Disclaimer: Exodus does not provide tax, accounting, or legal advice. The information in this article is for informational purposes only and should not be used as tax, accounting, or legal advice. Consult with tax, accounting, and legal advisors before making any decisions regarding taxes.
- Cryptocurrency Taxes USA: Introduction
- Crypto Sale or Exchange Taxes (Capital Gains Tax
- Crypto Mining Taxes
- Cryptocurrency Income Taxes (Getting Paid in Crypto)
- Airdrop Taxes
- Hard Fork Taxes
- Staking Taxes
- Lending Taxes
- ICO Taxes
- Crypto Margin Trading Taxes
- Crypto Donation Taxes
- Crypto Tax Forms
- Crypto Tax Software
- State Taxes for Crypto
- Can I Just Not Pay Crypto Taxes?
Cryptocurrency Taxes USA: Introduction
Tax season is upon us! While every country taxes cryptocurrency differently, we’ll cover crypto taxation in the US since many of our readers are American. Also, for federal tax purposes, the US treats crypto as property, which is also the case in some other jurisdictions, such as the UK, Canada, and Australia.
This means that tax principles that are generally applicable to property also apply to crypto. Crypto, like property, is usually considered a capital asset that can be subject to capital gains tax.
So without further ado, here’s more on everyone’s favorite topic - taxes!
Crypto Sale or Exchange Taxes (Capital Gains Tax)
Crypto Sale Taxes
In the US, crypto is treated as a capital asset, and any sale of crypto is subject to capital gains tax.
When you sell crypto, you calculate your capital gain or loss based on the difference between the sale price of the crypto and its adjusted basis. What’s the adjusted basis? Well first, the cost basis is how much you paid for your crypto. The adjusted basis is the cost basis minus expenses like transaction fees and commissions.
With regards to the cost basis, the IRS has not given any explicit guidance on how to identify cost basis in crypto sales or exchanges (since you can sell a bunch of crypto at one price but acquire units of it at different prices).
However, the IRS will likely go with “First-In-First-Out” (FIFO) for identifying cost basis. FIFO means that the first crypto assets you purchased are also the first you sold or exchanged. Using this information, you can calculate any gain or loss based on the purchase price of the oldest units of the asset that were sold and the asset’s price at time of sale or exchange.
Regardless of whether or not you go with FIFO for your crypto tax reporting, apply a consistent methodology and keep records of all your transactions. Report your cost basis or adjusted basis on Form 8949 and Form 1040, Schedule D.
Cost basis for crypto that’s received as income (e.g. mining, sale of goods or services), as opposed to bought outright with cash is a little different. Cost basis in those situations is calculated by tallying up the money spent in USD to acquire the crypto, which can include things like commissions, fees, and other acquisition costs.
Crypto Exchange (Crypto to Crypto) Taxes
Now, when you exchange crypto, you calculate capital gain or loss based on the difference between the fair market value of the crypto asset on the day you exchange it and the adjusted basis of the asset. Do note that whereas before January 1, 2018, crypto to crypto exchanges weren’t taxable events, starting January 1, 2018, such exchanges incur taxes.
Crypto to crypto exchanges are accounted for in USD (difference between fair market value of the new crypto asset and adjusted basis of the original crypto asset).
Short-Term vs. Long-Term Capital Gains Taxes
Once you figure out your capital gain from your crypto sale or exchange, that amount gets taxed at your normal income tax rate if it’s a short-term capital asset or at reduced tax rates if it’s a long-term capital asset.
Short-term would mean that you sold or exchanged your crypto within 365 days or less. On the other hand, Long-term is if you sold or exchanged your crypto after holding it for 365 days or more.
Net capital gain or loss (includes short and long-term capital gains and losses) gets reported on Form 1040. As for the beginning and end dates of your holding period (how long you held onto the crypto before selling or exchanging it), that goes on Form 8949.
For short-term gain tax rates, reference 2019 income tax rates for individual filers. Report specific details regarding short-term gain or loss on Schedule D and Form 8949 (Part 1).
For long-term gain tax rates, the following applies:
- 0% if your taxable income is less than $78,750
- 15% if your taxable income is more than $78,750 but less than $434,550 ($488,850 for married filing together or qualifying widow(er), $461,700 for head of household, $244,425 for married filing separately)
- 20% if your taxable income is more than the thresholds for the 15% tax rate
The long-term capital gains tax that applies is reporting using Form 1040, while specific details about the long-term gain or loss go on Schedule D and Form 8949.
