A Guide to Common US Crypto Tax Scenarios

14 min readMar 24, 2018

Disclaimer: This is informational only. I am not a Certified Public Accountant. The information in this post is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. For financial, tax, or legal advice please consult your own professional.

With US tax day less than a month away, CoinTracker has been getting swarmed with questions about how to treat crypto taxes. And the IRS is paying attention to this problem. Here is a roundup of answers to the most common questions I have been seeing from a variety of sources and from talking to dozens of crypto CPA and enrolled agents. You can also see the CoinTracker Tax FAQ for a superset of this information.

How are cryptocurrencies taxed?

Tax laws vary around the world. Please familiarize yourself with the tax rules that apply to you based on your country/jurisdiction.

Most countries consider cryptocurrencies to be capital assets. Therefore if the asset appreciates in value and you sell/trade/use it for profit, the gains are taxed like capital gains. If the asset depreciates in value and you sell/trade/use it at a loss, you may be able to deduct the losses against other capital gains to reduce your taxes.

The amount of tax depends on how much capital gain/loss there has been on the asset, how long you have held the asset, and the specific regulations in your country/jurisdiction. Because each taxable event may create a capital gain, you need to know the date, cost basis, sale value, and any fees associated with each transaction.

Generally speaking, these are considered taxable events:

Selling cryptocurrency for fiat currency (i.e. USD, EUR, JPY, etc.)
Trading cryptocurrency for other cryptocurrency
Using cryptocurrency to buy a good or service
Receiving cryptocurrency as a result of a fork or from mining

On the other hand, the following are generally not considered taxable events:

Buying cryptocurrency with fiat currency
Donating cryptocurrency to a tax-exempt organization
Gifting cryptocurrency to anyone (if the gift is sufficiently large it may trigger a gift tax)
Transferring cryptocurrency from one wallet that you own to another wallet that you own

How does the United States Internal Revenue Service (IRS) treat cryptocurrency?

In 2014, the IRS released guidance on virtual currencies (i.e. cryptocurrencies). Some highlights include:

Cryptocurrencies are treated as personal property (not currency) and are therefore taxed as capital assets
Capital gains from selling cryptocurrency for fiat currency (e.g. USD) or using cryptocurrency to purchase goods or services are subject to capital gains tax
Cryptocurrencies that are obtained from mining are taxable as income at their fair market value at the time they are received
Mining equipment can be deducted as a legitimate business expense

In what jurisdiction are US citizens taxed on cryptocurrency?

All US citizens and US residents are subject to a worldwide income tax. Any currency — fiat or crypto — earned anywhere in the world is taxable. For example buying a product/service using cryptocurrency that has appreciated in value is taxable, as is realizing a capital gain on a foreign crypto-exchange.

In addition, states have their own additional tax regulations around cryptocurrency which may be in addition to whatever regulations apply.

Do I need to pay tax on my cryptocurrency?

If you traded, sold, or used any of your cryptocurrency to purchase something, then you may need to pay tax on these assets. If you were gifted or given cryptocurrency as payment, salary, or as a gift/donation, then this income should be reported just like any other income you receive.

If you are just buying cryptocurrency with your own money and storing it (no selling/trading/using it), then you likely do not need to pay tax on it. #HODL

What if I only traded crypto:crypto within an exchange without cashing out to fiat?

That is still a taxable event and treated the same as if you sold your cryptocurrency for fiat and then bought new cryptocurrency with that fiat. The taxable event is selling cryptocurrency (whether for cryptocurrency or fiat), not whether you cash out of an exchange with fiat currency.

If I buy something with crypto is that a taxable event?

Probably, but it depends on the rules of your country/jurisdiction. If it is considered a taxable event in your country, then you would be paying tax on the capital gains (the amount that the asset appreciated while you held it).

For example let’s say you bought one bitcoin for $1,000 and then you bought a car with that bitcoin. At the time of the purchase, the bitcoin was worth $20,000. The $19,000 of capital gains are taxable.

How are cryptocurrencies taxed if I earn them rather than buy them?

Most countries consider earning cryptocurrencies as a barter transaction (payment-in-kind). This means that you would be taxed as though you had earned an equivalent amount of fiat currency as income.

For example, if you earned one bitcoin, valued at $1,000, then you would be taxed as though you earned $1,000 of income.

