How is Cryptocurrency Taxed?

Written By
Julija A.
Updated
August 18,2022

Cryptocurrency is a hot topic right now, and with good reason! The value of Bitcoin and other cryptocurrencies has been on the rise for the past few years, and there are now many exchanges where investors can buy and sell cryptocurrencies.

As more people invest in crypto, the IRS is starting to take notice. In this article, we will discuss how cryptocurrency is taxed in the United States.

We will cover everything from determining if you owe taxes on your crypto holdings to how to report them on your tax return form. Read on for all you need to know about crypto taxes.

How is Cryptocurrency Taxed?

Cryptocurrency is taxed as a capital asset. This means that if you sell your crypto for more than you paid for it, you will owe capital gains tax on the difference. The tax rate you have to pay depends on how long you have held the cryptocurrency.

If you have held it for less than one year, you will pay short-term capital gains tax at your ordinary income tax rate.

If you have held it for longer than one year, you will pay long-term capital gains tax, ranging from 0% to 20%, depending on your total taxable income.

Of course, if you sell your crypto for less than you paid for it, you can claim a capital loss on your taxes. This can offset other capital gains you may have, and it may even lower your overall tax bill.

Now that we’ve covered some basics on cryptocurrency taxing, let's look at how to determine if you owe taxes on your crypto holdings.

Do I Owe Taxes on My Cryptocurrency?

If you bought crypto and held it as an investment, you will likely owe taxes on it when you sell. The same goes if you have used cryptocurrency to purchase goods or services.

That’s because purchases of goods and services are also subject to capital gains tax.

So, how do you know if you owe taxes on your cryptocurrency? The best way to find out is to consult with a tax professional. They can help you determine if you have taxable events and how much tax you owe. 

What Are Taxable Events?

To have a better understanding of crypto taxes, we need to also explain what taxable events are. A taxable event is any occasion when you sell, trade, or exchange your cryptocurrency. This also includes using crypto to purchase goods or services.

If you are given cryptocurrency as payment for a property, item, or service, it is considered a taxable event, and you need to report it on your taxes.

Another event that can trigger a capital gain tax is if you exchange one cryptocurrency for another. For instance, if you trade Bitcoin for Ethereum, it would be considered a taxable event.

 That said, the act of actually buying a cryptocurrency (to hold) isn’t a taxable event. It’s important to keep track of all of your cryptocurrency transactions so you can properly report all your taxes on crypto.

Calculating Your Taxes

If you have a taxable event, you will need to calculate your taxes. This can be done by using some of the crypto tax software solutions available on the market, or you can calculate them yourself by using the following formula:

(Sale price - Cost basis) x Tax rate = Capital gains tax owed

For example, let’s say you bought one Bitcoin for $1,000 and sold it later for $2,000. To calculate your taxes, you would use the following formula:

($2000 - $1000) x 20% = $200

This means you would owe $200 in capital gains tax on your Bitcoin sale.

Cryptocurrency Tax Rates for 2022

Tax rate

Single filer

Married filing jointly

Married filing separately

Head of household



10%

$0 – $9,950

$0 to $19,900

$0 to $9,950

$0 to $14,200

12%

$9,951 to $40,525

$19,901 to $81,050

$9,951 to $40,525

$14,201 to $54,200



22%

$40,526 to $86,375

$81,051 to $172,750

$40,526 to $86,375

$54,201 to $86,350

24%

$86,376 to $164,925

$172,751 to $329,850

$85,526 to $163,300

$86,351 to $164,900

32%

$164,926 to $209,425

$329,851 to $418,850

$164,926 to $209,425

$164,901 to $209,400



35%

$209,426 to $523,600

$418,851 to $628,300

$209,426 to $314,150

$209,401 to $523,600

37%

$523,601 or more

$628,301 or more

$314,151 or more

$523,601 or more

Tax Reporting

Now that you know how to calculate your tax on cryptocurrency, it’s time to find out how to actually make a tax report. You will need to file Form 8949 with the IRS.

This form is used to report capital gains and losses from the sale of investments. On this form, you will need to list all the cryptocurrency transactions you made during the year, including the date of the transaction, the sale price, and the cost basis.

Once you have completed Form 8949, you need to attach it to your federal income tax return. You will also need to file Schedule D, the form used to report capital gains and losses from all investments, not just digital currency. 

Tax Filing Tips

If you're having trouble keeping track of your cryptocurrency and the taxes that go along with it, there are a few things you can do to make the process easier. 

