Not sure how to pay taxes on cryptocurrency? Wondering which transactions are taxable or how to lower your tax bill? Read on for answers to your most pressing crypto tax questions!
Jump to common crypto tax questions:
Do I need to file crypto taxes?
Short answer: Yes, you need to report cryptocurrency on your tax returns. However, this doesn’t necessarily mean that you’ll owe any tax. If all you did was hold, you won’t owe any taxes on your crypto—but the IRS still wants to know. Failing to report could lead to tax debt, fines and interest, and even criminal prosecution in extreme cases.
In fact, starting with the 2019 tax year, the first question the IRS asks on Schedule 1 of Form 1040 is: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” So not only do you have to report each transaction, but you must answer this question and identify to the IRS that you had crypto activities during the year.
How do cryptocurrency taxes work?
Cryptocurrency is treated as property, not currency, for tax purposes. Unfortunately, this means that most crypto transactions—including selling, exchanging, and spending your crypto—are considered taxable events. For each transaction, you need to show your cost basis, proceeds (or sales price), and your capital gain (or loss). Only capital gains will be taxed, though all transactions need to be reported.
What does that mean, exactly? In the simplest terms, if you purchased Bitcoin for $500, and then sold it for $10,000, you’re required to report a $9,500 capital gain. In certain circumstances, such as the payment of fees, there are ways to deduct from the taxable value.
For a more detailed breakdown of how cryptocurrency taxes work, read Cryptocurrency & Bitcoin Taxes: 6 Things You Need to Know.
How do I report cryptocurrency on my tax return?
To report cryptocurrency on your tax return, you first need to check “yes” to the question: “At any time in [year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Complete IRS Form 8949 (Sales and Other Dispositions of Capital Assets). The 8949 is used to track the cost basis for each virtual coin and the sale price—aka the USD value you received from selling it.
Sale Price – Cost Basis = Capital Gain or Loss. (And remember, selling a coin for USD, exchanging one type of coin for another, or using a coin to purchase goods and services are all considered a “sale” from the IRS’s perspective.)
To make the process even more fun, you must also separate your transactions into short-term gains and long-term gains. It’s a long-term gain if you held the coin for at least one year. Long-term gains are taxed at a lower rate than short-term gains. Form 8949 asks for the date coins were acquired and sold for each transaction, which determines your holding period.
As of 2020, crypto exchanges are not issuing Form 1099-B, which would identify all the necessary information for Form 8949. If you use a service that does issue a Form 1099-B, such as Robinhood, then you can transpose this information onto your Form 8949.
Next, you must fill out Schedule D of Form 1040 using the totals from Form 8949. This will calculate the amount of tax you owe on your crypto gains.
That sounds super complicated. Can you make it easy?
Yep! Gordon Law Group is here to make your crypto tax reporting simple. All you have to do is send your transaction history through a secure API or file transfer. We work our crypto tax magic, and you get a bulletproof report for your tax return!
Whether you’re filing for this year or fixing past years’ reports, we can help. Have lost or missing transactions? Don’t worry; we’ve helped countless clients rebuild their history to properly report.
When is cryptocurrency considered taxable income?
Cryptocurrency is taxed as income if it’s received through mining, in an airdrop, or as payment for goods and services. In this case, you need to find the fair market value of the coins (in USD) when you received them and count that amount toward your gross income.
If you then sell, exchange, or spend the coins, those transactions are taxable based on the capital gain or loss. The fair market value at time of receipt—the same amount you reported as income—would be your cost basis for any future transactions.
I haven’t reported crypto taxes in the past. What should I do?
If you haven’t reported your crypto for prior years and want to avoid a cryptocurrency audit (or worse), you should call a tax attorney who understands virtual currency. We’ve helped countless clients rebuild their crypto trading history and stay out of trouble with the IRS.
You may be able to use the Voluntary Disclosure Program, or you may be able to simply file amended tax returns. We’ll walk you through your options and help you choose the best course for your unique situation.
The IRS is auditing more taxpayers for unreported crypto than ever before. By amending your tax returns to report crypto transactions, you can avoid penalties, or in some cases even an audit.
Do I have to report cryptocurrency losses to the IRS?
Yes, you need to report your crypto losses to the IRS—and doing so could actually save you a pretty penny, for two reasons.
One: Unless you send the IRS a full crypto report, including losses, they’ll have nothing to go on except your total sales volume, and often treat that entire amount as a taxable gain. To put it simply, they’ll think you owe much more than you actually do.
Two: You can harvest cryptocurrency losses and use them against future gains, lowering the amount you owe in taxes for future years. Learn more about this option in the video below.
How are forks and airdrops taxed?
In 2019, the IRS issued Revenue Ruling 2019-24, which provides guidance on the taxation of hard forks and airdrops of cryptocurrency. Airdrops (whether resulting from a fork or not) are taxed as income and must be reported on your Schedule 1 tax form. The fair market value of the airdrop on the day it was received is the amount you should report on your Schedule 1. This is also considered your cost basis if and when you sell the airdropped coins. If a fork does not result in an airdrop, it’s not considered a taxable event.
Are crypto to crypto exchanges taxable?
Crypto to crypto exchanges (for example, selling Bitcoin to purchase Ethereum) are taxable events. The IRS has definitively stated that like-kind exchange does not apply to crypto for tax years 2018 onward. However, even for years before 2018, it’s nearly impossible to argue that crypto-to-crypto is not taxable (we’ve never seen it successfully argued!). Watch a detailed breakdown in the video below.
