Last Updated: January 09, 2024
What is cryptocurrency?
In short, cryptocurrency is a form of digital money.
Cryptocurrency is similar to cash, such as US Dollars ($) or Euro (€), but exclusively digital so there are no physical bills or coins. The first mainstream cryptocurrency, Bitcoin, was created by a pseudonymous person (or persons) called Satoshi Nakamoto in 2008. Since then, thousands of cryptocurrencies have emerged like Ether, Monero, Zcash, and more.
In addition to being completely electronic, cryptocurrency has another unique property compared to all other forms of money: it is not controlled by any central authority. In the Bitcoin whitepaper, Satoshi describes how the decentralized protocol works without requiring any governments, central banks, or financial institutions.
Learn more about bitcoin and other cryptocurrencies in the Cryptocurrency 101 guide.
Is cryptocurrency taxed?
Most countries, like the US, tax cryptocurrency as property. 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, CAD, EUR, JPY, etc.)
- Trading cryptocurrency for other cryptocurrency (e.g. BTC for ETH, does not require cashing out to fiat to be taxable)
- 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 (except in cases where the purchase price is lower than the fair market value of the purchased coin)
- 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
To learn more about how cryptocurrency is taxed, please checkout the CoinTracker FAQ.
How is cryptocurrency taxed?
IRS guidance clarifies that cryptocurrencies are taxed as property. Therefore when you dispose of cryptocurrency held as a capital asset (e.g. sell bitcoin, trade ether, use litecoin to pay for a mining rig, etc.) you are subject to capital gains or losses.
With cryptocurrency, the IRS has clarified that like-kind exchanges are not allowed so every cryptocurrency-to-cryptocurrency exchange is a taxable event. Let’s take a look at an example:
*Assumes FIFO (First-In First-Out based accounting)
Walking through the steps above:
- Jon has 1 bitcoin (BTC), no taxable event
- Jon receives 1 ETH as a gift, no taxable event
- Prices increase, but no assets are disposed so no taxable event
- A cryptocurrency-to-cryptocurrency trade is executed which is a taxable event: +$900 capital gain
- Jon initiates a transfer between two of his cryptocurrency wallets, no taxable event
- A fork generates a new coin and therefore income: +$90 income
- Jon sells his assets as a capital gain: +8,100
So in total, Jon has accumulated $9,000 of capital gains and $90 of ordinary income. CoinTracker would help break this into short-term capital gains and long-term capital gains, ordinary income, and complete his tax forms to be cryptocurrency tax compliant.
Cost basis methods
You can apply different cost basis calculation methods to your cryptocurrency including FIFO (first-in first-out) and specific identification. You can also account for your coins separately by wallet/exchange (recommended in the US) or in one queue across all your wallets/exchanges (universal). CoinTracker automatically performs these accounting calculations for you to minimize your cryptocurrency capital gains.
Specific Identification Allowed, Even on Exchanges
The IRS laid out the specific criteria needed to apply specific identification accounting for your cryptocurrency, even that held on custodial exchanges (e.g. Coinbase, Binance, Gemini, Kraken, etc.). This can be tricky to calculate manually, but CoinTracker automatically does the accounting for you to help minimize your tax burden and provides the supporting documentation for your tax filing.
Checkout the CoinTracker FAQ for more details on how cryptocurrency cost basis, net fiat invested, and capital gains work.
If you receive cryptocurrency from mining, forks, airdrops (even unintentionally), or as a payment in exchange for goods/services, you must also report these earnings on your tax return. See below for a breakdown of how US cryptocurrency taxes work for mining, donations/gifts, forks, and airdrops (or see our international tax guide on cryptocurrency earnings).
Cryptocurrency tax rules vary for miners depending on whether they are hobbyists or business miners (see the cryptocurrency tax guide on mining to for details).
- Income will go on line 21 (other income) of your Form 1040 Schedule 1 (Additional Income and Adjustments to Income)
- Expenses directly associated with mining will go on a Schedule A (Itemized Deductions), miscellaneous subject to 2% of AGI limitation (only applies to 2017 and prior years)
- Income and expenses both go on a Schedule C (Profit or Loss from Business) or on applicable business returns (Form 1065, Form 1120, Form 1120S)
- Income may be subject to the 15.3% self-employment tax
- Business related expenses can be deducted to offset mining income
There are two kinds of forks: hard forks and soft forks. A hard fork is when a cryptocurrency splits into two or more branches because the existing code for the coin is changed. This results in the original version and a new version (or versions) of the initial coin. Examples include Bitcoin (BTC) and Bitcoin Cash (BCH), Ether (ETH) and Ether Classic (ETC), etc.
