- The IRS sees crypto as property sold for a loss or a gain.
- If you sell your crypto for a profit, capital gains taxes apply.
- Staking or interest income from crypto is treated as regular income for tax purposes.
When Do You Have To Pay Taxes On Crypto?
Actually, there may be more scenarios than you think. Don’t worry, though. We’ll explain the crypto tax rules in just a sec. In general, if you make a profit or get income from crypto, you’ll owe cryptocurrency taxes.
Here are some scenarios that are considered taxable events, and a few that aren’t.
- Trading one crypto for another
- Selling NFTs
- Receiving crypto from a fork or airdrop
- Using crypto as payment for goods/services
- Selling crypto for fiat (like USD)
- Earning from crypto mining
- Earning a yield on crypto (staking, lending, etc.)
- Buying crypto with fiat
- Moving crypto from one wallet you own to another
- Depositing collateral for a loan
Looking for a little more detail on which activities will send Uncle Sam a’knocking? We’ll give you the scoop on each taxable event below.
Crypto trading tax rules say that when you sell a digital asset to buy another one, like selling Bitcoin to buy Ethereum, it’s a taxable event. Selling your investment or exchanging it in any way for a different investment is taxable. But only if you have a gain. Losses reduce your tax liability. So, keep in mind that there are tax rules for crypto-to-crypto trades, depending on the outcome.
Note: Simply buying crypto with USD isn’t taxable. There’s no gain or loss until you sell it or trade it.
Any profit you make from trading is a capital gain, and Uncle Sam wants a piece of it. If you’ve traded Bitcoin (BTC) for Ethereum (ETH), ETH for a non-fungible token (NFT), or BTC for fiat (like USD)—each of these is a taxable event.
Let’s say you buy 1 BTC for $50,000, its market value increases to $75,000, and you sell it. That’s $25,000 in capital gains you’ll need to report in your taxes. That one’s easy.
But when you trade one crypto for another, non-IRS folks like us might see that as one transaction. Let’s say you traded Bitcoin for Ethereum. Simple, right? Not so much.
Uncle Sam sees it differently. Everything must be valued in USD. Your simple transaction is really three transactions with a whole bunch of numbers to track.
- You bought Bitcoin
- You sold Bitcoin
- You bought Ethereum
Here are the numbers you’ll need to know:
- How much did you pay for Bitcoin in USD? That’s your cost basis.
- How much was Bitcoin worth at the time of the trade? That’s your selling price.
- How much were the fees? Trading fees get added to your cost basis.
- How much money did you make or lose on Bitcoin? That’s your capital gain or loss. Subtract your cost from the selling price.
- How long did you hold the Bitcoin? If it was less than a year and you had a gain, you’ll pay the short-term capital gains tax rates (taxed as regular income).
- Lastly, what was the cost of Ethereum in USD? That’s your cost basis for when you eventually spend or sell your Ethereum. Uncle Sam sees this as a new purchase rather than an exchange.
Selling And Minting NFTs
NFTs are cool, but they might set your wallet on fire from a tax standpoint if you aren’t careful. Here are some taxable events surrounding NFTs.
- Minting NFTs: When minting an NFT (the initial creation of an NFT to the blockchain), the minting cost in USD sets the cost basis for an NFT. Good news: No taxes are due until you sell and realize a gain (or loss.)
- Selling NFTs: Just like selling Bitcoin or Ethereum, if you have a profit on your NFT, you have a capital gain.
- Buying NFTs: In most cases, you’re spending crypto to buy NFTs, which the IRS sees as a sale or disposition. If you have a profit on the crypto you spent to buy the NFT, you have a capital gain.
- NFT Royalties: Some NFTs come with royalties (most don’t). Any royalties you earn are income.
An NFT can be a piece of art, a trading card, music, event tickets, metaverse property, and all sorts of stuff we haven’t even thought of yet. When you own an NFT, you own all rights, royalties, and trademarks.
For example, if you buy an NFT for $500 and trade for another NFT worth $700, you’ve earned a $200 (taxable) capital gain. Remember, the IRS sees this as three transactions.
