCH tokens from an airdrop. On the day you receive them, the fair market value per token is $3.50. Your tokens are subject to Income Tax, so you need to calculate their total worth.
$3.50 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.
Selling or trading 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, trading 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.
You sell your 200 airdropped 1INCH tokens a couple of days after. The fair market value per token is $4, so your proceeds are $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 haven't held 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
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.
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.
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 trade coins from a hard fork, you'll pay Capital Gains Tax. Your cost basis the fair market value of the coins or tokens on the day you received them.
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.
Giving a crypto gift
American taxpayers enjoy an annual $16,000 gift tax exclusion(or a $17,000 gift tax exclusion for the 2023 tax year). This allowance is per person, so you can give multiple gifts up to the limit to different people. You can also give multiple crypto gifts to the same person, provided the total amount is less than the limit of $16,000 for 2022 ($17,000 for 2023).
Gifts valued at more than $16,000 would potentially subject you to gift taxes of 40% of the amount over $16,000, but only if you have also exceeded the lifetime exclusionof $12.06m (or $12.92 million in 2023). You may also need to file a Form 709 if you gift more than the allowance.
Gifting crypto is a ‘non-recognition’ event for Capital Gains Tax purposes, meaning there is no capital gains tax owed by the person making the gift. Rather, the cost basis is inherited by the recipient which will be used to calculate capital gains if they eventually sell the asset.
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.
Selling a crypto gift
You'll pay Capital Gains Tax if you dispose of your gifted crypto by selling it, trading 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
The IRS is 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.
However, the Income Tax benefits of non-cash donations differ to the tax benefits of cash donations and any donations of crypto will be considered non-cash donations, including stablecoins.
If you donate cash to a qualified organization, you can deduct the full value of the donation up to 60% of your adjusted gross income (AGI). Any unused amounts can be carried forward to the following 5 tax years.
If you donate property, you can deduct between 20% and 50% of your adjusted gross income - the amount depends on the type of organization.
For 2021, there was an enhanced deduction available of up to 100% of AGI for cash donations to qualifying organizations. This was a temporary measure as part of the CARES act; the standard deduction rules applied again from 2022.
Because of the enhanced deduction available for cash donations, a taxpayer may wish to cash out their crypto first before donating in fiat. Whether this would be preferable from a tax perspective will depend on the potential Capital Gains Tax owed on the cash-out.
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.
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.
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, trade or spend any crypto you received as a result of mining activities.
Staking crypto taxes
Confusing - the term staking gets used interchangeably in crypto. It can refer to both DeFi lending and proof-of-stake cryptocurrencies. From a tax perspective, this matters because they may have different tax implications.
Staking as part of a PoS consensus mechanism
Some cryptocurrencies - like Polkadot, Solana, Avalanche and Cardano - use a PoS consensus mechanism. In a PoS consensus mechanism, you ‘stake’ your crypto to earn a reward. It's very similar to mining crypto as part of a PoW mechanism - a network participant gets selected to add the latest batch of transactions to the blockchain and earn crypto in exchange.
There is an argument that because you are creating newly generated coins, you should not be taxed on the receipt of the coins - the argument uses the analogy of creation of other property (such as a manufacturer creating a computer) who would not be taxed on the value of the computer following the completion of manufacturing, but only once sold to an eventual customer.
On the other hand, DeFi lending lets you lend your crypto through a given protocol - like Aave - and receive interest in the form of crypto from borrowers on the other side of the transaction. DeFi lending is much more comparable to a typical lending arrangement whereby you provide capital in return for interest, with the interest rewards being taxable as income.
IRS staking guidance
The IRS hasn't released any official guidance on staking rewards and how they're taxed. However, for a long time it was presumed that as proof of stake rewards were similar to mining rewards, they would be taxed in a similar vein. As above, mined coins are subject to Income Tax based on the fair market value at the point you receive them. However, a recent court case filed against the IRS suggests this might not be the case in the future.
A couple who staked Tezos attempted to claim a refund on their staking rewards for 2019 - which the IRS denied with no clarification. So they filed against the IRS and were offered a refund in December 2021. The couple have refused the refund, stating that they wish to set the legal precedent that staking rewards from PoS should be viewed as the creation of new property and subsequently only subject to Capital Gains Tax on disposal, not Income Tax on receipt of the newly created tokens. Since then, the US District Court for the Middle District of Tennessee sided with the IRS, dismissing the Jarretts' case as moot - but Jarretts plan to appeal, so watch this space!
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.
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 trading, 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 if it's new tokens. Capital Gains Tax if you receive LP tokens that accrue value.
Borrowing from DeFi protocols: Capital Gains Tax if you receive tokens in exchange for collateral.
Paying interest in DeFi protocols: No tax unless you're paying in crypto, in which case potential Capital Gains Tax, although this could be an investment expense and tax deductible, depending on why you borrowed crypto.
Selling or trading NFTs: Capital Gains Tax.
Buying NFTs: No tax if buying with fiat currency. Buying an NFT with crypto would be seen as a taxable crypto to crypto trade.
Minting/creating your own NFT: No tax - though minting costs may be able to be added to your cost basis.
Selling an NFT you created: Income Tax.
Staking on DeFi protocols: Income Tax if you receive new tokens. Capital Gains Tax if you receive LP tokens that accrue value.
Yield farming DeFi protocols: Income Tax if you receive new tokens. Capital Gains Tax if you receive LP tokens that accrue value.
Earning liquidity tokens from DeFi protocols: Income Tax or Capital Gains tax depending on whether you're earning new coins or you receive LP tokens that accrue value.
