You should consult your own tax, legal and accounting advisors before engaging in any transaction.
The IRS considers cryptocurrency holdings to be “property” for tax purposes, which means that if you sell or dispose of it for another digital asset, you must report the transaction on your tax return.
A common misconception is that if you don't trade crypto back to U.S. dollars, you do not owe taxes on any gain. Understanding the different types of cryptocurrency transactions and how they are Taxed is one of the first steps in entering the world of crypto.
Knowing the different transactions that take place with cryptocurrency will help you with all that. Read ahead to learn more about the major cryptocurrency transaction classifications.
✔️ = Likely taxable | ❌ = Likely no tax effect
❔ = It depends | 💲 = Possible deduction
Which cryptocurrency transactions are taxable?
❌ Buying coins (Fiat to Crypto)
In general, buying cryptocurrency with fiat is not a taxable event. Taxpayers with significant crypto holdings in a foreign exchange might be required to complete certain informational forms (see Foreign Holdings below).
✔️ Selling coins (Crypto to Fiat)
Sales of coins WILL trigger taxes on the capital gains and losses. Often the tax rate on capital gains is more favorable than your ordinary income tax bracket. Many of our users try Tax Loss Harvesting at year-end. TLH is an advanced strategy to offset capital gains with the losses on coins that did not perform well.
❔ Hard Fork
Hard forks are taxable when they are followed by an airdrop of the new coin. For more information see Airdrop below.
Any airdrop (random or from a hard fork) is taxable as ordinary miscellaneous income for the value of the coin on the date you receive it. Many random airdrops are worth very little and do not grow in value, so the tax impact of those will be minimal.
❌ Soft Fork
Soft forks (backwards compatible ledgers) generally do not result in the airdrop of additional coins, so there is no tax effect.
✔️ Trades & Exchanges (Crypto to Crypto)
This one truly deserves its own article because it causes confusion. The IRS has decided to treat crypto to crypto trades as a sale followed by a buy. This is similar to how stocks are treated, yet it feels very unintuitive to many crypto-investors. The sale part of that transaction is taxable (see Selling Coins above) and the buy portion is not (see Buying Coins above).
✔️ Wages / Payment (Receiving crypto for goods and services)
Treat crypto wages and payments as you would any fiat wages/payments. These amounts will be reported on the 1040 as wages or Schedule C income.
❔ Gifts Sent
Crypto gifts follow the same tax guidelines as other property and fiat gifts. There is no gain or loss to recognize. Each sender can gift $15,000 (double for MFJ) per recipient, per year, without paying gift tax. When gifts exceed this amount in a single year, the excess gift value will chip away at the lifetime gift-tax-free exclusion of a cool $11.4 million. The average taxpayer will never pay gift taxes because of the large annual and lifetime exclusions. Filing Form 709 is often required to formally claim these exclusions.
❔ Gifts Received
Gifts of virtual currency are not taxable to the recipient until the coins are sold, at which point they follow the general rules of Selling Coins (see above). The cost basis for the sale will depend on the sender's basis, the gift tax the sender paid, and the FMV on the date of the gift, so detailed record-keeping is essential. When the sender's holding period is known and determinable, it will "carryover" to become the recipient's holding period.
Finally, a possible deduction! Donations of coins to a charitable organization will not result in income, gain, or loss. Donated crypto held long-term (over 1 year) can be deducted on Sch A at the FMV of the coin on the date of donation. Donations of short-term holdings can be deducted on Sch A at the lesser of: 1) FMV on the date of donation or 2) your cost basis (i.e. what you paid for it). One thing to note, donations are deductible as an ITEMIZED deduction which is unavailable to filers who choose the standard deduction.
✔️ Purchases (Sending crypto for goods and services)
Buying an item or service with cryptocurrency is treated as if you had sold the coins for fiat and purchased the goods with the fiat proceeds. (See Selling Coins above)
Thankfully, moving your coins between accounts that you own will not affect cap gains and income taxes. Be careful about moving large amounts from US-based exchanges to foreign exchanges as there could be an informational filing requirement (see Foreign Holdings below).
✔️ Mining/Staking Rewards
Rewards of any kind are treated as miscellaneous income which will be reportable on the 1040 and taxed at ordinary income rates.
✔️ Interest & Dividends
Just like any other interest and dividends received, these amounts for crypto accounts will be reported on Sch B of the 1040. Many smaller or internationally-based exchanges and wallets do not send the 1099s you expect from brokerage accounts, so a service like ZenLedger can help you keep your own records!
❔ Foreign Holdings
Coins held in a foreign exchange (ex: Bitfinex, Huobi, Binance & others) might be reportable on FATCA Form 8938, FINCen 114, and IRS FBAR forms. There are different dollar amount thresholds for each form. These forms are informational and do not create a tax liability. There are, however, steep penalties for failure to file.
SYMBOLS KEY: ✔️ = Likely taxable | ❌ = Likely no tax effect | ❔ = It depends | 💲 = Possible deduction
For more information see: IRS FAQ on Virtual Currencies
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.