How is Cryptocurrency Taxed? Your Guide to Taxes on Crypto

Written By
Julija A.
Updated
December 07,2022

The crypto world isn’t the uncharted land it used to be a decade or so ago. Back in the day, the process stumped anyone trying to purchase some bitcoins.

Luckily, times change and, nowadays, we have dozens of crypto exchanges, sites that accept these coins as regular currency, and you can even invest in crypto. Of course, with such widespread usage always come taxes. US citizens now have to report cryptocurrency earnings during tax season, as they would any other asset.

But, how is cryptocurrency taxed in the United States? More importantly, how much will you pay if you own some crypto coins? Read on to find out.

Understanding Crypto Taxes

Most people regard Bitcoin and other cryptocurrencies as virtual currencies. After all, that’s part of the crypto definition and how blockchain technology works.

Be that as it may, while you can use cryptocurrencies to pay for various goods and services, they’re not considered a currency by the IRS. Instead, they’re taxed as property - i.e., an asset.

It also doesn’t matter that cryptos are decentralized in nature: Your gains and losses will affect your taxes.

But, what about non-fungible tokens (NFTs), earnings from play-to-earn video games, and other blockchain-related assets? They’re now all considered digital assets by the IRS and, since October 2022, crypto taxes have to be paid on all those properties, too.

To summarize, every cryptocurrency and blockchain-powered digital asset is now taxable and must be reported on your tax form when the tax season starts. Still, this process has a few complicated points, which we’ll discuss in the next section.

When and How is Cryptocurrency Taxed in the US?

In the before times, there was a lot of confusion about whether you owed taxes on virtual currency in your wallet. The rules are still a bit fuzzy, but the IRS has since defined what is now considered a taxable event and what isn’t.

Purchasing crypto coins from a cryptocurrency exchange and holding onto the assets is perfectly fine, but you’ll still have to pay taxes on them. All crypto transactions (i.e., both buying and selling) generate a taxable event that you’ll need to include on your tax forms.

Cryptocurrencies are capital assets according to the IRS, much like stocks and securities. Selling, trading, or exchanging them generates capital gains taxes. Additionally, cryptocurrency taxing rules state that using crypto for payments also generates taxable events.

Now, the question is - which crypto transactions and events are taxable? Besides what we’ve already mentioned, you also need to report when you’re given some crypto as a gift through an airdrop, earn them through staking and play-to-earn games, or receive crypto payments for items or services.

This is all considered taxable income, as it provides you with financial interest and, thus, falls under the US crypto tax system rules.

There is an exception to this rule, and that’s when your crypto loses value. When you take the cost basis of your coins at their fair market value - their value on the date of purchase - and their sale value is lower than that, it means you’ve suffered capital losses and can offset your income taxes, reducing your tax liability along the way.

Cryptocurrency Tax Rates for 2022

Several factors determine how much you’ll have to pay for your crypto transactions during the tax season. These include your cryptocurrency income, the timespan of ownership, and your tax filing status.

Cryptocurrencies are considered short-term taxable gains if you’ve held them for less than 365 days. Therefore, we can separate the taxes into two categories - short-term capital gains and long-term capital gains.

Here’s how high the rates of cryptocurrency short-gain taxes are for 2022:

Tax rate

Single filer

Married filing jointly

Head of household

10%

$0 – $11,000

$0 to $22,000

$0 to $15,700

12%

$11,001 to $44,725

$22,001 to $89,450

$15,701 to $59,850

22%

$44,726 to $95,375

$89,451 to $190,750

$59,851 to $95,350

24%

$95,376 to $182,100

$190,751 to $364,200

$95,351 to $182,100

32%

$182,101 to $231,250

$364,201 to $462,500

$182,101 to $231,250

35%

$231,251 to $578,125

$364,201 to $462,500

$231,251 to $578,100

37%

$578,126 or more

$693,751 or more

$578,101 or more

The cryptocurrency capital gain taxes are calculated according to this table:

Tax rate

Single filer

Married filing jointly

Head of household

0%

$0 to $44,625

$0-$89,250

$0-$59,750

15%

$44,625 to $492,300

$89,250 to $553,850

$59,750 to $523,050

20%

$492,300 or more

$553,850 or more

$523,050 or more

Mining Cryptocurrency and Taxes on Staking

As mentioned, earning crypto through mining and staking is now taxable in the US. You also have to pay taxes on any virtual currency given to you through promotions like airdrops and earned through metaverse activities, as this is all considered crypto income.

Unlike the capital gains and losses you face when trading and exchanging cryptocurrencies, coins acquired through the methods listed above count as your ordinary income and will be taxed as such.

However, once you do decide to spend or sell this cryptocurrency, you’ll still have to pay capital gains tax on it, according to the tables above.

Reporting Your Cryptocurrency Taxes

With the tax season looming, let’s talk about filing for and paying taxes on crypto in a practical sense.

First, you need to know which IRS tax forms to fill. As you may have guessed by now, the exact forms required depend on your crypto acquisition methods. Starting from 2022, the standard Form 1040 includes a question about engaging in cryptocurrency transactions.

Here are the forms you may encounter related to tax on cryptocurrency:

  • Form 1040 - the standard annual income tax form.
  • Form 1099-NEC - potentially required if you obtained crypto through mining.
  • Form 8949 - a form where you’ll log all your taxable transactions in crypto as an asset.
  • Schedule C - additional form for crypto miners where they need to state whether they’re hobby miners or running a business.
  • Schedule D - a form summarizing all capital gains and losses, including crypto.
  • Schedule SE - this form is only needed if you’re self-employed and earn cryptocurrency through that line of work.

Once you’ve got the required forms, you can start filing your taxes on cryptocurrency gains. To make this as uncomplicated as possible, it’s imperative to keep records of your crypto transactions throughout the year; you might even want to use specialized software to help you sort out your taxes.

Even if you’re well organized, you might want to consider hiring an expert as a consultant. This is an additional expense, yes, but tax experts can help you sort everything out when you don’t know how to pay taxes on cryptocurrency. They will make sure you pick the right forms and analyze which transactions you owe taxes on.

Furthermore, people that regularly trade crypto and deal with high volumes of transactions should consider hiring a certified public accountant to run their books. Just like with fiat currencies and other taxable assets, keeping track of virtual assets and properly reporting on everything will save you troubles with the IRS down the line.

Bottom Line

Paying taxes, whether on physical or virtual goods, is a challenge for most people, but once you’ve grasped the basics of cryptocurrency taxing, everything will fall into order.

Keep in mind to check with the IRS for any new updates and regulations and adequately keep track of your crypto funds. With a bit of practice and guides like this, you’ll master the art of crypto tax filings in no time.

FAQ

Do I pay taxes on crypto if I don’t sell?

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Yes, certain circumstances require you to pay taxes on your held cryptocurrencies even if you’re not selling them. These would include crypto mining, staking, and earning crypto through airdrops and metaverse activity.

Where do I report cryptocurrency on my taxes?

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First, check on the standard Form 1040 that you had any cryptocurrency transactions in the first place. Then, on Form 8949, put down all the crypto purchases and expenses you had in the previous tax year. You may also need to acquire additional forms from the IRS if you’re mining crypto, or running a small business that deals with crypto in some form.

Do I have to report crypto losses on my taxes?

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Yes, both gains and losses must be reported on your tax form. How is cryptocurrency taxed in the case of a loss, then? As the IRS considers it a capital investment and earnings through cryptocurrency trade are capital gains, all your crypto losses are taxed as capital losses, too. This means you can claim a tax return on your devalued crypto coins and, furthermore, reduce the total amount you have to pay during that tax season.

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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