How Do Taxes Work With Cryptocurrency? – Paying Taxes on Cryptocurrency in the United States
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 as currency like the U.S. dollar.
That means crypto is treated like real estate or gold in most cases (minus a few rules), and thus it is subject to the short and long-term capital gains tax in most cases whether used for purchasing goods/services or for trading/investment (see official IRS guidance and state guidance below; crypto use for business may have special considerations).
The above are the basics; we’ll go over all the more complex factors below.
What tax forms do I need to file for cryptocurrency? The core of what you need to do for the IRS in respect to cryptocurrency is fill out and submit Form 8949 at tax time. This is the form used to report your capital gains and losses from investment property.
TIP: We aren’t tax professionals and as such don’t offer professional advice. Below is just a collection of information about cryptocurrencies like Bitcoin, Litecoin, and Ethereum regarding taxes. We strongly suggest having an accountant assist you in reporting capital gains from cryptocurrency. That said, feel free to ask questions below in the comments.
The Basic Tax Implications of Cryptocurrency (Unless you “Just HODL” You Almost Certainly Owe the Short Term and/or Long Term Capital Gains Tax)
- Trading cryptocurrency to fiat currency like the dollar is a taxable event (AKA a realization 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),
- Using cryptocurrency for goods and services is a taxable 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),
- Giving cryptocurrency as a gift is not a taxable event (the recipient inherits the cost basis; the gift tax still applies if you exceed the gift tax exemption amount),
- A wallet-to-wallet transfer is not a taxable event (you can transfer between exchanges or wallets without realizing capital gains and losses, so make sure to check your records against the records of your exchanges as they may count transfers as taxable events as a safe harbor),
- 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) if you hold less than a year you realize short-term capital gains and losses.
Essentially, anything other than buying, holding, or transferring a cryptocurrency is a taxable event (meaning you realize capital gains and losses at fair market value at the time of the event when you trade, sell, or use crypto).
These regulations mean that you and your accountant are up against a lot of work and best estimates this tax season if you did even a moderate amount of trading.
You’ll need to be prepared to pay capital gains taxes (thus you will need fiat currency at tax time).
We will cover basic exceptions and grey areas below.
The Tax Implications for the Average Cryptocurrency User
Putting aside the employer end of things and focusing on the average Bitcoin user, the tax implications of the above are:
- If you trade cryptocurrency for a good or service, trading a cryptocurrency for a video game for example, then you need to keep a record and report every transaction, reporting the fair-market value of the currency at the time of the transaction. Or in the words of the IRS: “A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”
- If you trade cryptocurrency as a capital asset, either for another cryptocurrency or fiat currency (like the US dollar), you need to keep a record and report those transactions (using the fair-market value of cryptocurrencies in cases where one cryptocurrency is traded for another). Then at the end of the year, you need to report all cryptocurrency transactions, and all the related gains and losses (and all transactions), and then pay taxes based on your total gains.
Ex. If you trade Litecoin for Bitcoin, that is a transaction that needs to be accounted for by reporting the fair-market value in US dollars at the time of the transaction. Likewise, if you trade Bitcoin to USD, that is a transaction that needs to be accounted for.
Bottom line on cryptocurrency and taxes in terms of reporting: You need to keep a record of your trades, transactions, and holdings, tally your profits and losses from selling/using/trading crypto, report that to the IRS at tax time (potentially also filing quarterlies), and then pay your capital gains taxes along with your other taxes. If you make a good faith effort to report and pay, then the worst your likely to see is a fee if you get it wrong, if you try to hide your funds, you could get in trouble. Exchanges typically don’t provide all the information you’ll need for reporting, so it is advised that you keep your own records.
Notes on Cryptocurrency and Taxes
Below are some notes on cryptocurrency and taxes.
