An As Simple As it Gets Breakdown of Cryptocurrency and Taxes

To summarize the tax rules for cryptocurrency in the United States, cryptocurrency is an investment property and you owe taxes when you sell, trade, or use it. With that said,¬†“the character of a gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.”[1][2]

That is the gist of cryptocurrency and taxes in the U.S., below we explain some details and clarify the implications of the above.

NOTE: We aren’t tax professionals and can’t offer tax advice. This is simply a compilation and summary of our research on cryptocurrency and taxes. Make sure to see the official guidance below and contact a tax professional if you did any substantial amount of trading in 2017.

Here is the bottom line on cryptocurrency and taxes in the U.S. for investors/traders (it can be gleaned from the official IRS guidance from 2014; you’ll need to reference Publication 544 as well):

  • For tax purposes in the U.S., cryptocurrency is generally treated as property (a capital asset like stocks, bonds, and other investment properties). It is not treated like a currency, it is treated like real estate or gold. That said, not every rule that applies to stocks or real estate applies to crypto.
  • Trading cryptocurrency to fiat currency like the dollar is a taxable event.
  • Trading cryptocurrency to cryptocurrency is a taxable event (you have to calculate the fair market value in USD at the time of the trade; good luck with that).
  • Using cryptocurrency for goods and services is a taxable event, i.e. spending cryptocurrency is a “realization event”¬†(again, you have to calculate the fair market value in USD at the time of the trade; you may also end up owing sales tax).
  • Buying cryptocurrency with USD is not a taxable event. You don’t realize gains until you trade, use, or sell your crypto. If you hold longer than a year you can realize long term capital gains (which are about half the rate of short term).
  • Wallet-to-wallet transfers (where for example Bitcoin is sent from one Bitcoin wallet to another) are not taxable events. However, some exchanges may treat them as taxable for a safe harbor (so make sure to check their records against your own).
  • Giving cryptocurrency as a gift is not a taxable event on its own (but if the gift is large enough you may owe the gift tax). The recipient of the gift receives essentially inherits the cost basis (so if you bought .1 BTC for $100, when the recipient sells or trades it they owe taxes on profits over $100).[3][4]
  • You owe taxes when you sell, trade, or use forked coins or coins you mined.
  • Mining and using crypto as a business has unique considerations (see IRS guidance¬†above).
  • For 2017, it isn’t clear if you can claim like-kind property exchange (which would make it so you didn’t have to realizes gains and losses on trades). After December 31, 2017¬†1031 exchanges are limited to real estate. Thus, unless there is clarification you’ll owe taxes on all crypto trades in 2018 forward (but might be able to claim like-kind with the help of your accountant in 2017).¬†See: Forbe’s Loophole Allows Tax-Free Bitcoin Exchanges Into 2018 for a breakdown of what may or may not be possible.[5]
  • To find out what you owe you have to tally up your gains and losses in a year and deduct this from your cost basis (good luck; most exchanges keep track of your trades, but not their value in USD, your accountant may use “reasonable estimates”). TIP: You can use your own records if you kept better records than the exchanges you used. Thus, one may want to keep their own record of every trade throughout the year noting time of trade, amounts in crypto, and dollar value.
  • If you don’t know the exact fair market value at the time of a trade or use of cryptocurrency, use your best reasonable estimates.
  • Moving the same coin between two wallets or exchanges shouldn’t be a taxable event, but you do have to account for it. Exchanges might treat these as taxable events by default, so make sure to not go off their records alone.
  • FIFO rules should be optional. You should be able to choose between “First in First Out” FIFO and “Last in Last Out” LIFO.
  • The wash rule likely doesn’t apply to crypto.¬†Section 1091 wash sale rules only mention securities, not intangible property.
  • There are loopholes in the new tax bill that let high frequency traders use a passthrough to benefit (essentially you would create an LLC for your trading). You have to be trading a good amount (in terms of volume and USD values) for this to work. See a professional for advice if you think this applies to you.
  • You must make a good faith effort to claim your crypto and pay your taxes no matter which route you take.
  • Trying to hide your assets is tax evasion, a federal offensive.
  • Making a good faith effort, but getting it wrong, results in a fee.
  • If you think you maybe might owe taxes from past years, file an amended return and get right with the IRS before they come looking for you. See:¬†IRS Offers Tips on How to Amend Your Tax Return.
  • When you file, be consistent. You can’t do FIFO over here, like-kind over there, wash rule here but not there, etc.