Here are a few tips to help you out:

Keep a Record of Your Transactions

A good organization of all your crypto transactions is essential. You should keep a list of all the transactions you have made, including the date, amount, type of coin, and the crypto exchange you used.

You should also note how long you held the coin and how much you sold it for.

This practice will help you immensely when calculating your taxes because you will have all the information in one place. You can use a spreadsheet or software to help you better manage your crypto portfolio.

Fill Out the Correct Tax Forms

When filing taxes on cryptocurrency gains, you need to make sure you’re filling out the proper forms. Depending on your situation, there are a few different forms you might need to fill out. The most common ones are Form 8949 and Schedule D.

You will need to file Form 8949 if you sold, traded, or exchanged cryptocurrency during the fiscal year. You will also need to file Schedule D if you’ve had any capital gains or losses from investments.

There’s also a Schedule C form for sole proprietors who have crypto income from mining or trading. And lastly, there’s a Schedule 1 form for those who have reported crypto mining as a hobby.

Consult with a Tax Expert

If you're still feeling lost regarding cryptocurrency taxes, you can always consult with a tax expert. Cryptocurrency taxing rules are pretty strict, and they can be confusing to newcomers.

A tax expert will be able to help you figure out what forms you need to fill out and how to report your crypto taxes properly.

They will help you sort out your taxes and make sure you're doing everything correctly by letting you know about taxable events and how much tax you’ll have to pay.

Having a good understanding of how cryptocurrency is taxed is essential for anyone who owns or trades crypto. By following these tips, you can ensure you're compliant with the IRS and avoid any potential penalties for neglecting your taxes.

How to Reduce the Cryptocurrency Tax Bill

Now that you know the cryptocurrency taxing basics, you can start thinking about how to reduce your tax bill.

Make Long-Term Investments

If you’re investing in cryptocurrency, you can take advantage of the long-term capital gains tax rate. This lower tax rate applies to assets held for more than a year.

However, you should still remember that digital currencies are highly volatile, so you need to invest carefully and only funds you can afford to lose.

Harvest Your Losses

If the market value of your cryptocurrency holdings has gone down, you can use that to your advantage by selling and then buying back the same amount. Your crypto taxes will be lower because you will be able to claim a capital loss.

You can also use this strategy if you have gains in other investments. You can offset some of your cryptocurrency losses by selling your assets that have gained value.

This is called tax-loss harvesting, and it can help you reduce your overall tax bill. Tax-loss harvesting can help you offset other investment losses, such as stock market losses. This can help you reduce your overall tax bill.

Use a Tax-Advantaged Account

If you’re investing in cryptocurrency for the long term, you can use a tax-advantaged account, such as an IRA or 401(k). This will help you defer or avoid taxes for cryptocurrency trading gains.

You can also use a Roth IRA to invest in cryptocurrency. With this account, you will pay taxes on your profits only when you withdraw the money in retirement.

Consider Cryptocurrency Loans

If you have a large amount of cryptocurrency, you can take a loan against it. This can help you avoid taxes on your crypto gains and give you the cash you need without having to sell your assets.

You should always consult with a tax advisor before taking out a loan against your cryptocurrency holdings, though.

Bottom Line

Cryptocurrency taxes can be confusing and overwhelming at times, but it’s essential to understand how they work. By following the guidelines from our article, you can ensure you're on the right path and avoid any tax penalties.

Remember to always keep your crypto transactions in order, stay compliant and consult with a tax expert if you have any questions.

FAQ

Do you have to pay taxes on crypto if you don't sell?

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You don't have to pay taxes on crypto if you don't sell. However, if you do sell, you will owe capital gains taxes on the difference between the sale price and your cost basis. This is important as the cost basis determines your tax liability and how much tax you will owe.

What happens if you don't report cryptocurrency?

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If you don't report cryptocurrency, the IRS can impose penalties and interest. That is why it is crucial to know how to pay taxes on cryptocurrency.

The IRS has also been known to issue summons to taxpayers who have not reported their crypto holdings. If ever in doubt, you should consult with tax experts to ensure you are properly reporting your crypto assets.

Can you write off crypto losses?

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Yes, you can write off crypto losses on your taxes. This is done by claiming a capital loss on your tax return. Capital losses can offset other capital gains you may have, and they may even lower your overall tax bill.

How much is crypto taxed after a year?

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If you have held your crypto for longer than one year, you will pay long-term capital gains tax, which can be between 0% and 20%. If you have held your crypto for less than one year, you will pay short-term capital gains tax at your ordinary income tax rate. Your crypto taxes will depend on how long you have held your crypto and when you sold it, which is why it is important to keep track of your crypto assets at all times.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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