- Buy NFT A
- Sell NFT A
- Buy NFT B
But If you mint NFTs, the profit from selling your NFTs would be considered ordinary income—unless you’re just a hobbyist. As a hobbyist, the minting cost becomes your cost basis, and a sale above your cost basis is a capital gain.
NFTs can also provide passive income, such as royalties or rental fees. Passive income is still just income in the eyes of the IRS. Income is taxable.
Abbatiello tells us that he always tries to relate the transaction to a normal fiat transaction. If you’re renting out an NFT for a fee, then that should be treated similarly to renting any other type of property.
Airdrops & Forks
Airdrops are when crypto tokens or coins are given away for free. This usually happens when a new coin is launched or a new project needs to draw in users. It’s often a promotional tool and sometimes only given to existing token holders or people using a specific platform.
A similar situation is a hard fork, which is when the code behind a blockchain is altered enough to split the blockchain and create a new coin. You can score some free crypto that way, too, and in both cases, tax rules for crypto says it may be taxable as income (not gains).
In 2020, Uniswap airdropped 400+ UNI tokens to over 250,000 wallet addresses that had interacted with the popular decentralized exchange.
Bitcoin Cash was a hard fork of Bitcoin—and Bitcoin holders suddenly had both coins.
How does the IRS see these transactions? Well, the crypto fairy left crypto under your pillow, which makes the new coins or tokens taxable income. The USD value of the coins or tokens at the time of receipt becomes your cost basis used to calculate gains or losses if you sell or spend that crypto later.
Abbatiello tells us that there is a big argument that you shouldn’t pay taxes until it’s sold, but he suggests consulting with your CPA before going down that road. If there is a value for the asset when received by the airdrop, that would be the basis used for reporting it as income.
Crypto lending is when users deposit their currency to be lent out with interest. The interest you earn is considered (taxable) income.
If you decide to lend ETH, for example, and earn $50 in interest during the tax year, you would report that as $50 of income. If you earn interest in crypto, the IRS wants you to convert the value of your earnings to USD.
Selling your crypto to raise cash can create a tax bill. We covered that earlier.
Another option is crypto borrowing, which lets you access the value of your crypto without selling (and creating taxable events). Tax rules for crypto say that If you take out a crypto loan, the loan proceeds are non-taxable. If you use your crypto loan for investment or business reasons, you can write off your loan interest fees.
But crypto borrowing has some gotchas as well.
Here’s the catch, and it’s a big one: crypto market volatility puts penny stocks to shame, so there’s a high risk of liquidation. That’s when the lender sells your crypto collateral to pay the loan. That could mean a tax bill, assuming you had a gain. According to the IRS, a transfer of property to satisfy a debt is an exchange. Exchanges are taxable events. Your crypto stack is gone too. Yeah, it’s a big consideration to weigh before deciding to borrow against your crypto. Discuss your needs with a CPA or tax professional before committing to a crypto loan.
Staking is when people commit their crypto to the proof-of-stake consensus for a blockchain. Basically, it’s collateral for the blockchain to verify and validate transactions. When you stake your crypto, you’ll typically earn rewards paid in tokens. And, you guessed it, cryptocurrency tax rules say that the rewards are income as far as .gov is concerned.
The US dollar value of your crypto rewards is based on the market value of the coin the day you received the reward. If you stake $50,000 of your ETH funds and the return for your rewards is 5% per year, you’d earn $2,500. That $2,500 would be reported as income on your taxes.
Some DeFi protocols, like GMX, use staking and rewards as well — but not to validate blockchain transactions. Instead, your staked tokens act as a way to secure that specific decentralized app. The income is all the same in the eyes of the IRS, though.
Remember, the income you have to report is based on the value of the tokens on the day you earned the rewards. Who can keep track of all that? Most of us can’t, but tax software can pull the data from the blockchain or your exchange accounts.
It’s helpful to remember this: The IRS only understands dollars. If your neighbor gives you three chickens for helping pull his tractor out of the mud, you can’t pay the income tax on three chickens in chicken wings and drumsticks.
