Taxation of Bitcoin and other cryptocurrencies in the U.S.
For federal tax purposes, cryptos like Bitcoin and Ether are treated as property. Under currently applicable law, cryptocurrency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.
As such, general tax principles applicable to property transactions apply to transactions involving the sale or exchange of cryptos. Property held by a taxpayer is generally considered a capital asset and will be subject to capital gains tax.
Income tax explained
There are two primary ways that crypto activities are taxed:
- Profits made when disposing of or selling cryptocurrencies, taxed as capital gains. These profits can be taxed at ordinary income tax rates or lower (long-term) capital gains tax rates ( more on this below).
- Profits or rewards earned as a payment for conducting certain crypto-related activities, such as staking,* which generally are treated as ordinary income and taxed at ordinary income tax rates.
Cryptocurrency Capital Gains Activities – Sale or Exchange
Capital gains tax activities
Trading any digital asset for another (this includes stablecoins and NFTs)
Selling digital assets for fiat currency (including metaverse items or property)
Selling or using digital assets to pay for goods or services
How to calculate your taxable income from crypto in 3 easy steps
Step 1: Calculating the cost basis
To find out how much tax you owe, you’ll need to calculate the “cost basis” for each crypto transaction you made over the previous tax year that resulted in a profit.
The cost basis equals the price you paid for the asset increased for any fees paid (such as exchange fees, gas fees, etc.) to acquire the digital asset.
Similarly, when you sell cryptocurrency, you can deduct the selling fees from your proceeds. This deduction is beneficial because it reduces your tax liability (which results in lower gains or higher losses).
Step 2: Determining which digital asset was sold
For investors that only use one platform and who complete a handful of digital asset activities per year, calculating gains and losses is a relatively straight-forward process. But, for people who are highly active in the crypto space and engage with multiple platforms and assets, it can be significantly harder.
When you sell digital assets, you are required to identify which “tax lot” was sold. For example, let's say you purchased varying amounts of SOL at different prices through the year. At the end of the year, you decided to sell 2 Solana (SOL) tokens. You will need to determine which specific tokens you had sold from your SOL holdings.
Assuming such tokens were purchased for varying amounts, this will impact your gain or loss from the sale.
The IRS accepts several methods for determining which “tax lot” was sold, including:
First In First Out (FIFO): The first asset you bought is the first asset you sell.
Last In First Out (LIFO): The last asset you bought is the first asset you sell.
Highest In First Out (HIFO): The most expensive asset you bought is sold first.
Specific Identification (Spec ID): Specific Identification (Spec ID): pick the asset you sold, provided you can identify it with records.
Note: Methods other than FIFO are effectively just variations on Spec ID.
If you select Spec ID, the IRS requires you to identify the date and time of acquisition, the fair market value at the time of acquisition, the date and time of disposition, and the fair market value at disposition (along with what was received as consideration in the disposition).
This provides you with flexibility in determining your gain or loss, but can also be complicated if you buy and sell a lot of crypto.
For example, in the above scenario using SOL, if you sell only 1.5 SOL, then you would need to identify from which lot you bought the SOL, and then break that lot up into the part that was sold and the part that’s retained.
There are software providers available that can help you to make these computations and lot selection processes simpler and will track your crypto lots, gains, and losses for your tax return.
Step 3: Calculating capital gains and losses
Your capital gain or loss is determined by subtracting your cost basis (adjusted for any fees) from the selling price (adjusted for any fees).
In addition, if you had multiple sales transactions, you will usually “net” capital gains and losses; i.e. you would apply a long-term capital loss to a long-term capital gain, and a short-term capital loss to a short-term capital gain. If there are excess losses in one category, you can net these against gains of either type.
What this means is, the IRS allows people to deduct their losses from their overall capital gains tax liability.
For example, let’s imagine Alice had made an overall long-term capital gain of $10,000 after disposing of her crypto assets that she had held for more than one year.
In the same tax year, Alice made an overall short-term capital loss of $1,000.
When reporting her transactions to the IRS, Alice would be able to deduct her short-term capital loss of $1,000 from her overall capital gain of $10,000. This would reduce her capital gains tax liability from $10,000 to $9,000.
Definitions
Capital assets include all property held for personal, investment or business purposes unless specifically excluded from its definition. As such, the sale or exchange of cryptocurrency is a taxable event subject to capital gains tax.