Adding liquidity to liquidity pools: Capital Gains Tax depending on whether you receive LP tokens in exchange for your liquidity.
Removing liquidity from liquidity pools: Capital Gains Tax depending on whether you receive LP tokens in exchange for 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, you can also learn more in our US DeFi tax guide.
Earning new tokens 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.
Selling or trading coins and tokens on DeFi protocols
Anytime you sell or trade 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
A recent trend in crypto is the growth of DAOs (Decentralized Autonomous Organization). They are effectively member-owned communities without central leadership. It’s an organizational structure that allows stakeholders to make governing decisions without the need for any kind of centralized authority. Instead of a small Board of Directors making decisions about the company, DAOs enable the community of token holders (members) to vote on the future of the organization.
A good example of this is Uniswap. Holders of UNI tokens vote on issues relating to the protocol - for example, how transaction fees are used and what new features to add.
Members of a DAO can profit from the DAO in various ways. For example, they might receive a share of the profits which result from the activities of the DAO or they might sell their DAO tokens to investors.
The IRS has no specific guidance on the taxation of DAOs. However, given the DAO is not a registered entity in any jurisdiction and has no central control, it cannot pay taxes itself. It’s therefore most akin to a flow-through entity, which is a business entity that passes any income it makes straight to its owners, shareholders, or investors. Under this interpretation, any income passed on to the members of the DAO would likely be subject to Income Tax, and sale of DAO tokens which have appreciated since acquiring them would be subject to capital gains taxes.
Do you pay tax when spending crypto?
Thinking of heading to Home Depot 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 views this as you selling your crypto for market value. 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.
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.
When do you have to pay taxes on crypto?
The US financial year runs from the 1st of January to the 31st of December each year, so the current financial year is 2022. You need to report your crypto taxes for the financial year by the 15th of April the following year as part of your annual tax return, so the next tax deadline is the April 15, 2023. As this falls on a weekend - the official tax deadline for 2022 is Monday April 17, 2023. For US expats, this deadline is June 15, 2023.
If you filed for an extension to file your taxes using Free File or Form 4868, you'll automatically have an extension until the 15th of October.
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:
Identify all your taxable crypto transactions for the entire financial year you're reporting on.
Identify which transactions are subject to Income Tax and which transactions are subject to Capital Gains Tax.
Identify the cost base for each transaction using your chosen accounting method.
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.
The IRS has released a draft of the 2023 tax return (Form 1040 2022). 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)?". This is just a draft currently, but is likely to be included in the 2023 tax return, and potentially extended.
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 crypto tax software to generate crypto tax reports. Here's how easy it is:
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 and LIFO for our US users.
4. Connect Koinly to your wallets, exchanges or blockchains
Koinly crypto tax software 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. Make a coffee - let Koinly crunch the numbers
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.
6. 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.
Create a Koinly account, sync your wallets and exchanges and let Koinly generate your tax reports.
Download your IRS Report Form 8949 and Schedule D from the tax reports page in Koinly.
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. Read our in depth guide on how to file or follow these steps:
Complete Form 8949 with all your taxable crypto disposal transactions. (Koinly does this for you).
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.
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.
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.
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.
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.
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:
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.
You may even be able to claim your Koinly plan as a tax preparation fee deduction - provided you're self-employed and not a W2 employee.
Know the CGT allowance
Earning less than $41,676 a year as a single taxpayer in 2021? No Capital Gains Tax for you. If you're married and filing jointly, this allowance is $83,351. If you're the head of the household, this is $55,801.
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 $16,000 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%.
Pick the right cost basis method
Cost basis matters. FIFO, LIFO, HIFO 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 warning letters
The IRS has confirmed they've been sending out more letters to crypto investors they believe are underreporting, evading tax, or owing tax. This letter may come in the form of three possible types: 6173, 6174 or 6174-A.
The 6174 and 6174-Aletters are ‘no action’ warnings, and are considered to be ‘educational’ - they are designed to remind the taxpayer of their obligations to report and file their taxes on crypto transactions. If you have appropriately filed your taxes you do not have to do anything.
Letter 6173 does require action. Failure to respond to this letter will result in an audit of your tax account by the IRS.
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.
What happens if you don't report cryptocurrency on taxes?
The IRS does not look kindly on those who avoid crypto taxes and they've made it clear that crypto is a key focus for 2023. Tax evasion and tax fraud are both federal offences in the US - with penalties of up to $100,000 in fines or 5 years in prison. Learn more in our crypto tax evasion guide.
Still got questions? We got you. Here's some of our most frequently asked questions.
Is trading one cryptocurrency for another a taxable event?
Yes. Trading one cryptocurrency another is a taxable event as you're disposing of a crypto asset. Any gain is subject to short or long-term Capital Gains Tax depending on how long you've held your crypto.
Is converting crypto a taxable event?
Yes, like above, converting crypto into another crypto is a taxable event. It's a disposal from a tax perspective and any gain subject to Capital Gains Tax.
When do you pay tax on crypto?
You'll pay Capital Gains Tax on any gain you make whenever you sell, swap or spend crypto. You'll pay Income Tax whenever you're seen to be earning crypto - for example, staking or mining.
What is virtual currency considered for tax purposes?
Virtual currency, including crypto, is viewed as a property from a tax perspective and that dictates its tax treatment.
How much tax on crypto gains?
You'll pay up to 37% in tax on short-term crypto gains and up to 20% in tax on long-term crypto gains.
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.