If you did anything other than hold, you should see a tax professional ASAP (a local CPA for example). The lack of clarification this year plus the Coinbase lawsuit hints at the idea that the IRS will have its eye out for traders who moved more than $20k in crypto. You must make a good faith effort if you moved more than $20k in crypto (even just between wallets). Further, you have some additional tax responsibilities if you make more than $1k in capital gains in a year (see below).

Do I owe taxes on cryptocurrency even if I never cashed out? Putting together all the above points, one may owe taxes on cryptocurrency even if they have never sold cryptocurrency for US dollars and never cashed out to their bank account. Remember, trading and using cryptocurrency are both taxable events where the taxable amount is calculated from the fair market value in U.S. dollars at the time of the event. So if you spent the year trading Bitcoin to Ethereum in GDAX or Bittrex, then you realized short term capital gains or losses with each trade and owe taxes on that.

How capital gains and losses work?¬†All capital gains and losses¬†realized in a tax year (Jan 1 – Dec 31) are weighted against each other and subtracted from your initial investment (your cost basis). Then you owe taxes on profits in that year. The short term rate is very similar to the ordinary income rate. The long term rate (on assets held over 365 days) is about half the short term rate. Long term gains can be realized at any point in any tax year via the above methods (by selling, trading, and/or using cryptocurrency). Please note that if you calculate your gains and losses as “first in first out,” you are realizing all your long term gains first (thus, you may want to see if “last in last out” works better for you). Lastly, on $3k in losses can be carried over between years (so if you have more losses than gains, you can only bring $3k worth forward each year to offset future gains).

How capital gains tax relates to ordinary income and the progressive tax system: Capital gains and ordinary income are both counted toward your adjusted gross income (income after deductions). Your adjusted gross income affects your tax bracket both in terms of ordinary income and capital gains. The U.S. has a progressive tax rate on ordinary income and capital gains, that means you pay progressively higher rates based on your adjusted gross income. You don’t just pay the top amount you qualify for on all dollars you earn, you pay the rate of each bracket you qualify for, on dollars in that bracket, for each tax type. If you don’t understand how progressive taxation works, see an explanation of the progressive tax system.

What form do I use to calculate gains and losses?¬†Although it isn’t the only form you might need to file, Form¬†8949¬†Sales and Other Dispositions of Capital Assets is the form one would generally use to report capital gains and losses from selling, trading, and/or using cryptocurrency. Traders may also want to have¬†Form 8824¬†Like-Kind Exchanges¬†on hand.

What other forms do I need to file for cryptocurrency? Aside from the above forms,¬†some also might need¬†Form 4684 Casualties and Thefts (if for example they had a hard drive that stored crypto damaged in a hurricane, form 2210 for underpayments of quarterly taxes (explained in the next section), and¬†Form 8938 Statement of Foreign Financial Assets¬†if you used a foreign exchange. See: Golding & Golding’s Understanding the Rules of Bitcoin Reporting for FBAR & FATCA.[6]

When do I pay taxes on crypto gains, do I Have to file quarterly for crypto trading? In general the U.S. has a pay-as-you-earn tax system. When you get your check from your job, taxes are withheld. When you run a business, you pay quarterly taxes. When you make enough capital gains, it is the same deal. If you would owe more than $1,000 in taxes at the short and/or long term capital gains tax rate¬†for the year, then you should be making quarterly payments. If you wouldn’t owe more than $1,000, you can make an annual payment instead. If you have to file quarterly, then you need to use your best estimates. If you overpay or underpay, you can correct this at the end of the year. There is a fee for not making estimated quarterly payments when required, and if you underpay too much there is a fee for that too. See:¬†Large Gains, Lump Sum Distributions, etc¬†and Publication 505 (2017) Tax Withholding and Estimated Tax. If you overpaid, make sure to read up on:¬†Form 2210 Underpayment of Estimated Tax by Individuals, Estates and Trust. NOTE: To owe $1,000 in capital gains you have to make enough profit to realize $1,000 over the course of a year at your tax rate. Profits are not the same as the gross dollar amount traded, profits are calculated from all capital gains and losses in a year.