In the event of the sale of cryptocurrency, capital gain or loss is equal to the difference between the sale price of the cryptocurrency and the adjusted basis of the cryptocurrency.
In the event of the exchange of cryptocurrency, capital gain or loss is calculated by the difference between the fair market value of the cryptocurrency on the date of the exchange and the adjusted basis of the cryptocurrency.
The sale or exchange of cryptocurrency will result in a net gain or loss and will be taxed as a short-term capital asset at ordinary income tax rates or as long-term capital assets at reduced rates, depending on the amount of time the capital asset is in the hands of the taxpayer (i.e. holding period).
Cost Basis and Adjusted Basis
Generally, the basis of a coin or token purchased is the cost paid by the taxpayer, also known as the cost basis. The basis is adjusted for specific items including transaction fees and commissions related to the purchase. Altogether these items can be considered the acquisition cost.
In the case of an initial coin offering (ICO), a taxpayer may receive an investible token (security token) or future access to a product or service (utility token). The basis for either a security token or utility token will be the acquisition cost, as explained above.
Further, though there is no explicit guidance regarding the method to identify the cost basis of cryptocurrencies in a sale or exchange, it can be assumed the IRS will default to First-In-First-Out (FIFO) treatment for cost basis as a logical default position. Taxpayers must apply a consistent methodology to identify the cost basis for their cryptocurrency and are encouraged to keep detailed records of all exchanges. The cost basis or adjusted basis will be reported on Form 8949 and Form 1040, Schedule D.
Amount Realized
Generally, the amount realized in the sale or exchange of property is the fair market value of the property received by the taxpayer (transferor).
In the case the cryptocurrency exchanged is listed on an exchange and the exchange rate of the cryptocurrency to U.S. dollars is established by supply, the fair market value of the currency can be determined by converting the cryptocurrency into U.S. dollars at the exchange rate, in a reasonable manner that is consistently applied.
In the event of the sale of cryptocurrency, the amount realized by the taxpayer is equal to the sale price and any other consideration given to the taxpayer in exchange for their cryptocurrency.
Similarly, in the event of the exchange of cryptocurrency, the amount realized by the taxpayer is equal to the fair market value of the incoming cryptocurrency on the date of the exchange and any other consideration given to the taxpayer in the exchange.
For transactions occurring before January 1, 2018, the sole exchange of like-kind property, i.e. one cryptocurrency against another cryptocurrency was a non-taxable event in which no gain or loss was recognized by the transferor or transferee.
However, beginning January 1, 2018, all exchanges of non-real property, such as the exchange of one cryptocurrency for another, is a taxable event and should be accounted for at the fair market value.
If the taxpayer sells or exchanges cryptocurrency for other property, capital gain or loss must be recognized as mentioned above. In the case where one cryptocurrency is exchanged for a different cryptocurrency (i.e. no U.S. dollars actually exchanged), capital gain or loss must be recognized in USD for the difference between the fair market value of the new currency and the basis of the original cryptocurrency.
To illustrate, if 1 BTC (basis $5,000) was exchanged for 10,000 units of ADA and 1 ADA = $0.60, the taxpayer will need to recognized gain in the amount of $1,000 [(10,000 x $0.60) – $5,000]. The character of this gain is dependent on the holding period of the original currency in the hands of the taxpayer.
The taxpayer’s total net capital gain or loss (i.e. net short-term and long-term capital gains and losses) will be reported on the taxpayer’s Form 1040. Please refer below to the applicable capital gain taxes rates to be applied and detailed reporting.
Any subsequent sales or exchanges of the cryptocurrency in the hands of the taxpayer will follow capital gain or loss recognition as explained above. The basis of the newly exchanged cryptocurrency is equal to the basis of the old cryptocurrency. The holding period of the new currency in the hands of the taxpayer will begin on the day of the exchange.
Amount Recognized
In the event of the sale of cryptocurrency, the amount recognized as capital gain or loss is the difference between the sale price of the cryptocurrency and the adjusted basis of the cryptocurrency.
In the event of the exchange of cryptocurrency, the amount recognized as capital gain or loss is the difference between the fair market value of the cryptocurrency on the date of the exchange and the adjusted basis of the cryptocurrency.
This will be reported on Form 8949 and Form 1040, Schedule D.