On stable coins: A stable coin is a bit like a mix between a dollar and a crypto, and thus it logically has some tax implications worth considering in that respect. Although the IRS never issued any guidance specifically on stable coins, logically speaking, for tax purposes trading in and out of a stable coin is a taxable event. If you hold a stable coin that is valued at exactly $1, and you bought it for exactly $1, you have no gains or losses on it when you trade out of it (and thus converting it to dollars or buying a crypto with it should have no impact on taxes). However, when you trade into a stable coin it is like trading to dollars (like selling) and if the price of the stable coin fluctuates and you gain or lose money in the process you have to report the appropriate gains or losses.
Watch out for this trap: If you make a gains one year, but then lose them before tax time the next year, you’ll owe the IRS money you don’t have on those gains (unless you and your accountant can make a specific and reasonable case otherwise; although this might not work).
Keep records: It is smart to keep your own records. Cryptocurrency exchanges (like Coinbase/GDAX) generally keep records for you. However, if you have records, you should use them (or at least verify the exchange’s records using yours).
Know How the Tax System Works: The U.S. has a progressive tax system and a pay-as-you-go tax system. If you trade frequently, you’ll probably owe a higher rate and have to make quarterly payments. Meanwhile, those with low incomes and small long-term gains can end up owing no capital gains tax at all; those with capital gains of less than $1,000 in a year likely won’t have to file a quarterly. See: Large Gains, Lump Sum Distributions, etc and Publication 505 (2017) Tax Withholding and Estimated Tax. Meanwhile, if you overpaid (for example via a quarterly), make sure to read up on: Form 2210 Underpayment of Estimated Tax by Individuals, Estates and Trust.
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’s tax return. (Your prior year’s tax return must cover all 12 months.)
An example of a taxable event / realization event: As noted, when you spend a Bitcoin or other crypto, for example on a good or service, that is a “realization event” (same as trading crypto to crypto or crypto to fiat). At that point, you owe the capital gains tax on the fair market value of the goods or services provided. So if you bought $100 worth of pizza for 1 bitcoin, and you bought the bitcoin for $110, you lost $10 and would tally that loss (or, if you paid $10 for the Bitcoin, you realized $90 in gains and would tally that). When buying goods and services, you may also owe other taxes like the sales tax. Likewise, if you use crypto in business, you could owe other taxes (like payroll or state and local taxes) as well.
On using crypto for your business or mining: In general the same basic rules apply when using crypto as a business or when mining (that is, you tally capital gains when you convert the crypto back dollars or another crypto). However, there are special considerations for mining and business use. We don’t cover every aspect of crypto for business and mining on this page, so if you have a lot of transactions as a business or miner please see a tax professional.
What exactly is being reported: To be clear you need to report the dollar value of each trade and/or transaction throughout the year at the time of the trade. So if you traded BTC to ETH once, you need to go back and figure out the dollar value of that trade. That trade is then considered a capital gain or loss depending on if you made or lost money.
Can I Claim Like-Kind Property Exchange For CryptoCurrency?
With all the above said, there are some grey areas to consider.
First, there has been some confusion over like-kind property exchange. More generally, there is confusion over a person’s ability to claim a crypto-to-crypto trade as being of “like-kind,” thus effectively avoiding crypto-to-crypto trades being a taxable event.
For 2017 and past years it isn’t 100% clear if one can use like-kind property exchange rules to defer paying taxes on cryptocurrency until it is converted into USD or another currency. For 2018 forward, like-kind rules only apply to real estate until further notice (this was a change to the tax code that started in 2018).
If you intend to claim like-kind property exchange for past years, a tax professional should guide you. You’ll need to file forms, claim like-kind, make a good faith effort to report accurately, and officially state you are calculating this way.
All that covered, I would note that the IRS guidelines say:
“the character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer.”
You might treat all of your cryptocurrency as a single investment in cryptocurrency, a single capital asset. If you consider Ethereum to be in “like-kind” to Bitcoin for example, maybe you can justify not realizing capital gains in crypto-to-crypto trades for 2017 and past years only.
Or, more specifically, if you treat your cryptocurrency like an investment property to which rules for Nontaxable Exchanges should apply, claiming they are like-kind, then maybe, maybe, maybe this might seem reasonable.