You must make estimated tax payments for the current tax year if both of the following apply: 1) You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and 2) You expect your withholding and refundable credits to be less than the smaller of: a) 90% of the tax to be shown on your current year’s tax return, or b) 100% of the tax shown on your prior year‚Äôs tax return. (Your prior year‚Äôs tax return must cover all 12 months.)

РIRS: Large Gains, Lump Sum Distributions, etc.

TIP:¬†It can make life simple to cash out before midnight on December 31 and start again next year (as that would ensure all gains and losses are set in stone before the end of the tax year). Likewise, going all in on a crypto you don’t currently hold essentially has the same effect (if you treat crypto-to-crypto as a taxable event). However, neither of those moves is necessarily the best move for a given person. Those moves potentially hit the reset button on one hand, ensuring all the years gains and losses stay in that year, but realizes all gains and losses¬†with the other (meaning you are no longer “going long” on any crypto investments). The problem here is that if like-kind applies, then cashing out limits your options. It stinks that there was a serious lack of clarification this year, but it is what it is. Play it safe and see a professional before you go panic selling or trading due to tax implications. In general, if you are unsure, then do what you would do if there were no tax implications and be ready to pay taxes on profits.

WARNING: If you make great gains this year on-paper and traded crypto to crypto or crypto to dollars, but then crypto goes to heck next year, you could end up owing a ton of money to the IRS you don’t have. You could run into real problems if crypto goes to zero (very unlikely) or if you panic and sell low. Seek guidance from a professional before making rash moves. Like-kind rules could potentially get you out of a mess like the cases noted above, but you’ll need to file forms and attest to a very specific situation. You can’t do this alone, you must seek professional assistance. Even if you do file like-kind, the IRS can be like “nope” and send you a bill. Don’t put it “all on crypto” if you don’t have the fiat to cover the tax implications. But remember, if you are already in crypto, going to USD before the end of the year means for sure you are realizing gains and losses. There are way more considerations than there is time, next year make sure you are prepared well in advance. Fingers crossed the IRS bothers to provide guidance beyond the 2014 guidance moving forward (with the 1,000%+ rise in the price of crypto assets and all… it would only make sense).

Get $10 in free Bitcoin when you sign up at Coinbase and buy or sell $100 in Cryptocurrency
Citations

  1. the Official IRS Guidance from 2014
  2. IRS Publication 544
  3. Bitcoin Tax Guide: Gifts And Tips. TurboTax.com.
  4. The Gift Tax.Investopedia.com.
  5. Loophole Allows Tax-Free Bitcoin Exchanges Into 2018. Forbes.com
  6. Golding & Golding’s Understanding the Rules of Bitcoin Reporting for FBAR & FATCA. GoldingLawyers.com.

What do you think?

Andrew on

I think I’m slightly confused as to what happens once the gain or loss is realized when there are multiple transactions on a row, as when one tries to convert an altcoin to fiat.

Say I have a single coin of EXAMP that I purchased for BTC worth $10. I want to sell it for USD once it is worth $15. When I make the EXAMP/BTC trade, the $5 gain is realized and taxed. But when I sell the BTC back to USD, is the $5 taxed again, or does it count as part of the “capital” of the BTC/USD transaction and therefore not taxed (unless there’s a radical shift in BTC value between the execution of the two transactions)? And if the gain is taxed a second time, is the whole $5 taxed or just the remaining gain after the first taxation?

Andrew on

To clarify, by “capital” in that last part, I meant to ask would the $5 become part of the cost basis for any gained or losses in the BTC/USD transaction.

Thomas DeMichele
Thomas DeMichele on

In your example, since you already realized profits on the first trade, you don’t re-realize them on the second trade. You had $10, you profited $5 and got $15, you didn’t profit the second time when you sold back to USD (as you already had $15 worth of value). Your first trade was the equivalent of selling the USD just like your second one was.