Ditto for crypto. You can accept any kind of payment you want (except the illegal stuff), but it all comes down to the value in USD for tax-reporting purposes. We may see cryptos as currencies for use in blockchain ecosystems, but the IRS sees crypto as property.
Crypto payments are income, but you have to convert the value to USD. That’s true whether you mow someone’s lawn and they tip you in BTC, or you run a business and accept crypto for payment.
The income tax is based on the value of the crypto when you receive it. That initial value (the cost basis) is also used to measure any gains or losses when you convert the currency to fiat.
This one is pretty straightforward. If someone pays you $100 worth of BTC, you would report $100 in income, even if the value of that BTC has increased to $200 when you file. Your cost basis for the BTC is $100, though, because that’s what its value was at the time of payment.
If you later sell the BTC for USD, there might (will) be a change in price. You would report a capital gain or loss for the change in price compared to your $100 cost basis.
Crypto Mining Rewards
Crypto mining is similar to staking from a tax standpoint. Mining validates transactions on a blockchain network and rewards the miners with crypto. If you’re solo mining or contribute hash rate (computing power) to a mining pool, the mining rewards you receive are treated as income for tax purposes. We’ll get into more details below.
The tax treatment of mining earnings depends on whether you are a hobbyist or a business miner. If you mine crypto casually in your free time, your activity likely falls in the hobbyist category. This means the income you earn from mining will be reported as other income on Form 1040. You can also deduct related expenses as itemized deductions on a Schedule A.
If you mine crypto as a full-time business, your income and expenses will be reported on your Schedule C form. You will also have to pay self-employment tax on your mining income, just like if you work as a freelancer. This part comes down to your business structure and whether you’re an employee of your company or take pass-through earnings. Any deductions related to mining can be added as business deductions.
For example, if you mine 3 BTC when Bitcoin is worth $30,000 each, you’ve earned $90,000. You’d then report that $90,000 as income on your taxes.
According to Abbatiello, “Crypto mining is considered a business at the end of the day. You have all the resources and deductions available to you that any business owner would have. Depreciation is a huge factor with crypto miners and an amazing tool for tax planning. I often compare the Bitcoin mining industry to the Real Estate industry.
I also would like to add a factor many Bitcoin mining clients often miss. You must always consider the capital gains/loss side of conversion as well. Yes, when you receive the rewards, it’s income, but you must also calculate the change in the value of the BTC when you ultimately sell to USD or convert to another crypto.”
In other words, you’ll need to track the value of mining rewards in USD when you receive them. That’s the cost basis you’ll need to use when you ultimately sell your Bitcoin, hopefully for a tidy profit. Oh, and if you’re mining as a business, you can depreciate your equipment, the same strategy real estate investors use to reduce their taxable income from rental properties.
Perpetuals And Futures
Perpetual contracts and futures trading allow you to speculate on the future price of a given asset. Sometimes that’s crypto, like BTC, and sometimes it’s a commodity or even fiat currencies.
With perpetuals, there is no expiration date, and you never own the asset. Futures work a bit differently because they have an expiration date. But you can make or lose money with both, which is a taxable event.
Taxation for perpetuals is muddy, to say the least. Regulated Bitcoin futures, like those on the Chicago Mercantile Exchange, have a special rule called the 60/40 rule. Basically, 60% of the gains are taxed as long-term gains, while 40% are taxed as short-term gains.
Let’s say you buy a futures contract of 1 BTC at $50,000, and at expiration, the market price of BTC is $57,000. You made $7,000. Awesome, you genius, you. With the special rule, 60% of your gain is taxed as long-term gains, while 40% is taxed as short-term gains.
Perpetual futures contracts are unregulated, though, so the special taxation rules for regulated futures probably don’t apply. Your best bet: check with your CPA.
What You Need To File Taxes On Your Crypto
If you’re comparing the best crypto tax software, you’ll want to consider a service that fills out the tax forms for you. Some only give you a pile of numbers—especially at the free tier. Step-level and premium plans can complete IRS form Form 1040 Schedule and Form 8949 for you.
