IRS Notice 2014-21 describes how existing general tax principles apply to transactions using virtual currency, also known as digital currency. This notice is for use by taxpayers and their preparers.
How does the IRS tax cryptocurrency?
The IRS taxes cryptocurrency like property and investments, not currency. All transactions, from selling cryptos for fiat (USD) or another crypto, to using cryptos for purchases, are subject to the same tax treatment as other investment activity that incurs capital gains and losses.
Some cryptocurrency transactions are also taxed as income and reported on the IRS Form Schedule 1, such as interest, dividends, staking rewards, and mining income.
Capital Gains: Short-Term and Long-Term
Sales and trades of cryptocurrency are taxed as capital gains or losses, dependent on your accounting method (also known as your cost basis method).
To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it for one year or less, your capital gain or loss is short-term.
Short-term capital gains tax is a tax applied to profits from selling an asset you’ve held for less than a year. Short-term capital gains taxes are paid at the same rate as you’d pay on your ordinary income, such as wages from a job.
Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0 percent, 15 percent, and 20 percent, depending on your income. These rates are typically much lower than the ordinary income tax rate.
Long Term Capital Gains Rates for 2023:
Up to $44,625
$44,626 – $492,300
Married filing jointly
Up to $89,250
$89,251 – $553,850
Married filing separately
Up to $44,625
$44,625 – $276,900
Head of household
Up to $59,750
$59,751 – $523,050
ZenLedger helps you capture these gains and losses, both short and long term, and report them accurately on the IRS Form 8949 and IRS Form Schedule D.
Whether you earn cryptocurrency by mining or receive it in exchange for goods and services, It is taxed at your ordinary income tax rates, based on the value of the crypto on the day you receive it. (You may also owe capital gains taxes if you later sell the crypto you mined or received at a profit.)
Here are the most common examples of what is considered crypto income:
Receiving crypto as payment for providing a service.
Receiving crypto as interest or an airdrop.
Mining crypto and earning rewards.
Staking crypto and earning rewards.
ZenLedger will capture cryptocurrency transactions that are taxed as income and report them on IRS Form Schedule 1.
For more resources on the IRS.gov site:
This information is for informational purposes only and not for the purpose of providing financial, legal, investment, accounting, or tax advice. You should contact your CPA or other qualified tax professional to obtain advice regarding your particular issue or problem.