Cryptocurrency is still pretty new. So it may come as no surprise that there is a very little official guideline on how to properly tax bitcoin transactions at the federal level.
Here are some of the lesser-known facts that’ll help you understand crypto taxes.
1. Cryptocurrency As Property
Indeed, the IRS issued its initial advice in 2014 with the publication of Notice 2014-21, 2014-16 I.R.B. 938 (the “Notice”) in the Internal Revenue Bulletin. In that Notice, the IRS said that virtual currency will be treated as property (rather than currency) for federal income tax purposes.
2. Taxable & Non-Taxable Events
The majority of cryptocurrency transactions are taxed, although not all of them are.
Taxable Events
- Sell crypto for fiat currency like the US dollar, Yen, or Canadian dollar
- Swap one cryptocurrency for another, such as Bitcoin for Ripple or Cardano for Ethereum.
- Used cryptocurrency to purchase products and services.
- Because of sophisticated crypto scenarios, such as a hard fork or crypto mining, you will receive cryptocurrency.
Non-Taxable Events
Some of the examples of crypto transactions that aren’t taxable are:
- Buying crypto using fiat cash
- Transfer cryptocurrency from one of your wallets to another
- Giving cryptocurrency as a gift (gift above $15,000 will be subjected to gift tax)
- Donate crypto to a tax-exempt non-profit organization.
3. Capital Gains Taxes
If you’ve been holding your crypto assets as an investment, the earnings you’ve made are known as capital gains, and these profits are subject to capital gains taxes.
Sounds complicated? Let’s take a look at an example.
Suppose you bought $2000 worth of Ethereum a few months ago and paid a $10 transaction fee. So, your cost basis for this entire transaction will be $2010. Now if you sell the Ethereum at $4500, you’ll incur a profit. How can you calculate the capital gain?
Capital gains = Selling price – Cost price – Fees
According to this formula, your capital gain will be $2490. And the amount of capital gains tax you’ll have to pay will be determined by the length of time you held the bitcoin and your income bracket.
4. Short-Term & Long-Term Capital Gains
Capital gains tax can be classified into the following categories based on the length of time that crypto has been held:
- On assets kept for less than a year, it is termed as short-term capital gains tax.
- On assets kept for more than a year, it is termed as long-term capital gains tax.
5. Crypto Income Tax
The following activities generate revenue that is subject to income tax:
- Deferred payment financing
- Obtaining cryptocurrency using an airdrop
- Getting paid in cryptocurrency as a reward or as a bug bounty
- Staking and liquidity pools are two ways to earn cryptocurrency.
- Getting money from crypto mining through transaction fees or block rewards
- As an artist/creator, you can create an NFT.
- Play-to-earn games reward you with tokens (Such as Axie Infinity)
6. Non-Taxable Events
Some of the examples of crypto transactions that aren’t taxable are:
- Buying crypto using fiat cash
- Transfer cryptocurrency from one of your wallets to another
- Giving cryptocurrency as a gift (gift above $15,000 will be subjected to gift tax)
- Donate crypto to a tax-exempt non-profit organization.
7. Reporting Crypto Taxes
The process of calculating taxes may be difficult for taxpayers. But thankfully, it is becoming easier.
- Cryptocurrency exchanges are making compliance with these rules easier than ever before. Individuals with substantial enough earnings receive 1099-MISC forms from Coinbase and other major exchanges, and everyone has easy access to their transaction history. This is particularly useful for crypto-to-crypto exchanges.
- Another great alternative is using . During tax season, using such software will make it simple for you by collecting data from many exchanges, computing your taxes, and creating typical IRS documents such as Form 8949 and Schedule D.
You may even automate the process of tax-loss harvesting Bitcoin losses to balance other profits if you’ve had losses. Using crypto tax software, like ZenLedger, will help you cut down on the time it takes your CPA to submit your taxes, and also save you money.
The Bottom Line
Bitcoin’s price has dramatically fluctuated throughout the years, resulting in big profits and losses for investors. At the same time, the Internal Revenue Service and the Securities and Exchange Commission have increased their enforcement activities to ensure that crypto firms follow the laws and that crypto investors pay their due amount.
ZenLedger easily calculates your bitcoin taxes and also finds opportunities for you to save money and trade smarter. or learn more about our !
Disclaimer: This material has been prepared for informational purposes only and is not intended to provide, tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
FAQs
- Do you have to pay taxes on Bitcoin?
The majority of Bitcoin transactions are taxed, although not all of them are. Here’s a list of all the Bitcoin transactions that are taxable:
-
- Sell crypto for fiat currency like the US dollar, Yen, or Canadian dollar
- Swap one cryptocurrency for another, such as Bitcoin for Ripple or Cardano for Ethereum.
- Used cryptocurrency to purchase products and services.
- Because of sophisticated crypto scenarios, such as a hard fork or crypto mining, you will receive cryptocurrency.
- How to report taxes on Bitcoin?
Cryptocurrency exchanges are making compliance with these rules easier than ever before. Individuals with substantial enough earnings receive 1099-MISC forms from Coinbase and other major exchanges, and everyone has easy access to their transaction history. This is particularly useful for crypto-to-crypto exchanges. Alternatively, you can also make use of crypto tax software that’ll help you automate the entire process of tax filing.
- How do I avoid paying taxes on Bitcoin?
You normally do not owe taxes on cryptocurrencies until you sell them if you are holding them as an investment and it is not making any revenue. You can completely avoid paying taxes if you don’t sell any within a particular tax year. However, you may wish to sell your bitcoin at some point.