You’ll need details on all your transactions:
- Which assets did you buy, and what was your cost in USD? This is your cost basis, which you’ll use to calculate your gain or loss.
- Which assets did you sell, and what was the selling price in USD? This determines your gain or loss. Subtract your cost basis from the selling price.
- How long did you hold the assets? This determines the tax rate on your gains or losses. Gains on crypto held less than a year are taxed at the same rate as regular income.
- Did you have income from staking or airdrops? This is taxed as income.
- Did you trade futures? Check with your CPA. Most futures in crypto probably won’t qualify for the special tax treatment that regulated futures markets enjoy.
- How much did you pay in trading fees? You can’t deduct fees on a personal return, but fees can be added to the cost basis of your crypto, which reduces your gain (or increases your loss).
Yeah, it’s a lot to track.
Typically, centralized crypto exchanges do provide the information you need to file taxes. But if you wander off into the wilderness of DeFi or don’t use centralized exchanges, you’ll need to track your transactions manually or use crypto tax software to import the transactions from exchanges and wallets.
Crypto Tax Rules For DeFi
If you dabble in DeFi, your tax situation may be more complicated. (Lucky you!)
Most leading crypto tax tools can import the details from your wallets and exchanges you use. But sometimes, the companies get it wrong. One common error is misidentifying tokens. For example, we’ve seen scam tokens masquerading as AAVE tokens identified as real AAVE tokens. The scam tokens are worth, well, nothing—and real AAVE tokens are worth about $80 each.
If you see something that looks a bit off, you can investigate further.
There are blockchain explorers that can help you locate the right info.
- Blockstream: Bitcoin blockchain explorer
- Etherscan: Ethereum transactions
- Arbiscan: Arbitrum transactions
- Polygonscan: Polygon transactions
- Solana Explorer: Solana transactions
Abbatiello says, “If you participate in DeFi, whether the values are significant or not, I would highly recommend using crypto tax tools. Manually tracking these transactions is cumbersome and time-consuming.“
How To Minimize Crypto Taxes
Depending on your individual situation, they may be a few strategies you can press into service. A good crypto tax service can help calculate your crypto gains, but a proper CPA or tax advisor can help build a tax strategy to help avoid paying more crypto taxes than you need to.
Tax Loss Harvesting
When you sell crypto or an NFT, you either make a profit (gain) or you lose money (if it’s worth less than when you bought it.) Selling at a loss can offset the taxes you owe for gains. A minus B, right? Simple enough. It’s called tax loss harvesting, and it can save money on your tax bill.
Don’t worry, you don’t have to give up your precious crypto forever. Just buy it back later.
Tax loss harvesting rules for crypto say you can even reduce your ordinary income through tax loss harvesting, although the IRS caps this at $3,000 for married couples filing jointly ($1,500 for singles).
For example, if your total capital gains were $30,000, but your total capital loss was $10,000, your total taxable capital gains would then be $20,000.
Similarly, some people use a wash sale strategy to offset their capital gains. A wash sale is when you sell an asset at a loss and then repurchase it. The IRS bans taxpayers from deducting losses from wash sales for traditional investments. Basically, there’s a 30 waiting period to repurchase. While no such rule exists yet for cryptocurrency, there’s already a push to close this loophole for crypto investors. If those rascals get their way, it’ll mean you can’t repurchase the same asset within 30 days and still keep the tax savings from the loss.
According to crypto tax rules, you can deduct crypto donations, but you have to convert the value of the donation to USD for tax purposes. You’re not donating 0.25 Bitcoin, you’re donating $5,000 worth of Bitcoin, or whatever the value is at the time. That same $5,000 value becomes the cost basis for the organization receiving the donation.
Gifts work a bit differently. If you give someone some crypto as a gift, the value of the gift determines whether you need to file form 709. Gifts under $15,000 in value (including other gifts to that same person) don’t require the extra form. The giftee gets the value of the gifted crypto at the time of the gift as their cost basis. Gifts aren’t deductible—unless the gift is made to a qualified nonprofit organization (which is really a donation, right?).
