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Crypto Taxes in the United States: A Guide

Updated: Nov 16, 2021

Today, we are exploring the main tax implications and guidelines for crypto taxes in the United States.

Before you contact an accountant, it helps to know the basic rules around the way the IRS looks at taxes when cryptocurrency is involved in a transaction. Fortunately, the basic rules are not complex. For tax purposes, the IRS treats cryptocurrency like stocks and other capital assets. If you sell your cryptocurrency for a gain, you have to pay taxes on that gain. Let’s see more details about crypto taxes in the United States.


The basics of crypto taxes in the United States

The United States is about average when it comes to crypto taxes. Other countries– like Germany and Malta, for example– have more beneficial tax schemes. However, not all countries allow cryptocurrency traders to deduct losses from their yearly income. The IRS does.

There are three main rules of thumb that cover the majority of cryptocurrency transactions:

  1. Selling cryptocurrency for US dollars or other fiat currencies creates a taxable event. When you cash out, you either realize a capital gain (or in other words, a profit) or a capital loss.

  2. Exchanging one cryptocurrency for another (like exchanging Bitcoin for Ether, for example), also triggers a taxable event.

  3. Buying goods or services with cryptocurrency creates a taxable event, as well.

What this means is that if you don’t use your cryptocurrency after you buy it, you’ll probably have no need to report anything at tax time.


Exceptions

  1. If someone pays you in cryptocurrency to do a job, you have to report that income as self-employment income– even if you save it.

  2. Any income you receive as the result of cryptocurrency mining, airdrops or hard forks have to be reported as income. Saving your cryptocurrency earnings in this case won’t exempt you from tax obligations.

Determining losses and gains

In order to find out if you made or lost money on a transaction, you need to know your cost basis. The cost basis of your cryptocurrency is the price you paid to acquire your crypto when you bought it.

The easiest way to determine your cost basis is with CoinTracking. We store historical prices for over 7,000 different cryptocurrencies on our own servers. That helps our software deliver quick, accurate calculations.

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There are many different methods of determining the cost basis of an asset. Most tax professionals believe that IRS will let you use whichever cost basis method you want, as long as you stick with whatever method you use and don’t try to change your method to reduce your tax bills.


Can I deduct my cryptocurrency losses?

Yes, you can deduct cryptocurrency losses from your yearly income.

The IRS lets cryptocurrency traders write off up to $3,000 in crypto losses from their ordinary income. If you lost more than $3,000 in a year, your losses can even carry forward into future tax years.

Another bonus: there is no limit to the amount of losses you can deduct from other capital gains. That means that if you sold your house or made money trading in stocks, you can use cryptocurrency losses to offset some or all of those gains.


Let one of our partner accountants check your work

In order to help our users feel confident that they’ve reported their crypto activity correctly, we’ve developed a new feature called CoinTracking Full Service.

The way it works is simple. After you copy all your exchange data to your CoinTracking account, you can contact one of our partner CPAs to get extra help. All you have to do is fill in this form, and a crypto-proficient tax professional will contact you to guide you through the process of submitting your cryptocurrency activity to the IRS.

Our partner tax professionals will:

  1. Assist you to import all of your transactions from exchanges and wallets

  2. Check your data for completeness and accuracy

  3. Assist you to fix any missing transactions such as trades, deposits, and withdrawals

  4. Provide you guidance on how to record complicated transactions such as ICO’s, lost or stolen coins, airdrops, gifts, etc.

  5. Create and review your CoinTracking tax reports

  6. Help you with anything else that’s necessary to generate an accurate CoinTracking tax report

More information about crypto taxes in the United States


The IRS addressed cryptocurrency for the first time in 2014

In 2014, the IRS issued a series of FAQs that answered some of the questions that tax professionals had been asking about cryptocurrency. This initial guidance established that for tax purposes, cryptocurrency would be treated like a capital asset. In other words, any capital gains or losses resulting from cryptocurrency investments should be reported at tax time.


2019’s updated crypto taxes guidance in the United States

The second round of guidance didn’t change the rules set forth in 2014 about crypto taxes in the United States. However, it did clarify a number of issues and questions about certain unusual situations involving various types of cryptocurrency transactions.


Airdrops and forks

The second round of FAQs from the IRS primarily addressed two topics: airdrops and forks.

An airdrop occurs when a crypto payment goes out to numerous wallet addresses. A hard fork occurs when a new cryptocurrency is formed and all of the holders of the older coin receive airdrops that make them owners of the new coin.

The IRS’s 2019 guidance stated that any cryptocurrency received in the form of an airdrop or as a result of a hard fork counts as ordinary income. If the taxpayer receives an airdrop but doesn’t gain the ability to cash out that airdrop until a later date, the tax event won’t trigger until the time at which the funds become available.


Virtual currency and self-employment income

The guidance goes on to state that any cryptocurrency received for performing services is self-employment income. For tax purposes, this self-employment income must be measured according to the fair market value of the asset at the time of receipt.


Cryptocurrency gifts and donations

Any cryptocurrency gifts that your receive do not increase your yearly income for tax purposes until you perform one of the following actions: exchange the cryptocurrency for fiat money, use the cryptos to buy goods or services or exchange the cryptos for other cryptos.

Interestingly, your cash basis and holding period is the same as the giver’s cash basis. However, if you cannot prove the cash basis or the holding period, they are both zero.

In addition, any cryptocurrency donations you make– like to a charitable organization, for example– will not result in a capital loss or capital gain. You can only take a charitable contribution deduction.


Get your crypto taxes in the US ready to-go with CoinTracking:

  1. Import your trades from 110+ exchanges/wallets.

  2. Support for DEX, Binance Smart Chain, and Binance Chain trades.

  3. 20+ advanced reports.

  4. Automatic Capital Gains calculations based on 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB).

  5. Fully Compliant Tax Reports.

Follow our weekly content about crypto taxes in the United States:

  1. Is Bitcoin taxable? The ultimate guide for 2021 taxes.

  2. Is transferring Crypto between wallets a taxable event?

  3. 5 ways a Blockchain fork impacts your Crypto taxes.

  4. Tax implications of getting paid in Crypto.

  5. Receiving a free airdrop? Watch out for taxes.

  6. Do you pay taxes on crypto trades?

  7. How to report crypto in your taxes?

  8. The tax guide to crypto loans.

  9. Earn Interest on Crypto: The Taxes Guide.

  10. Do you pay taxes on Bitcoin debit cards purchases?

  11. Find Crypto tax accountants near me.

  12. How to calculate taxes with Bitcoin dollar-cost averaging?

  13. How Crypto tax laws save money for Bitcoin hodlers

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.


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