Holding Period
On the date of the sale or exchange of the cryptocurrency, the taxpayer must identify the holding period for the cryptocurrency in order to apply the appropriate capital gains treatment.
Generally, if the cryptocurrency in the hands of the taxpayer is exactly one year (365 days) or less, the gain or loss from the sale or exchange of cryptocurrency is deemed to be a net short-term capital gain or loss.
If the virtually currency in the hands of the taxpayer exceeds one year (more than 366 days), the gain or loss from the sale or exchange of cryptocurrency is deemed to be a net long-term capital gain or loss.
The beginning and end dates of the holding period will be reported on Form 8949.
Short-Term Gain/Loss Treatment
If the sale or exchange of cryptocurrency results in a net short-term gain or loss, the capital gain or loss will be subject to ordinary income tax at the taxpayer’s respective income tax rate.
The taxpayer’s total net capital gain or loss (i.e. net short-term and long-term capital gains and losses) will be reported on the taxpayer’s Form 1040. Specific details regarding the taxpayer’s short-term gain or loss will be reported on Schedule D and Form 8949 (Part I).
Long-Term Gain/Loss Treatment
If the sale or exchange of cryptocurrency results in a net long-term gain or loss, the amount capital gain or loss will be subject to reduced tax rates dependent on the taxpayer’s respective income tax bracket.
To determine the correct reduced tax rates and calculate long-term capital gains tax appropriately, the taxpayer should use the instructions in the Form 1040.
The taxpayer’s total net capital gain or loss (i.e. net short-term and long-term capital gains and losses) will be reported on the taxpayer’s Form 1040. The respective long-term capital gains taxes calculated using the worksheet mentioned above will be reported using Form 1040. Specific details regarding the taxpayer’s long-term gain or loss will be reported on Schedule D and Form 8949.
Ordinary Income Offset by Net Capital Losses
If the taxpayer’s short-term and long-term capital gains and losses in the tax year result in a net capital loss position, the taxpayer can offset their ordinary income by the lesser of the net capital losses accumulated or $3,000. Any remaining net capital losses are carried forward indefinitely, retaining its original short-term or long-term character, and can be used in future tax years to offset ordinary income in the same fashion.
To report the offset of any ordinary income by net capital losses, the taxpayer will report this amount on Form 1040 and Schedule D.
Net Investment Income Tax (NIIT)
In addition to any capital gains tax or ordinary income tax relating to the sale or exchange of cryptocurrency, the disposition of the cryptocurrency in the hands of the taxpayer is also subject to the net investment income tax (NIIT). Generally, the gain from the sale or exchange of cryptocurrency can be reduced by losses deductible under IRC Sec. 165. However, if the capital gain or loss is recognized by the taxpayer as income recognized from a trade or business, the NIIT will not apply. Otherwise, the NIIT is applied at 3.8% to lesser of the taxpayer’s capital gain from the sale or exchange of the cryptocurrency or the modified adjusted gross income (MAGI) that exceeds the taxpayer’s applicable threshold amount, as explained in IRS Form 8960 Instructions.
The taxpayer must report the NIIT on Form 8960 and on Form 1040.
Tax Free Cryptocurrency Events
There are several crypto activities that are tax exempt. Some of these activities include:
- Purchasing cryptocurrency (including NFTs) using U.S. dollars.
- Transferring digital assets (including NFTs) from one of your crypto wallets to another crypto wallet you own.
- Minting NFTs (creating them, but not selling them).
- Gifting cryptocurrency (subject to the per person gift limit: $17,000 for gifts made during the 2023 tax year and $18,000 for the 2024 tax year).
- Depositing cryptocurrency as collateral for decentralized finance (DeFi) loans.
- Donating cryptocurrency to charitable causes (subject to qualification noted below).
- Locking up digital assets in a staking* smart contract (although earning rewards on those assets generally is taxable).
Charitable crypto donations can be tax deductible. However, an IRS memorandum mandates anyone claiming a tax deduction above $5,000 must obtain a qualified appraisal first.
It’s important to stress here, buying cryptocurrency using another cryptocurrency is a taxable event.
The IRS considers this action a disposal and then a purchase.
Ordinary Income Tax Activities
Any wages paid in cryptocurrency for completing work
Interest earned from staking* and DeFi lending platforms such as MakerDao (MKR), Curve (CRV), or Aave (AAVE)
Block rewards earned from crypto mining
Digital assets earned from bug bounties
Crypto received from play-to-earn games such as Axie Infinity (AXS), Gala Games (GALA), and Star Atlas (ATLAS).