- A gift to UNICEF: Deductible (within limits)
- A gift to your nephew: Not deductible, but also not subject to capital gains tax
Now, let’s look at a donation example. Let’s say you purchased BTC for $10,000, and it’s now valued at $30,000. You could sell it for a $20,000 capital gain (you’d owe taxes on that gain) and then donate it for a $30,000 write-off. Or — you can just donate it directly and leave with a $30,000 write-off. In theory, anyway. Be sure to check the rules or ask your CPA first. Some restrictions may apply based on income or other factors.
Deduct Transaction Fees
According to cryptocurrency tax rules, most crypto trading fees are tax deductible but not on Schedule A with your other deductions. Instead, you’ll add the fees to your cost basis (Form 8949).
If, for example, you buy an asset for $1,000 and pay $20 in trading fees, your cost basis would then be $1,020. When you later sell the asset for $2,000, your taxable capital gain would be $980. The fees you paid count towards the initial purchase price, which lowers your taxable profit by $20.
You aren’t taxed for crypto assets that you simply own. Once you sell them, you’ll be taxed on the profit. Holding an asset for less than 365 days makes the profit a short-term gain. Over 365 days, your asset is then considered a long-term gain.
Long-term gains are taxed at lower rates (between 0%-20%) than short-term gains (10%-37%.) Holding your crypto taxes for longer than a year can reduce the amount you’ll owe in taxes. In general, it’s better to consider long-term investments over short-term trading, at least from a tax perspective.
And there are two common ways to account for your crypto sales. If you sell the oldest assets first, it would be considered First-In-First-Out (FIFO.) Or you could sell the most recently acquired assets, a method called Last-In-First-Out (LIFO.)
Generally, in a rising market, LIFO gives you lower gains compared to FIFO. The opposite is usually true in a falling market. This is another area to discuss with your CPA before filing.
Use Crypto IRAs
A crypto IRA allows users to invest cryptocurrency into a retirement savings account and earn a tax deduction at the same time.
- Traditional IRA: You get a deduction at the time you make the contribution to your account. Your account grows tax-free, but you’ll pay taxes as you withdraw in retirement.
- Roth IRA: You contribute after-tax money (with no deduction). Your account grows tax-free, and there is no tax due on withdrawals because you invested after-tax money.
The crypto IRA market is growing rapidly with companies like iTrustCapital, BitcoinIRA, and Alto CryptoIRA.
Should You Hire A Crypto CPA?
For some people and in certain situations, it’s best to leave it to the experts.
- Active Traders: The more transactions you have, the more opportunities there are for mistakes. A crypto CPA will know what to look for and common trouble areas that can save you money or keep you out of trouble.
- People Active In DeFi: If your crypto adventures involve more than just trading, a crypto CPA can help you make tax sense out of all those weird things you did in DeFi-land.
- People Who Own A Business That Takes Crypto: Quickbooks and Freshbooks are popular for business accounting, but if you start taking crypto payments, off-the-shelf software might not work for you. Consider hiring an expert to set up a well-planned system and help you keep your taxes straight.
- High-Net-Worth Individuals: Most people are trading with hundreds or thousands of dollars. High-net-worth households might be trading with hundreds of thousands. The cost of getting it right the first time is probably cheaper than DIY mistakes that might leave money on the table.
CoinLedger has a database of crypto tax accountants. Koinly has a similar list of crypto-savvy CPAs.
To Sum It Up
Crypto tax rules are similar to those for traditional investments. Either it’s a capital gain (or loss) or its income. But the rules for traditional investments don’t always apply in the same way, and often there are a lot more transactions for crypto people. Specialized tax tools, or working with a crypto CPA can make your life easier when tax time rolls around. If you were looking for the tax rules in crypto, simplified, this article should cover it. However, if you still have questions, please check out our FAQs below.
