- Cryptocurrency is taxable and the IRS treats it like property for tax purposes.
- Crypto is basically taxed in two ways: as income or as long-term capital gains.
- If you transact with cryptocurrency, you’ll need to track key information to file your taxes each year.
When you file your taxes, you’ll notice a relatively new question on the 1040 form: At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?
It may seem like a straightforward question, but with cryptocurrency, it can be confusing to know just how to answer it. You might end up checking no—even if you should check yes—because you don’t understand the tax implications of your cryptocurrency transactions.
That’s the wrong choice. Both regulatory and governmental leaders have been taking steps to better track and regulate crypto activity, including the IRS.
Fortunately, the IRS and other tax experts have also been working to make cryptocurrency taxes easier to understand and comply with. Let’s take a look at how crypto is taxed, its tax rates and what you need to do to accurately report it on your taxes.
Inside this article
Is cryptocurrency taxable?
As of 2014, the IRS announced that cryptocurrency should be treated like property for tax purposes—and of course, as property, it’s taxable. However, the tax treatment can get a little complicated.
“The easiest way to think about the taxation of digital assets is to compare them to stocks—that’s the way the IRS has told us to treat them,” says Curt Mastio, CPA, founder of Founder’s CPA, a firm that caters to cryptocurrency and blockchain startups. “That said, there are some key differences.”
If your only cryptocurrency transactions were buying crypto with fiat currency (government-backed currency, such as U.S. dollars), the IRS says you can answer “no” to the Form 1040 question.
How crypto is taxed depends on the taxable event—that is, the transaction that triggers taxes. Here are the scenarios when crypto is taxed:
When you sell cryptocurrency for a fiat currency. When you trade in your crypto for a government-backed currency like the U.S. dollar, that’s a taxable event. You’ll be taxed on the fair market value of the crypto at the time of the trade.
When you use cryptocurrency to purchase something or pay someone. When crypto leaves your hands in exchange for goods and services, it’s taxable at its fair market value on that date.
When you trade different types of cryptocurrency. “Let's say I have Bitcoin and I want to use it to purchase Ether,” Mastio says. “I can go to a centralized exchange and use my Bitcoin to purchase Ether. So yes, I'm technically just buying Ether, but I'm also selling my Bitcoin which actually creates a taxable event.”
When crypto is airdropped to you. An airdrop—a promotional giveaway or reward of cryptocurrency—is a taxable event, treated the same way as if you received income for providing services. It's taxable at the fair market value of the asset on the date that you receive it.
Most types of forks. A fork is when a cryptocurrency’s blockchain or code is changed, creating two branches—or a fork. A hard fork is a change where both the old and new blockchains coexist, while a soft fork is when only the new blockchain is meant to be used.
“In most cases, a fork will be taxable. Again, the assets that you receive are taxed at the fair market value of that asset on the date that you receive it,” Mastio explains.
When you get income from staking and mining. Staking and mining are two different ways to create new cryptocurrency. Mining is adding new blocks to the blockchain yourself, which will reward you with the cryptocurrency you’re mining. On the other hand, staking is more like earning interest on a certified deposit: you “stake” your crypto to the blockchain until a transaction is verified and then are rewarded with “interest” when that transaction is added to the blockchain.
“If you're utilizing your own money to stake or mine on a network and you're earning additional assets for doing so, the amount that you earn is going to be taxable,” Mastio says. “Any digital assets you receive for your mining efforts are going to be taxable as ordinary income at their fair market value at the time you receive them.”
How is crypto taxed?
Cryptocurrency is taxed in two ways: as ordinary income and as capital gains or losses.
“If I were to pay you a certain amount of Bitcoin to write an article for my company, that’s the same as if I paid you in U.S. dollars,” Mastio explains. “It should be reported as ordinary income and the IRS will take that at the income tax rate on your personal tax return.”