Crypto Capital Loss (Writing off Crypto Losses from Taxes)
Lost money with crypto? Luckily, there’s a bright side to this in the sense that you can report a capital loss and use it to reduce your taxable income. The amount of loss you can use to lower your taxable income is the lesser of $3,000 ($1,500 if married filing separately) or your total net losses. If your losses exceed this limit, you can use them during future tax filing seasons to lower your taxable income in a similar manner.
Report any lowering of taxable income using capital losses on Form 1040 and Schedule D.
Net Investment Income Tax (NIIT)
Another tax you need to keep in mind when it comes to the sale or exchange of crypto is Net Investment Income Tax (NIIT). The NIIT doesn’t apply to businesses. For everyone else, the NIIT of 3.8% applies to the lesser of one’s capital gain from the sale of exchange of crypto or to the modified adjusted gross income (MAGI) that’s over one’s threshold amount.
MAGI for the purposes of NIIT is adjusted gross income (AGI) from Form 1040, Line 37 that’s increased by the difference between the excluded amount from gross income in section 911(a)(1) and the amount of any deductions or exclusions that aren’t allowed under section(911)(d)(6) for amounts described in section 911(a)(1).
MAGI thresholds are as follows:
- Single $200,000
- Married filing jointly $250,000
- Married filing separately $125,000
- Head of household (with qualifying person) $200,000
- Qualifying widow(er) with dependent child $250,000
NIIT gets reported on Form 8960 and Form 1040.
Crypto Mining Taxes
If you’re a crypto miner and make money from crypto that way, you, too, have to pay the taxman come tax season! Mining rewards over $400 must be reported to the IRS. You also have to identify whether you’re a hobby miner or business miner when you report.
The IRS classifies hobby miners as those who:
- Don’t earn more than $400 in mining income
- Do not engage in mining as a self-employed trade or business
Hobby miners treat mining income like ordinary income. Also, losses associated with mining for hobby miners cannot be used to reduce taxable income.
Hobby mining income is reported on Form 1040. If the taxpayer itemizes their deductions instead of taking the standard deduction, they can deduct mining-related expenses, including those related to virtual (cloud) mining at a maximum 2% of their adjusted gross income on Schedule A.
If you run a crypto mining trade or business that generates trade or business income, involves the owning or leasing of mining equipment, and generates over $400 in mining income, you are a business miner and have to report mining income as self employment income. Business miners are also subject to the 15.3% self employment tax.
Mining business expenses like electricity, hardware, and depreciation of mining equipment can be deducted for tax purposes.
Along with reporting mining income, business miners also report mining business expenses on Schedule C. The self employment income is then translated from Schedule C to Form 1040. Meanwhile, the self employment tax is calculated and reported on Schedule SE. After reporting on Schedule SE, the self employment tax goes on Form 1040.
Unlike hobby mining income, any net losses from business mining income can be used to reduce the taxpayer’s taxable income.
Cryptocurrency Income Taxes (Getting Paid in Crypto)
If you get paid in Bitcoin, you must report your total wages on your W2 form in dollars. Your employer must report your earnings on your W2 form in dollars, too, by converting payment amounts from Bitcoin to dollars on the date each payment is made. Moreover, tax withholding that applies to dollar wages applies to crypto wages.
As for that random airdrop that you claimed or that randomly showed up in your wallet, airdrop crypto is taxed as ordinary income on the date of receipt. The ordinary income amount and adjusted basis for the airdrop are equal to the fair market value of the airdropped crypto on the day it’s received. For reporting purposes, the airdrop gets reported as ordinary income on Form 1040.
After receiving the airdropped crypto, any sales or exchanges thereafter will follow capital gain or loss guidelines as mentioned earlier. To calculate short or long term capital gain or loss, the holding period begins on the day you received the airdrop.
However, do note that an airdrop’s value can be of low or no value if there isn’t a market to exchange the airdropped crypto (meaning there is no way to derive a fair market value).
Hard Fork Taxes
In October 2019, the IRS released specific guidelines with regards to hard forks in cryptocurrency and how they are treated from a tax perspective. In sum, when a hard fork occurs, and you receive newly forked crypto, that becomes ordinary income equal to the forked crypto’s fair market value on the day you receive it.
This is the case provided you are able to access the crypto so that you can sell, exchange, or otherwise dispose of the forked crypto. If a crypto you hold went through a hard fork but you didn’t receive the forked crypto via an airdrop or other sort of transfer, you don’t have any fork-related taxable income.
If you end up selling or exchanging the forked crypto, the sale or exchange amount on the day of sale or exchange is used to calculate gain or loss. Also, the holding period for the forked crypto begins on the day the hard fork happens.
Staking assets like NEO to earn passive crypto income? Staking guidelines follow those of mining, including whether or not you identify as a hobby staker or a business staker.
Lend out your crypto on DeFi (decentralized finance) protocols like Compound Finance?