Frequently Asked Questions
You have to report crypto transactions to the IRS, but that doesn’t always mean you’ll have a tax bill. If you buy but don’t sell — and you don’t have crypto income – no taxes are due. In the US, crypto taxes generally fall into two categories: gains/losses and income. If you sold or spent crypto and had a profit at the time of the transaction (compared to your cost), that would be a capital gain. If you earned crypto rewards for staking, that would be income. Similarly, airdrops or crypto paid to you for a service you provide are taxable as income.
Yes, you must report crypto transactions, but you might not owe taxes. For example, if you bought Bitcoin and still have it, you don’t have a realized gain yet. IRS, USA crypto tax rules say that once you sell or trade crypto, you have a loss or a gain to report on your taxes. Other income from staking or lending is also taxable.
No. You only pay taxes for gains from your crypto. That said, you still need to report your crypto losses in order to qualify for tax deductions. In some cases, losses can be deducted from your taxable income. Income from staking and airdrops (distributed tokens) are taxable as income.
The IRS can tax up to 37% of your crypto gains, depending on your income level. Tax rates increase with income and differ depending on your filing status. Short-term gains (you held your crypto for less than a year) are taxed at your standard income tax rate. Long-term gains can be as low as 0% or as high as 20%.
If you’ve made crypto sales or trades or spent any crypto, you’ll have to report those transactions on your taxes. But that doesn’t mean you’ll owe money. In some income brackets, the long-term (one year or longer) capital gains rate is 0%. It’s also important to know that income from staking, or lending is treated as income even if you don’t have gains or losses to report.
In the US, you are required to report cryptocurrency transactions. The IRS can impose accuracy-related penalties of 20% on the underreported income, regardless of source. Penalties also accrue interest charges. In addition, the IRS can place a lien on assets for unpaid taxes, meaning they can take the money out of your bank account or place a claim against other property, including your home. In short, it’s wiser (and cheaper) to pay the taxes due from gains or other crypto income.
If you don’t sell your crypto, you don’t have to pay taxes on your crypto — in most cases. Crypto trading tax rules say you still have to report your crypto transactions on your taxes, but if you don’t sell, there is no taxable capital gain (or loss). This comes with some exceptions, however.
Let’s say you bought Ethereum and staked it to earn staking rewards — but you didn’t sell. In this case, there is no realized gain or loss, so no capital gains taxes are due. But — the staking rewards you receive from staking would be taxable as income. The cost of the coins or tokens when you receive the rewards becomes your cost basis to determine a gain or a loss when your sell or spend that crypto in the future.
The $600 reporting requirement often associated with 1099 income isn’t the reporting standard in this situation, although many exchanges provide a 1099 form if you have crypto income. If you only make $1 with your crypto, you may have a tax bill.
Even without a 1099 form, the IRS needs you to report all crypto gains (or losses) and all crypto income. If you haven’t sold, you generally won’t pay a tax bill for your crypto, regardless of the amount you hold.
However, the IRS still wants to know about your crypto activity.
A new question regarding Digital Assets on Tax Form 1040 asks if either situation applies to 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)?
Buying crypto is not included in the question (but you still need to answer). A purchase without a sale or disposition (like spending your crypto or sending it to someone else) isn’t taxable because you don’t have a realized gain or loss until your crypto leaves your possession.
There are some ways to reduce your crypto taxes, but you’ll still need to pay the taxes due if you have a capital gain or you receive crypto income.
- Hold long-term: If you hold your crypto for 12 months or longer before selling, capital gains are taxed at 0% to 20%, depending on your tax bracket. Short-term gains are taxed at your normal income tax rate (up to 37%).
Tax-loss harvesting: Just as capital gains create a tax bill, losses can reduce your tax bill. In some cases, it may make sense to sell at a loss to reduce your overall tax liability for capital gains in crypto or other assets, like stocks. Be aware that tax-loss harvesting for traditional assets, like stocks, are subject to wash-trading rules. Basically, you can’t rebuy the same asset within 30 days — or you lose the tax-loss benefit. Currently, digital assets don’t fall under the wash-trading rules, but that could change.