Like-Kind Exchange in 2018 and Beyond
As noted above, even if like-kind applies for 2017 (and previous years), in 2018 the new U.S. tax bill bans all like-kind exchanges that aren’t related to real estate.
Thus, moving forward in 2018 and beyond like-kind is off the table unless the rules change or the IRS offers clear guidance otherwise.
Also, since the tax bill does away with like-kind in 2018, it calls into question the use of like-kind in 2017.
Still, a professional might be able to help you make a case for like-kind in 2017 if you have treated crypto as an investment property and you can make a reasonable case for it (please note that you cannot do this yourself, you must hire a professional).
See: Forbes Loophole Allows Tax-Free Bitcoin Exchanges Into 2018 for a breakdown of what may or may not be possible.
Other Rules to Consider
There is more to this if you do end up paying capital gains taxes.
- The wash rule does not apply (Section 1091 wash sale rules only mention securities, not intangible property; although you could perhaps make a case for it when you file.)
- One should be able to choose between FIFO (First in First Out) and LIFO (Last in First Out).
TIP: In general you’ll want to use a LIFO calculation to avoid realizing gains from your older holdings first. So keep that in mind when you trade.
Get Ready to Pay Taxes on Capital Gains and Hire a Tax Professional
If you trade, you have some flexibility, but you may have no way around realizing capital gains/losses (since every trade that isn’t a wash results in gains or losses).
With the lack of information exchanges provide in mind, we can say that crypto trading makes preparing for the tax season incredibly complex and rather risky in the US.
Anyone who did substantial crypto-to-crypto trading should see an accountant and make a “good faith effort” to report their holdings accurately and pay taxes.
Messing up a good faith effort could result in fines, but not making a good faith effort could be seen as tax evasion. Paying a fee is not the worst thing in the world, going to federal prison for tax evasion is pretty bad.
That covered, as a safe harbor where rules are unclear, you should assume you need to pay taxes of profits from crypto-to-crypto trades and that each trade from crypto to fiat and fiat to crypto is a taxable event for the calendar year or tax year.
Unless you have talked to an accountant and have a game plan for how you will account for your crypto, you should prepare for the worst and make sure you have a plan B that includes paying taxes on profits from all crypto-to-crypto transactions.
You may need to convert to USD to pay taxes (since cryptocurrency isn’t a US fiat currency). If for example you are “all in” on crypto, and thus will need to cash out some crypto to pay taxes you need to know if crypto-to-crypto trades are taxable.
Before you cash out crypto, talk to an accountant and come up with a game plan for when you will cash out. You may benefit from cashing out on Dec 31st, or you may benefit from holding into the New Year. It really depends on your specific situation!
For example, if you want to realize losses for the year and know you won’t claim like-kind, you may want to take a loss before the end of the tax year on paper (to lower your taxable income). Or conversely, if you want to avoid taking gains, you may way to cash out after Jan 1st!
The bottom line here is that your specific situation will determine your best course of action. If you traded, your situation is complex. Thus, thus you will likely want to see a professional for advice before the end of the year (ideally) or ASAP.
To sum up that last part:
- If you convert from crypto to fiat and keep your cash in fiat in this tax year, then clearly we know that is taxable. Thus, you can get in a situation where the funds you cash out are themselves subject to a tax. This opens up a rabbit hole.
- Meanwhile, and this is good news for holders, if you bought cryptocurrency and held it, you don’t pay taxes until you trade it for fiat or another crypto.
- Lastly, hiding your crypto assets and not paying your taxes could at best end up with you owing fees, interest, and missing out on some deductions and at worst can be seen as tax fraud or evasion. You don’t want that. See “what happens if I don’t pay my taxes.”
With all the above in mind in mind, we cover the basics of cryptocurrency and taxes below alongside some insight into some still unanswered questions.