Capital gains and loss taxes are a bit more complicated. Since the value of cryptocurrency fluctuates, when you get rid of your cryptocurrency, it will likely be for either more or less than you paid for it. If it’s more, you have a capital gain to be taxed. If it’s less, you have a capital loss.
The second consideration is whether the capital gain or loss is short-term or long-term. “It’s usually more advantageous to trigger long-term capital gains taxes rather than short-term,” Mastio notes. Short-term gains are taxed at the same rates as income, while the highest long-term capital gains tax rate is 20%, which will be lower than the income tax rate for most people.
If you hold your crypto for a year or less, you’ll have a short-term capital gain or loss. If you hold it for longer than a year, it’s long-term.
Cryptocurrency tax rates for 2022
Any cryptocurrency you hold for over a year will be taxed as long-term capital gains. Any crypto that leaves your hands before a year or that you receive as payment for goods and services will be taxed as short-term capital gains or ordinary income—the rate is the same for either.
Long-term capital gains tax rates
|Single||Married Filing Jointly||Head of Household||Tax Rate|
|Income over $0||Income over $0||Income over $0||0%|
|Income over $41,675||Income over $83,350||Income over $55,800||15%|
|Income over $459,750||Income over $517,200||Income over $488,500||20%|
Short-term capital gains tax/ordinary income tax rates
|Single||Married Filing Jointly||Head of Household||Tax Rate|
|$0 to $10,275||$0 to $20,550||$0 to $14,650||10%|
|$10,275 to $41,775||$20,550 to $83,550||$14,650 to $55,900||12%|
|$41,775 to $89,075||$83,550 to $178,150||$55,900 to $89,050||22%|
|$89,075 to $170,050||$178,150 to $340,100||$89,050 to $170,050||24%|
|$170,050 to $215,950||$340,100 to $431,900||$170,050 to $215,950||32%|
|$215,950 to $539,900||$431,900 to $647,850||$215,950 to $539,900||35%|
|$539,900 or more||$647,850 or more||$539,900 or more||37%|
How to report crypto on your taxes
One of the ways crypto is different from ordinary investments is that no one is going to send you the documents you need to file your taxes. “If you open a Robinhood account and trade stocks, Robinhood will give you the documents you need for your tax return,” Mastio says. “They’ll send you your Form 1099 and you can just plug that into your tax software or send it to your accountant. The crypto space is very, very different.”
That’s why you have to track and report all of the information yourself—which can be pretty difficult. Taking a look at the IRS form you’ll use for cryptocurrency will give you a better idea of the information you’ll need to log.
Here’s what you’ll need to track:
The type of cryptocurrency
The date you acquired it and its fair market value that day
The date it left your hands and its fair market value that day
Your gain or loss from the transaction
However, Mastio says there’s an easier way than building a giant spreadsheet. “I always recommend you set up software to track all of that,” he advises. “There are some good options out there that will aggregate your transactions across different exchanges, wallets and blockchains and help you generate those tax reports at the end of the year. It'll tell you what your gains and losses are and what amount of your gains is short-term capital gains, what amount is long-term and it can also report ordinary income from things like staking, mining and just receiving payment for services you provided.”
Mastio says while his team uses CoinTracking.io, there are many other solid options for tracking crypto transactions for tax reporting. Do a little research as some can be better for specific crypto situations: One software might be better for a novice while another might be better if you’re doing a lot of complex transactions.
Crypto is a fascinating and rapidly evolving sphere that will continue to attract interested buyers. Do your homework and understand how the taxes on cryptocurrency work before you dive in—you’ll be grateful to yourself when Tax Day rolls around!
What happens when you don’t report cryptocurrency on taxes?
The IRS may audit your taxes and find that you committed tax evasion or tax fraud. Then they could charge penalties and interest or even file criminal charges.
When do you pay taxes on crypto?
You pay taxes on crypto with the rest of your taxes when you file between January and April each year. The IRS has options for repayment such as short-term payment plans or installment agreements where you make monthly payments.