With a soft fork, the code for the coin is getting changed but it is backward compatible with older versions. So it is more like an update resulting in one updated blockchain (rather than two or more blockchains).
Soft forks do not result in any tax consequences because there is no new coin — simply a protocol upgrade to your existing coin.
The IRS released guidance on cryptocurrency taxes on October 9, 2019, which applies retroactively. One key element clarified here is that new coins that you receive from a hard fork (when a coin splits into two), result in taxable income. This means, for example, that if you were holding Bitcoin at the time of the Bitcoin Cash hard fork (August 1, 2017) or Bitcoin Cash at the time of the BSV hard fork (November 15, 2018), you are liable for reporting and paying income tax on the receipt of those coins. For more details on how this works, checkout the tax guide on cryptocurrency forks.
Note: you didn’t have to sell/dispose of the forked coins for the income tax to apply — simply holding the original coin at the time of the fork which would allow you to have received the forked coin is sufficient in the eyes of the IRS to trigger an income tax event.
Airdrops are free coins that are sent to your wallet. Coins are generally airdropped to your wallet by ICO issuers to increase awareness and improve marketing and publicity for the project. Sometimes you may get coins through airdrops, and you may not even know about it (until you check your CoinTracker account!).
The IRS has remained silent on how taxes are applied to airdropped coins, so unfortunately this is a grey area. To be conservative, we recommend applying the hard fork guidance to airdrops as well and treating airdrops as ordinary income. Checkout our guide on how cryptocurrency taxes apply to airdrops for more details.
Margin Trading and Derivatives
Gift tax rules are more complicated than you might expect so we have put together a separate cryptocurrency tax guide for donations and gifts.
Once you have your short term and long term capital gains amount (automatically calculated with CoinTracker, you can lookup your taxable amount based on your income for the year. The CoinTracker FAQ explains how to calculate your cryptocurrency tax based on your tax rate.
Tax Planning With Cryptocurrency
What is your biggest personal expense? Take a minute, think about it.
The most common answers we hear are rent/housing, transportation, food, and debt/bills. The truth, however, is that for most people the biggest expense is tax.
We consistently find people spend disproportionately less time on tax planning even though it is often the highest leverage activity to optimize personal finances. Small steps can make a huge difference, and there are a number of ways that taxpayers can improve tax planning with cryptocurrency and save money including with cryptocurrency tax loss harvesting (wash sales only apply to stocks and securities, not bitcoin), SDIRAs and more.
How Do Tax Authorities Know About My Cryptocurrency?
Tax authorities such as the IRS, ATO, CRA, HMRC, and others use a variety of techniques to track cryptocurrency transactions and enforce tax compliance. For starters, the IRS has subpoenaed domestic and international cryptocurrency exchanges such as Coinbase and Bitstamp for user transaction information. This has lead to at least tens of thousands of cryptocurrency users’ transaction information being shared directly with the tax authorities.
In addition, tax authorities, like the IRS, use data analytics tools such as Chainanalysis and Palantir to pinpoint cryptocurrency users and tie their identity from a regulated cryptocurrency exchange to their off-exchange wallets and transactions (including multiple layers removed from the exchange).
The IRS and other tax authorities also partner and share data with other governmental bodies, academic institutions, and international governments to share information about cryptocurrency usage.
What Happens if I Don’t File My Cryptocurrency Taxes?
In the US, the IRS requires that you file your taxes (in some cases, even if you owe zero taxes or should be owed a refund, you are still required to file your taxes). Failure to file can result in fees, penalties, interest, confiscated refunds, audits, and even jail time.
IRS warning letters
In July 2019, the IRS started sending out over 10,000 warning letters to US taxpayers who hold cryptocurrency. These letters included IRS Letters 6173, 6174 & 6174-A. In addition, the IRS has been sending out CP-2000 notices whenever there is a mismatch between a 1099-K and what a user reports on their tax return.
Many taxpayers have come to CoinTracker when they received these notices and used CoinTracker-generated responses to these IRS letters successfully. In one case, a user actually went from owing thousands to getting a refund after working with CoinTracker.