What if I receive or give cryptocurrency as a tip or gift?

Gift and tipping rules vary from country to country. If required to report as taxable income, you would simply convert the cryptocurrency to their fair market value at the time they are received. Generally giving cryptocurrency as a gift is a non-taxable event for the giver, unless it meets the threshold for a gift tax. For the receiver, in addition to any taxable income that may be relevant, you will also take on the cost basis of the cryptocurrency from the donor.

There is however an important exception if the donor’s basis was higher than the market value of the bitcoin at the time of the gift (i.e. there was a capital loss on the coins at the time of the transfer). In this case, the receiver should recaculate their capital gain/loss using their basis as the market value of the bitcoins on the date of the gift. If there is still a loss from the donor’s original basis, then the receiver can proceed using the gift-date market value as the basis. If however there is now a capital gain, US tax law says to ignore the gain and report nothing (e.g. there is no capital gains event!). Note: the receiver always takes on the original donor’s original purchase date for the coin in short/long-term capital gains calculations.

This is very confusing, so here’s an example to demonstrate. Let’s say that Rashmi buys one bitcoin for $1,000. Two years later she gives it to Jon when the price of bitcoin is $500. Ten days later Jon sells the bitcoin. Consider the following scenarios:

Jon sells the bitcoin for $1,100. He takes on Rashmi’s original basis of $1,000, and has a long term capital gain of $100.
Jon sells the bitcoin for $400. Since there is a capital loss using Rashmi’s basis, he can’t use that basis. Instead, he takes on the basis of the fair market value of the bitcoin at the time of the transfer ($500), leaving a long term capital loss of $100.
Jon sells the bitcoin for $900. Again, since there is a capital loss using Rashmi’s basis, he can’t use that basis. He takes on the basis of the fair market value of the bitcoin at the time of the transfer ($500), however now this would yield a capital gain of $400, so instead you disregard the sale and nothing should be reported.

This is a counter-intuitive tax scenario, so it may help to think of this treatment as a way to prevent folks from sharing their capital losses with friends. Regardless, make sure to keep records any time you receive a crypto-gift, of the donor’s original basis, acquisition date (which you always inherit), as well as the fair market value of the coin on the date of the gift.

What happens if I receive a coin from a fork?

There is some debate about how to treat forked coins (e.g. as a stock dividend, etc.) as there is no authoritative guidance from the IRS. That said, the most conservative and sensible approach seems to be following well-established “treasure trove” doctrine where the IRS has long held that “found” money is a taxable event.

So for example if you own one bitcoin (BTC) and it forks into one bitcoin (BTC) and one bitcoin cash (BCH), then the one BCH you receive needs to be reported as taxable ordinary income (not a capital gain). This is true whether or not you sell your BCH. In addition, the amount you use for your reported income becomes your basis for the new BCH, and what you will use to calculate capital gains when you sell your BCH.

There is also some debate as to the exact method for calculating the fair market value for the BCH. For example there could be a time delay between when the fork occurs and when you gain control of the forked coin depending on whether you are using a local wallet or an exchange wallet. One simple, straightforward approach is taking the price at the time the forked coin (BCH) becomes available to you in your wallet (whether on an exchange or a local wallet) as the price for basis and taxable income. Note that some argue that the cost basis should be zero for forked coins and all upside should be considered capital gains, though this is a more aggressive approach. If you are unsure what to to here, please consult your tax professional.

How do I report mined cryptocurrency?

It depends on whether you are a hobby miner or a self-employed (business) miner. Here are some of the measures that the IRS provides for determining which camp you are in:

The manner in which the taxpayer carries on the activity
The expertise of the taxpayer or his advisors
The time and effort expended by the taxpayer in carrying on the activity
Expectation that assets used in activity may appreciate in value
The success of the taxpayer in carrying on other similar or dissimilar activities
The taxpayer’s history of income or losses with respect to the activity
The amount of occasional profits, if any, which are earned

As you can see, there is some amount of subjectivity to the classification. As an example, if you have a full-time custom mining rig, you are probably a business, and if you are randomly doing some mining on an old computer, you are probably a hobbyist. In both cases you will need to report your mined coins as taxable ordinary income and your basis will be the fair market value at the time you receive the coins.