If I buy $15 of BTC and then sell it (with no fees), then I buy it, then I sell it, again and again, if there is no profit, there is no capital gains to tax and no capital losses to tally.

Trading and selling are taxable events where you realize profits, you pay gains on profits. The fact that they are taxable events are irrelevant (from the standpoint of paying a capital gains tax) if you aren’t realizing gains or losses on a trade or sale.

Jim on

What to do with trades before IRS guidance? Many exchanges went out of business and all trades data with them going back to 2013 and partially to 2014.

If I take my TOTAL USD I used to buy crypto with and subtract the total crypto sold in the same year back to USD, is that a reasonable number I can use for gain/loss ?

LIke 2017:
Total buying crypto: $6000.
Total selling crypto (emptying wallet): $6500.

Profit: $500

Is that ok?

So confusing…

Thomas DeMichele
Thomas DeMichele on

I would say that is reasonable, however its better if you get a professional to help you make that case.

In generaL: you have trades from back in the day that you didn’t account for, you should see an accountant. They will help you with everything from estimating your past gains and losses to amending past returns to dealing with the IRS.

Filing taxes for crypto as a trader without an accountant is like being your own lawyer in a divorce or rebuilding your engine based on YouTube videos. It might work out, I think you can technically do it, but it seems unnecessarily risky and like a ton of work.

Tim on

“There are loopholes in the new tax bill that let high frequency traders use a passthrough to benefit (essentially you would create an LLC for your trading). You have to be trading a good amount (in terms of volume and USD values) for this to work. See a professional for advice if you think this applies to you.”

Can you expand on that a little more? An IRS link for example? I do have a trading app which will execute many trades and I’m interested in the tax implications. Ideally I would like the app to be able to trade in an out of any cryptocurrencies…

Thanks!

Thomas DeMichele
Thomas DeMichele on

I will write an article on it, in the meantime it is the sort of thing you would want to run by an accountant and get their advice on.

alex on

Thanks for the article. Very useful.
Any idea how forked coins would be calculated though?
Let’s say I get bitcoin gold worth $300 at the time of the fork. Would that count as a $300 gift that would be taxable? Or is there no tax event until I sell (in which case, would the cost basis be $0?)?

Regards

Thomas DeMichele
Thomas DeMichele on

Glad you asked. I was trying to keep it short, but that is important:

So, it is my understanding based on my research (although I’m going to run this by my accountant and I suggest you do as well):

Your cost basis on Bitcoin Gold (BTG) is zero. Your profit is the full amount of your first trade from BTG to another crypto or fiat.

So it is $300 profit the second it changes forms (assuming it is traded when its fair market value in USD is $300; for example if you traded it on Bittrex for $300 worth of Etherum).

It is not a gift, it is like Bitcoin broke off a self similar part of itself (I really hope it isn’t considered as a dividend, not sure how that would work as there is no fair market value at the time of the fork really as the forked coin won’t have a stable price on the exchanges).

Now with that said, I do wonder if you could trade it back to Bitcoin and make the case that “it really was in like-kind to Bitcoin.” If anything is like-kind, it is a fork from the main chain. Literally uses the same code with a few tweaks.

Here again though, this is something we want a CPA to help us with. We don’t want to be our own criminal lawyers in a trial, we don’t want to be our own family lawyers in a divorce, we don’t want to be telling the IRS that we think Bitcoin Gold is so similar to Bitcoin we shouldn’t be taxed on it when we convert it back without the help of a professional either. ūüôā

So, when in doubt, the cost basis is zero and the rest is profit with forks. However, see a professional so you know what the best way to file for you personally is. One could clearly make cases either way on the surface, but we will leave it up to experts to deal with the nitty gritty of the tax code.

Mark on

If I put $200 into Bitcoin a few weeks ago, lost a little, then used it to buy Ripple, where does that leave me at this point?

If I used the $30 profit I made on Ethereum and bought TRON with the $30 worth of Ethereum, where does THAT leave me?

Thomas DeMichele
Thomas DeMichele on

If you are playing with small amounts of money like that, you potentially will owe nothing. It depends on your income. You still have to account for your crypto though.