In case you receive an IRS warning letter, we have put together an IRS crypto warning letter guide that will help streamline you through the process of responding.
How to File Cryptocurrency Taxes
Filing your cryptocurrency taxes can seem like a daunting task, especially if you are trying to tackle them from scratch. Luckily CoinTracker can help you get you filed and compliant quickly. Get started with CoinTracker today.
What’s New with Cryptocurrency Taxes in 2023?
The IRS has been very active in 2023 when it comes to cryptocurrency taxation. They released a number of documents that provide guidance and instructions related to the tax treatment of cryptocurrency.
IRS CCA 202302011
CCA 202302011 was released on January 13, 2023, in order to provide advice on the treatment of a cryptocurrency that has substantially declined in value. If a stock becomes worthless (the value goes down to effective zero), you can take a deduction called worthless security deduction (§165(g)). Some taxpayers relied on this rule and took a loss on coins like Luna which went down to almost zero. The IRS advised that the worthless security deduction does not apply to crypto because it’s not a security under §165(g). If you want to take a deduction/capital loss, you somehow have to sell it.
IRS CCA 202302012
The IRS released CCA 202302012 on January 13, 2023 as well. This CCA provides advice on charitable contributions of cryptocurrencies to a qualified charity. If you donate a digital asset over $5,000 to a charity, you need to get a qualified appraisal from an expert (even if the value is readily available from an exchange). If you don’t have this certificate, you can’t technically take the deduction on your tax return.
IRS Notice 2023-27
Notice 2023-27 was issued on March 21, 2023. This notice provides guidance on the treatment of NFTs. They acknowledge that an NFT could represent anything. Ex: your house, piece of art, or event ticket. Therefore, the IRS will use the look-through method (what does the NFT actually represent?) to determine if an NFT is a collectible or not. If an NFT is considered a collectible, it will be subject to a slightly higher long-term capital gains tax rate (28% vs 20%) than non-collectible assets. If not, normal capital gain taxes will apply.
IRS CCA 202316008
On April 21, 2023, CCA 202316008 confirmed that a change in consensus mechanisms (Ex: ETH PoW→PoS) does not create a taxable event as long as you own the same coin after the migration.
Rev. Rul. 2023-14
Rev. Rul. 2023-14 was issued on July 31, 2023, and the IRS provided its first-ever formal guidance on staking rewards. Staking reward income is taxable at the time of receipt based on the fair market value.
Cryptocurrency question added to more forms
The infamous virtual currency question has been added to all business returns (Forms 1065, 1120S, 1120) and the trust form (Form 1041) in addition to the individual tax return (Form 1040).
2023 & 2022 version: At any time during 2023, did you (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or financial interest in a digital asset)?
How cryptocurrencies taxes work internationally
Each country applies taxes differently. This post is primarily geared toward cryptocurrency taxes in the US by the Internal Revenue Service (IRS). To learn more about how cryptocurrency taxes work in other countries, see below:
Foreign Filing Requirements for Cryptocurrency
US residents holding foreign financial accounts are normally subject to additional special foreign filing disclosures in the form of FinCEN Form 114 (FBAR) and IRS FATCA forms. FBAR does not apply to cryptocurrency.
The IRS emphasized this position when they issued Notice 2023-34 in April 2023, which modified Notice 2014-21. The Department of Treasury acknowledged that certain foreign jurisdictions (Ex. El Salvador) now accept Bitcoin as a legal tender. Notice 2014-21 said that cryptocurrency does not have legal tender anywhere. The IRS updated that language and said cryptocurrency can be legal tender in some jurisdictions.
FATCA is a grey area so as a more conservative stance, we recommend just filing if you aren't sure whether it applies or not.
For more information about how foreign filing works, read about CoinTracker’s visit to speak with FinCEN and IRS regulators.
CoinTracker for Accountants and Crypto CPAs
CoinTracker is built for tax professionals in addition to end users. Our Head of Tax Strategy, Shehan Chandrasekera, has run several CPEs on the topic such as the one below. If you are a tax professional interested in learning more about how CoinTracker can help you help your clients with cryptocurrency taxes, please let us know.