If you are a hobbyist:

Income will go on line 21 (other income) of your Form 1040 (US Individual Income Tax Return)
Expenses directly associated with mining will go on a Schedule A form (Itemized Deductions); miscellaneous subject to 2% of AGI limitation (does not apply in 2018 onward)
Your income is not subject to the 15.3% self-employment tax (only normal income tax), however you receive fewer and less valuable deductions against your income

If you are a business miner:

Income and expenses both go on a Schedule C form (Profit or Loss from Business)
Your income is subject to the 15.3% self-employment tax, though there are more valuable deductions against your income

What if I donate my cryptocurrency?

In the US, if you donate your cryptocurrency to an IRS-recognized tax-exempt charity (e.g. 501(c)(3) organization), the IRS does not require you to pay capital gains on the transaction and you can deduct the value of your donation based on the fair market value of the cryptocurrency on the date of the donation.

Do wash sales apply to cryptocurrency?

A wash sale occurs when you incur a capital loss, and then buy a replacement stock or security within a 30-day window before or after the capital loss is incurred. For example, let’s say you buy a Google stock for $1,000 on January 1, sell it for $800 on January 10. You have incurred a capital loss of $200. Let’s say however than within 30 days (before or after) January 10 (even if it falls on a separate taxable year), you buy another Google stock — that is considered a wash sale and you cannot deduct the capital loss. Wash sales are in place to prevent people from taking losses in one tax year and then immediately buying back into the stock.

There is some debate as to whether wash sales apply to cryptocurrency sales, however the IRS specifically states that wash sales only apply to stocks and securities. Since the IRS has also issued guidance that cryptocurrencies are property, we do not calculate/apply wash sales. You should consult your CPA or tax professional for further advice on whether to apply wash sales to your cryptocurrency trades.

Can I apply a 1031 like-kind exchange to my cryptocurrency trades?

A 1031 like-kind exchange allows you to swap property with someone else without having to pay taxes as long as the property being exchanged is “like kind” (i.e. similar). Typically these rules are meant to apply to real estate transactions, however there is some debate about whether they apply to other types of transactions such as crypto:crypto trades.

Most experts believe that crypto:crypto trades do not qualify for like-kind exchanges, and this is also the conservative approach so it is the philosophy we follow as well. Additionally, in 2018, the IRS has clarified that like-kind exchanges only apply to real estate (i.e. not cryptocurrency).

What is my tax rate for my crypto gains?

In the US, the amount you pay in federal taxes on your crypto gains depends on how long you have held the coins and your ordinary tax rate.

If you have held coins for one year or less, they are considered short term capital gains. In this scenario, the gains are simply added to your income for tax purposes and taxed at your ordinary income tax rate (you can look this up here). This is the higher tax treatment scenario.

If you have held the coins for more than one year, they are considered long term capital gains. In this scenario, the gains are taxed between 0–20% depending on your ordinary income tax rate (you can look them up here). This is the lower tax treatment scenario.

For example let’s say that your annual income is $50,000 and you are filing as single. You buy one bitcoin on January 1, 2016 for $400 and sell it on January 1, 2017 for $1,000. You have a short term capital gain of $600, which taxed at your ordinary income tax rate of 25% results in a tax of 0.25 * $600 = $150 in additional federal taxes.

Instead let’s say that your annual income is $30,000 (still filing as single). You buy one bitcoin on January 1, 2016 for $400 and sell if on January 2, 2017 for $1,000. You have a long term capital gain of $600. Your ordinary income tax rate is 15%, and your long term capital gains rate is 0%. Therefore you pay no federal tax on this bitcoin sale (state taxes may still apply).

You can read more about IRS’s guidance on short and long term capital gains here.

Do I have to report every transaction where I buy something with cryptocurrency?

If your government has judged that capital gains were made when you spend cryptocurrency, then yes (like in the U.S., for example). This includes crypto:crypto trades.

How can I figure out my crypto taxes?

CoinTracker offers a few different methods to help you figure out your U.S. crypto taxes. Additionally, if you are in the United States, you can refer to the IRS’s guidance on cryptocurrency taxes. Beyond that, you should consult your tax professional to understand how much tax you owe.

What options do I have for calculating my capital gains?