To your question:

$200 BTC minus your losses = capital loss
Buying Ripple = not a taxable event. Still have a capital loss.

$30 profit on Ether = capital gain of $30 offset by the capital loss on BTC.
Buying Tron = not a taxable event.

So it leaves you broke even-ish (feel free to ask a follow up).

Rock on

What I am trying to figure out is that you are saying we have to pay taxes on capital gains if we profit. But does this apply if we haven’t cashed out?

If I where to make a profit of $20K am I expected to pay taxes for those gains even if I dont have that money in my bank account and its still in crypto coins on an exchange?

Thomas DeMichele
Thomas DeMichele on

Yes, if you trade crypto to crypto in GDAX, Bittrex, or Kraken (for example) then each trade is a taxable event. You are realizing capital gains and losses with each trade, thus you have to account for that and pay taxes of profits.

Like-kind property exchange might present a work around for 2017, but moving forward that has been taken off the table… of course, things could change, but that is where we stand right now.

Stratton Moore on

Thank you for the informative article. I just have a quick question:

What form do I need to use to report a loss when I sold my LTC to fiat?

Basically I just bought Litecoin with USD then rode the train and ended up selling – the remainder is just in my ‘USD’ Wallet on Coinbase. Lost about $100 but that’s how it goes sometimes! Thanks for the help.

Thomas DeMichele
Thomas DeMichele on

You would account for it here: //www.irs.gov/pub/irs-pdf/f8949.pdf

You can carry forward your capital losses, so it is probably worth accounting for.

Essentially I say “if you traded crypto, see an accountant.” That could mean “go to HR and block and tell them about your capital loss” or it could mean “sit down with a local CPA.”

However, if you didn’t make $1k in gains, you generally have a lot of wiggle room and can consider filing your own taxes (as there isn’t much to muck up). Meanwhile, if you traded over $20k in crypto, have a lot of crypto holdings, or made over $1k in gains, then you would be wise to see an accountant (as there is a lot to muck up).

Richard on

Hey Thomas, I’ve made a total of 21 trades as of the end of 2017, and i think it was around 900 dollars total. I exported the transaction logs from coinbase and binance to cointracking.info and calculated my gains and losses. Is it sufficient to bring that to a regular tax accountant and they will understand how to input that into my taxes?

Thomas DeMichele
Thomas DeMichele on

That should be just fine. You would want to ask them directly, but you have it right. You want to (if you didn’t keep your own records) print out the best available records and plop them down on your accountants desk (or email them to them).

Then let them give you direction from there.

Richard on

What information do i need to bring to the tax accountant if i am holding crypto lets say on Binance or in a wallet? Binance is chinese market so would i have to fill out a FBAR? not quite sure what the procedure would be on that.

Thomas DeMichele
Thomas DeMichele on

Great question, I would gather your record of transactions first and foremost. That is the main thing they will need.

I don’t know if a FBAR applies honestly. The accountant will. I’ll ask next time I can talk to my accountant and update with the info.

Here is some basic guidance on FBAR and crypto:

//www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar
//www.goldinglawyers.com/fbar-bitcoin-2017-2018-important-cryptocurrency-reporting-tips/

And this one covers FBAR, FATCA, PFIC, and offshore disclosures (essentially the basket of anything that could apply to foreign entities in terms of assets and currency):
//www.goldinglawyers.com/do-i-report-bitcoin-on-an-fbar-or-fatca-form-8938/

Simon on

So say I invested $3000 in Litecoin and it dropped to $2000. I then transfer $1000 of the remaining $2000 of Litecoin to a different Exchange. How do I report the capital loss since I only transferred a portion of the remaining Litecoin. Do I still report the entire $1000 loss or…?

Thomas DeMichele
Thomas DeMichele on

Transferring from wallet-to-wallet is not a taxable event. So it doesn’t matter. It isn’t taxable until you trade it for a different crypto or dollars (or use it to purchase goods or services).

Simon on

Thanks for the response. So if I take the $1000 Litecoin I transferred wallet-to-wallet and use it to buy Bitcoin and then use the Bitcoin to buy Tronix; I will have to report losses and gains, correct? Although in my case it’d just be losses since I didn’t have any gain.