CoinTracker Partnerships and TurboTax Cryptocurrency
CoinTracker has partnered with trusted industry leaders to make cryptocurrency taxes simple. CoinTracker is the only cryptocurrency tax service partnered with cryptocurrency exchanges Coinbase and Gemini, and integrates with tax filing services such as TaxAct and TurboTax.
Here is a detailed guide on how to file your cryptocurrency taxes using CoinTracker and TurboTax. You can also use CoinTracker’s cryptocurrency capital gains tax calculations to file in a variety of ways including with TaxAct, H&R Block, with your own accountant (or we can recommend an accountant), etc.
Crypto Tax Forms
There are a variety of tax forms that may apply for your cryptocurrency tax filing, depending on whether you are a business or individual, whether you are mining, etc. At a high level, here are some of the key forms to pay attention to:
- Form 8949 (Sales and Other Dispositions of Capital Assets) with a complete list of every cryptocurrency disposal you have had (e.g. sell, trade, send to a third party, etc.)
- Schedule D (Capital Gains and Losses) with an aggregate sum of your capital gains across all asset classes
- Form 1040 (Individual Income Tax Return) including your Schedule D information
- Schedule 1 (Additional Income and Adjustments to Income) any income (from forks, airdrops, mining, or payments) will go on the "other income" line z)
The IRS Form 1099-K is a tax report that broker-dealers (and some cryptocurrency exchanges such as Coinbase, Gemini, Robinhood, etc.) generate. They keep one copy for themselves, send one copy to you (the user), and one copy to the IRS. This form essentially shows aggregate transaction volume per month.
Unfortunately, this form is completely useless for filing taxes. IRS guidance has clarified that cryptocurrency is taxed as property, meaning that the capital gains tax is calculated based on the difference between the fair market value at the time a crypto asset is disposed of and the cost basis at which the asset was acquired. The 1099-K includes none of this information. Instead it simply sums the total proceeds of cryptocurrency dispositions across all transactions. This cannot be used to correctly file cryptocurrency taxes.
Therefore the IRS clarifies that you need to use Form 8949 (which is what is generated by CoinTracker) to file your cryptocurrency taxes (source: IRS, A40). The 1099-K helps the IRS understands who are high transaction users, however those numbers are not actually used in your tax filing.
Security is the top priority for CoinTracker. Without a secure platform, CoinTracker would not have tens of thousands of users trusting over $20 billion in crypto assets tracked. We take several measures to secure user data.
What Are The Best Cryptocurrency Exchanges To Use?
There are a number of factors to consider when deciding which cryptocurrency exchanges to use such as reputation, security, geographic support, trading pairs, liquidity, regulatory licenses, and more. CoinTracker has also assembled a comparison of trading fees on several popular exchanges.
One often overlooked but critical element in evaluating a new cryptocurrency exchange is how easy it is for you as a user to gather the transaction information needed for filing your cryptocurrency taxes. Specifically, the elements to look out for are read-access API keys that provide complete transaction history over all time including: trades, deposits, and withdrawals (you would be surprised at how many exchanges don’t make this basic information readily available causing big problems at tax filing time). CoinTracker supports automatic integrations with 300+ exchanges — more than any other product — and you can check ahead of time whether the exchange you are considering using provides full API information or only partial CSV information.
Decentralized Finances(DeFi) and Crypto Taxes
Decentralized Finance (DeFi) is a new developing area in the cryptocurrency space. DeFi products allow users to interact with their cryptocurrency without trusting a centralized authority/institution (e.g. custodian, exchange, etc.) and instead just on code. Examples of emerging DeFi services include cryptocurrency exchange, interest earning, margin trading, and more.
For example, one recent area that has especially been developing is interest earning via tools like Multi-Collateral DAI, Maker Vaults, and Compound. According to the IRS tax code, interest earned from these DeFi protocols is taxable interest income reported annual on the Schedule B, Part I (more about DeFi interest crypto taxes). Refer to our DeFi and Yield Farming tax guide for a more in-depth discussion on DeFi taxes.
Crypto Tax Software and Cointracking Calculator
The easiest, most secure, and most accurate way to get your cryptocurrency taxes done is with CoinTracker. CoinTracker’s crypto portfolio calculator and crypto tax software has helped over 10,000 users file their taxes on over $1 billion in crypto assets. Get started today!
Disclaimer: this post is informational only and is not meant as tax advice. For tax advice please speak with a tax professional.