When it comes to crypto lending taxes, any amount that borrowers repay you for a loan (interest) is taxable interest income that gets reported on Schedule B, Part I. The interest income reported is the fair market value in dollars of whatever crypto asset you received.
In addition to any tax related to interest income, you may also have to pay a 3.8% NIIT, which applies to the lesser of one’s capital gain from the sale of exchange of crypto or to the modified adjusted gross income (MAGI) that’s over one’s threshold amount, as outlined in the Crypto Sale or Exchange Taxes (Capital Gains Tax) section.
For ICO investors, there are two different sets of guidelines depending on whether the ICO token is a security token or a utility token.
Security Token Taxes
According to the SEC, most ICO tokens are security tokens since they operate as investments. Like traditional securities issued in IPOs, the adjusted basis for security tokens received in an ICO is the taxpayer’s acquisition cost. Moreover, no income is recognized on the date of receipt.
The people behind the ICO must provide taxpayers with Form 1099-B and Proceeds from Broker and Barter Exchange Transactions, which outlines the security token’s activity for the tax year.
Selling or exchanging the security token after acquiring it will lead to a capital loss or gain.
Utility Token Taxes
For ICO tokens that are utility tokens and not security tokens, they are classified differently from security tokens but taxed similarly.
Utility tokens do not give holders ownership rights, such as those of the blockchain technology associated with the tokens. Therefore, the purchase of a utility token is classified as a purchase of intangible property.
For tax purposes, on the date of receipt, no income is recognized with the adjusted basis of the token being the original acquisition cost. Post-acquisition sales or exchanges of the token are recognized as a capital gain or loss.
Crypto Margin Trading Taxes
For all the high-stakes margin traders out there, margin trading with crypto (borrowing money from a crypto exchange to trade) is not a taxable event in itself. It’s only when you close your trade position that you incur any taxable gains (or losses). All gains or losses from margin trading are declared on Form 8949.
When it comes to paying interest on margin trades, you can claim those payments as itemized deductions. However, if the interest was paid in crypto, they are subject to capital gains.
Crypto Donation Taxes
Looking to make a charitable donation in crypto while potentially lowering your tax burden? Donating crypto to a Section 501(c)(3) tax-exempt charity might be the answer.
Cryptocurrency donations are valued at the time of their donation according to the donated crypto asset’s fair market value. Donating more than $500 in crypto requires the filing of Form 8283.
As for potentially lowering your tax burden, crypto donations are tax deductible if
- You held the crypto for more than a year. You can then deduct from your taxes the fair market value of your contribution up to 30% of your adjusted gross income (AGI).
- You held the crypto for less than a year. You can then deduct the lesser of your cost basis for the crypto or the fair market value of the donated crypto up to 50% of your AGI.
- You received the donated crypto originally as payment for a service. You can then deduct the fair market value of the crypto on the day you received it.
Another benefit of charitable crypto donations is that contributions that aren’t 100% deductible in the current year can be rolled over for the following 5 years.
Crypto Tax Forms
To access any of the tax forms mentioned in this article, search the IRS website for any required forms.
Crypto Tax Software
There are crypto tax software solutions like CoinTracker (which will support simple importing of transaction history from Exodus soon) that can greatly simplify the process of crypto tax reporting. While their premium accounts do carry a price, CoinTracker is free up to 200 transactions.
State Taxes for Crypto
While the IRS has come out with (some) guidelines for federal taxes on crypto assets, most states have not issued any sort of guidance when it comes to crypto taxation. As such, it might be wise to consider how your state taxes other forms of currency and to what extent your state follows federal tax requirements.
Can I Just Not Pay Crypto Taxes?
We know - the topic of crypto taxes can be quite annoying from keeping records of all your transactions to reporting to basically paying taxes twice (assuming you bought crypto with some sort of income that got taxed as well).
Nevertheless, skipping out on taxes altogether is a bad idea. In the early days of crypto, the IRS was slow to go after people who didn’t report crypto taxes. However, the tax authorities have been ramping up their enforcement activities, as seen when the IRS got Coinbase, the popular centralized crypto exchange, to handover information on Coinbase users who transacted more than $20,000 worth of transactions on Coinbase from 2013 to 2015.
Another thing to remember is that the blockchain, except for private ones like those of Monero, are open for anyone to see. All it takes is linking an address on the blockchain to someone’s identity for the authorities to identify tax evaders, who can face penalties like 5 years in prison and a fine up to $250,000.
Phew! We hope that we were able to make the topic of cryptocurrency taxes in the USA at least a little bit easier for you. Though the process is still confusing (like most tax situations), clearer IRS guidelines and guides like these should have you on your way to full crypto tax compliance.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.