What if I get paid in crypto?
Virtual currency received as payment for goods or services should be treated as income on your tax return. Just like an airdrop, you would report the fair market value of the deposit (as of the time you received it). Whether you were paid wages or paid as an independent contractor will determine where on your tax return the income is reported, such as on Schedule 1 or Schedule C for self-employed taxpayers. If you sell the coins, the amount of income that you originally reported is also your cost basis.
How do I report crypto mining on my taxes?
The coins awarded for crypto mining count as income and should be reported as such. Typically, mining is considered a business, in which case the income must be reported on Schedule C of your tax return. You must include the fair market value of any mined coins at the time you received them.
Do I owe crypto tax if I use an overseas exchange or wallet?
In almost every case, offshore cryptocurrency holdings by US persons are still subject to stateside reporting and taxation. In fact, the IRS has a history of filing—and winning—John Doe warrants that compel foreign banks to hand over identifying information about accounts tethered to US citizens. Officials have relied on the process for decades. Now, the IRS is using it to unearth Bitcoin and altcoin holdings stashed overseas.
In some cases, crypto holdings may be subject to Foreign Bank and Financial Accounts Reporting (FBAR) filing requirements. Failure to file can result in serious fines, and in extreme cases, sometimes even jail.
Is moving my crypto from one exchange or wallet to another a taxable event?
No, moving your crypto between wallets or exchanges that you own is not taxable. As long as the virtual currency remains in your possession, this is simply a transfer and not a transaction.
Has the IRS released any guidelines about cryptocurrency tax?
Yes, the IRS maintains a Virtual Currency Issues Team; and yes, said team has produced some guidelines about cryptocurrency tax issues.
- Rev. Rul 2019-24 is recently published IRS guidance that discusses the taxation of hardforks and airdrops.
- The IRS also released frequently asked questions on virtual currency transactions, including topics like determining cost basis, making or receiving crypto payments, and inventory methods.
- Notice 2014-21 is an IRS guide that covers various crypto legalities, including paying employees with virtual funds and the agency’s take on certain types of token trades.
- In 2016, the nation’s tax czars also published a report entitled “As the Use of Virtual Currencies in Taxable Transactions Becomes More Common, Additional Actions Are Needed to Ensure Taxpayer Compliance.”
If you don’t have time to wade through IRS legalese, never fear, we’ve already done it for you. Get in touch to schedule a confidential consultation with a cryptocurrency tax attorney.
Do Coinbase and other exchanges report to the IRS?
In late 2017, a federal court compelled Coinbase—a well-trafficked token exchange and wallet service—to fork over information to the IRS. Coinbase was forced to provide the trade history of about 14,000 accounts that exceeded $20,000 worth of trades between 2013 and 2015.
And in December of 2017, Coinbase announced that it would file Form 1099-K with the IRS for customers who had more than 200 receipt transactions amounting to greater than $20,000 during the taxable year.
Since then, Coinbase and most other US exchanges have been issuing Form 1099-K to customers with a copy to the IRS each year.
I got a 1099 from my crypto exchange. Do I need anything else?
If you received a 1099-K from Coinbase or another crypto exchange, this does not mean your crypto reporting is complete! In fact, the 1099-K form is very misleading: It only reports your proceeds and does not calculate your gain/loss. You’ll still need to report your cost basis and proceeds for each transaction; otherwise, the IRS will think you owe much more in crypto taxes than you actually do.
If you use only one exchange and you receive Form 1099-B, you can simply add the information from this form to the 8949 when filing your tax return. If you use multiple exchanges, however, you may not have the cost basis for all coins and additional reporting may be required.
Why is the IRS laser-focused on cryptocurrency?
The Internal Revenue Service cares about one thing and one thing only: collecting as much tax as possible. Since cryptocurrencies are on the rise, the IRS wants its take.
In addition to tax revenue, the government seems concerned about the money laundering potential of virtual currency. Since digital tokens don’t have material backing, authorities feel it is ripe for white collar crime activity. However, evidence to this end has yet to bear fruit.
Why are some Bitcoin holders looking for offshore “crypto havens”?
Bitcoin’s value is on a sky-bound trajectory, many a millionaire has been made, and some are looking to extract as much fiat currency as possible without incurring colossal tax penalties. As a result, “crypto havens” are popping up, seemingly constructed with Bitcoin Billionaires in mind. Small island tax shelters like Vanuatu have developed Bitcoin-for-citizenship programs. Moreover, some individuals with crypto-heavy portfolios are using Bitcoin loan agreements that have beneficial tax implications.
In addition, for US persons, Puerto Rico is a popular crypto tax haven that doesn’t require a passport, let alone a change of citizenship. Taking advantage of an offshore crypto haven is complicated, but certainly possible. Get in touch with us to learn more.
Connect with a cryptocurrency tax lawyer
Cryptocurrencies are quickly becoming part of the mainstream marketplace. If you’re concerned about adequately reporting virtual currency gains (as an individual or for a business), give our skilled cryptocurrency tax lawyers a call.
As experienced tax attorneys who’ve been dealing with crypto since 2014, we understand every angle of the cryptocurrency tax puzzle. Get in touch today!