The simplest and most conservative method is first-in-first-out (FIFO), which is what CoinTracker provides by default. This means that the first coin that you purchase (chronologically) is the first coin counted for a sale. The alternative is specific identification where you identify exactly which coin is being spent from history using another method (e.g., highest-in-first-out [HIFO], last-in-first-out [LIFO], etc.).

For example let’s say that you buy one bitcoin for $400 in 2015, one bitcoin for $5,000 in September 2017, and one bitcoin for $4,000 in October 2017. Then you sell one bitcoin at the December 2017 for $15,000. Using FIFO, your capital gains would take the $15,000 proceeds and subtract the first cost basis for that coin ($400 from 2015). This would result in a long term capital gain of $15,000 — $400 = $14,600. Using HIFO, the capital gain would be $15,000 — $5,000 = $10,000 and using LIFO it would be $15,000 — $4,000 = $11,000.

IRS’s guidance is that FIFO and specific identification may both be used for stocks and bonds, however there is no specific guidance for cryptocurrency in this matter. There is debate in the community as to whether specific identification will be accepted by the IRS. The most conservative approach is to simply use FIFO, though specific identification may be more tax advantaged (see more information here). Please consult your tax professional for guidance on your personal situation.

How often are cryptocurrency taxes due?

The U.S. has a pay-as-you-earn tax system. That means, when you get a paycheck from your employer, taxes are withheld throughout the year. When you run a business, you pay quarterly taxes. When you owe more than $1,000 in capital gains for the year, you should be making quarterly payments as well (if you owe less than $1,000, then one annual payment is fine). Here is IRS’s guidance on quarterly taxes for capital gains.

You should be making your best estimates and if you overpay or underpay, you can correct this at the end of the year using Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts). If you do not make estimated quarterly payments when required, or underpay too much, there are fees.

Which tax forms do I need to complete?

You should consult your tax professional to figure this out.

Generally speaking, in the U.S., you will want a Form 8949 (Sales and Other Dispositions of Capital Assets) complete with your cryptocurrency transaction history, a summary of your overall capital gains (across all assets) on your Schedule D (Capital Gains and Losses), and then your Form 1040 (Individual Income Tax Return).

Additionally, if any of your cryptocurrency assets were lost or stolen, you will want to complete Form 4684 (Casualties and Theft). If you held $10,000 or more on a foreign exchange (non-US based) at any time during the tax year, you need to file a FBAR. If you held more than $75,000 on a foreign exchange during the tax year, then you must additionally file a Form 8938 (Statement of Specified Foreign Financial Assets, a.k.a FATCA) if, on a foreign exchange, you held either more than $75,000 (at any time during the tax year) or more than $50,000 (on the last day of the tax year). If you underpaid your quarterly taxes for capital gains, then you will want to complete a Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts).

I don’t have enough fiat money (e.g. USD) to pay my taxes. Should I sell crypto to pay my taxes? If so, won’t they be taxed again?

In general, you should always gross up your crypto sales for taxes when taking profits trading cryptocurrency. As an example, let’s say that your effective tax rate on capital gains is 33%. If you are trying to cash out $10,000 of profits from your bitcoin holdings, you should sell $15,000 worth of bitcoin and set aside $5,000 for taxes (33% of $15,000 is $5,000, leaving the $10,000 that you want to cash out). For help with your specific situation, you should consult your tax professional.

Where can I get tax advice on cryptocurrency?

Please speak with a Certified Public Accountant (CPA), Enrolled Agent, tax lawyer, or other tax profession who is familiar with your financial situation and the local tax laws. CoinTracker also offers $50 off a crypto tax filing service after you purchase a tax plans.

How can I avoid paying crypto taxes?

You should always pay your taxes.

There is a good chance you’ll get caught if you try to evade crypto taxes, and you don’t want to be paying late fees to your government or worse. Remember, all transactions on the blockchain are on a public, immutable ledger forever. If your government ever finds out that you tried to evade taxes, then can impose penalties on you retroactively.

Additionally, many exchanges are starting to report trading history to governments either proactively or due to government subpoenas, and governments themselves are starting to get more intelligent about tracking down tax evaders. Don’t be the person caught committing tax fraud.

I accidentally did not properly report my tax for cryptocurrency for historical tax years. What should I do?

Speak with your tax professional. The IRS has also issued guidance on amending your tax return for a previous year.

This is ridiculous!

Sorry, we don’t make the rules! Feel free to contact your representative to let them know how you feel.