Thomas DeMichele
Thomas DeMichele on

So in general you should report any capital gains or losses you had in a year. When you trade crypto to crypto you realize gains and losses. Thus if you lost money swapping around $1k between LTC, BTC, and TRX, then yeah you should report it. You can carry forward your losses, so if you have capital gains the next year you can offset them. Only $3k can be carried over to each year, but you can carry them through as many years as you need.

So if you lose $30k, you can carry $3k a year for 10 years.

Tex on

So say you see a minimal gain of about $1200 on small $600 deposit in BTC (yr2017) & didn’t cash out.

Then sent funds (in yr 2018) to an exchange to buy BTC in order to buy an alt coin.

Then deposited same way wallet-exchange-BTC-ALT coin a couple more times to purchase additional alt coins.

1. Are any taxes due for 2017?
2. What events would be taxable for 2017 & 2018?
3. How would one determine taxable amount of crypto to crypto transaction. Would folks have to know going rate for each coin at the time?

Bit of a noob, not sure where one gets that info. Especially if rate has likely changed since.

-Thanks in advance

Thomas DeMichele
Thomas DeMichele on

The second you change your BTC to any other coin, it is a realization event (you realize capital gains and losses). It doesn’t matter if you go from BTC, to an alt, then back to BTC… in fact, this is the exact sort of thing being taxed.

The only way around it for past years was claiming like-kind exchange. 2018 forward like-kind seems to be off the table according to the new rules.

So:

1. Tally up all your gains and losses, and you owe taxes on the profits at the marginal tax rate on dollars based on the brackets for the capital gains tax based on your income.
2. All selling, trading, and usage events are taxable.
3. The dollar value of the transaction is calculated at fair market value on the exchange you are using at the time of the event (if you didn’t record this, then you have to use best estimates). If you buy $300 worth of Bitcoin using litecoin, then the fair market value is $300 USD. Profit is capital gains weighted against capital losses in a tax year weighted against your cost basis.

This can all be a bit of nightmare to figure out, but the end result is that you are only paying taxes on profits.

Unfortunately this is all so complex that anyone who did any significant amount of trading really needs to see a tax professional. I can’t see that move not providing value to substantially all crypto traders who moved over $20k or made over $1k in profits… but honestly, even if you made less it isn’t a bad move.

Rock on

If you pay taxes on gains, even if you dont cash out, do you get taxed again also at cashing out?

You said earlier that if I gift crypto there is a tax? that sounds absurd. thats like saying if I give my friend $50 bucks I have to give uncle sam a tax cut of that. And who exactly gets taxed, the receiver or the sender? both?

What if I didnt give any but instead lost coins by sending them to the wrong wallet? What happens then?

Thomas DeMichele
Thomas DeMichele on

1. No, you only get taxed on profits. Once you have accounted for the dollar value you have now, you have accounted for it. When you cash out its a realization event, and you pay taxes on profits. If you don’t have profits because you already realized gains by trading, then you can just cash out without an additional tax burden. Taxable events don’t mean you pay taxes, they just mean you realize gains and losses and thus tally them toward your total profit or loss.

2. I am not sure why I wrote that giving a gift is a taxable event. When you give a gift you give them the same cost basis you paid. So if you give 1BTC you bought for $10, and then they cash it out for $10k, they owe taxes on $9.99k, but you owe nothing. There are no additional taxes for gifts unless you gift over the allowed amount (over $14,000 in USD value; not calculated from cost basis, but from current value in USD at the time the gift is given). //turbotax.intuit.com/tax-tips/estates/the-gift-tax/L1sFpFeXV. If you give your friend $50, no big deal. If you give your friend $50k, Uncle Sam wants a cut. Same deal if its $50 worth of BTC or $50k.

3. If you lost coins there is a series of things you have to do like report the loss and file the proper forms. If you lost a bunch of money call a lawyer and/or accountant immediately. I’m not sure the exact right steps, but clearly seeking professional guidance ASAP is the right first step. You can’t just be like “oops, I lost it.”