Rewards earned from watching ads on crypto-based web browsers such as Brave.
Creator earnings from NFT collections such as Bored Ape Yacht Club, CrypToadz and Doodles.
Any cryptocurrency income earned from metaverse land or properties such as Decentraland (MANA) or The Sandbox (SAND)
Interest earned from DeFi liquidity pool activities on platforms such as Uniswap (UNI), Balancer (BAL), or Compound (COMP)
Tokens received from airdrops such as Blur (BLUR), Jito (JTO) or Flare (FLR)
Cryptocurrency earned from referral bonuses
Cryptocurrency that comes from hard forks, like Bitcoin Cash (BCH)
Any tokens received from Learn and Earn educational programs
Do you pay taxes when staking
During 2023, the IRS has published guidance regarding the treatment of cryptocurrency staking rewards.
In Revenue Ruling 2023-14, the IRS provided guidance that staking rewards must be included in gross income for the taxable year in which the taxpayer acquires “dominion and control” of the awarded cryptocurrency.
"Dominion and control" generally refers to the taxpayer’s ability to freely sell, transfer or withdraw the asset.
The ruling further clarifies that this treatment applies whether the taxpayer stakes directly to a proof-of-stake blockchain or receives additional tokens through staking on an exchange/through delegation.
The amount of taxable income is based on the reward’s fair market value on the date the taxpayer gains dominion and control.
US clients that received over $600 in staking rewards in 2023 will receive an IRS Form 1099-MISC. This will also be reported to the IRS.
This form helps in calculating the reward amount includible on your 2023 U.S. income tax return.
You can learn more about IRS Form 1099-MISC here and the Tax Forms FAQ here.
Note that at this time, many platforms do not provide a Form 1099 to report gains, losses, or sales as that is not a regulatory requirement (however, there currently are Proposed Regulations that would require this in the future).*
How to file my 2023 crypto taxes
Once you’ve calculated how much tax you owe, you’ll need to complete one or more of the following forms.
Declare your crypto activity
Page 1 of Form 1040 requires you to affirmatively state whether, at any time during 2023, you:
- (a) Received (as a reward, award, or payment for property or services); or
- (b) Sold, exchanged, or otherwise disposed of a digital asset (or a financial interest in a digital asset).
- For example, check “Yes” if at any time during 2023 you:
- Received digital assets as payment for property or services provided
- Received digital assets as a result of a reward or award
- Received new digital assets as a result of mining, staking,* and similar activities
- Received digital assets as a result of a hard fork
- Disposed of digital assets in exchange for property or services
- Disposed of a digital asset in exchange or trade for another digital asset
- Sold a digital asset
- Otherwise disposed of any other financial interest in a digital asset
The following actions or transactions in 2023, alone, generally don’t require you to check “Yes”:
- Holding a digital asset in a crypto wallet or account
- Transferring a digital asset from one wallet or account you own or control to another wallet or account that you own or control
- Purchasing digital assets using U.S. or other real currency, including through the use of electronic platforms such as PayPal and Venmo
Capital gains tax forms
For capital gains tax, you’ll need to complete Form 8949. If you’ve reported losses, you may be able to deduct the amount from your capital gains tax liability.
To do this, you will need to complete Form 1040, Schedule D.
Income Tax Forms
For crypto-based income taxes, most people will be required to complete Form 1040, Schedule 1 or Schedule C.
However, depending on your status, you may be required to complete a different type of 1040 form.
- Form 1040–SS: Applicable to residents in Guam, American Samoa, the U.S. Virgin Islands (USVI), the Commonwealth of the Northern Mariana Islands (CNMI), and Puerto Rico
- Form 1040-NR: Applicable to people considered “nonresident aliens”, e.g., engaging in certain activities in the U.S. or receiving certain income from the U.S.
Crypto tax reporting tips
To streamline the crypto tax reporting process, several third-party service providers offer tailored software solutions.
These services generally estimate your crypto taxes using exported trade order data from supported crypto exchanges and other platforms that you might use.
Forbes Advisor and Blockpit list the following crypto tax companies as leading service providers in 2024:
- CoinTracker
- Koinly
- CoinLedger
Bitcoin Tax FAQ
Do you pay taxes on Bitcoin mining?