TIP: If you are confused, you should be. The IRS has made almost no effort to clarify the rules, and the current tax bill only made the situation more complex for traders. That may make you feel like “it is on them.” However, it is on you; your taxes are your responsibility.
TIP: The one exception to the tax bill putting traders in a bad place is: if you are an LLC, list yourself as a trader, and meet certain criteria (mostly related to your income) the tax bill can work in your favor a bit. You might want to consider this for 2018.
NOTE: If you make very little money outside of trading, and you didn’t make that much trading, then you won’t owe much. This is due to the way the progressive tax system works. If you are somewhere in the middle, there are many more considerations.
NOTE: As noted, FIFO rules should be optional in cryptocurrency. Learn more about cryptocurrency and FIFO. FIFO requirements like FOREX traders face almost made it into the tax reform bill, but they didn’t get included in the final bill.
TIP: The long-term capital gains rate is lower than the short-term rate. Between that and the accounting nightmare, one can see why holding crypto long can be a real benefit concerning taxes. In the U.S. it is hard to trade effectively enough to offset all the negative effects.
NOTE: To qualify for like-kind property exchange, you have to file your taxes and file the 8824 form that claims like-kind property exchange. So not only is no one sure if this is an option, but further, it being an option requires filling out a form, claiming all your crypto assets, and filing your taxes. We say this a few times on the page, but let us stress it here: see an accountant before the end of the fiscal year if you made profits in crypto. Don’t try to be a hero and figure this all out yourself unless you know what you are doing.
TIP: You should assume the IRS knows your trading history. They want their taxes on your Bitcoin Cash, Bitcoin, and other cryptocurrency profits. If you made money from a fork, that is if you got forked coins and sold them; make sure to pay your taxes. Don’t assume that you can get away with tax fraud. That is a dark road to head down; you could end up being the person who is made an example of. Entities like Coinbase are fighting to protect your transaction history, but be aware that there is little chance that the IRS is going to let the gains this year go by without collecting their due. Don’t risk federal prison; pay your taxes. See the ruling of the United States v. Coinbase (it was at best a partial victory).
TIP: This page is meant as a general overview. For official documents related to the IRS, cryptocurrency, and taxes see Sales and Trades of Investment Property, Like-Kind Exchanges Under IRC Code Section 1031, and IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply.
Looking to the IRS Guidance on Cryptocurrency
The report says:
Virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
——- End IRS ——-
FACT: The above guidance isn’t the only document you need to consider. Also important is a 31-page report from the Treasury Inspector General for Tax Administration released Sept. 21, 2016.
TIP: Some states have specific state-based rules, for example, Washington and New York (this is mostly rules for those who wish to operate an exchange, but there are also rules that could apply to individuals and businesses using cryptocurrency). Everyone should take the time to brush up on rules for their state, especially if they will be reporting state taxes (and not just federal).
TIP: For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars.
TIP: If you mine cryptocurrency you have to pay taxes on the coins you mine, and you’ll owe the money as self-employment income and be subject to the self-employment tax.
In Summary: Key Facts About Cryptocurrency and Taxation in the United States and in General
Here are the key points to understand about cryptocurrency and taxes that were covered above:
- The rules about cryptocurrency and taxes are murky at best. Does cryptocurrency follow like-kind exchange rules, or should it be treated as currency? For now one should assume it doesn’t (and thus there is no way around paying taxes on profits realized at the time crypto-to-crypto trades are made), but the truth is there is no crystal clear direction on this yet. That is just one of many unanswered questions from 2017 – 2018. If you had any substantial activity in the cryptocurrency space, consider hiring an accountant to help you square up with the IRS at tax time.
- Trading cryptocurrency to cryptocurrency is a taxable event (and so is using it in any way). Every transaction between cryptocurrency and cryptocurrency, cryptocurrency and fiat currency, or cryptocurrency and goods and services needs to be recorded, and appropriate taxes need to be paid. The like-kind form would give you a way to get around this if it works, but that is looking less and less likely as the year rolls on.
- Cryptocurrency is treated as property for tax purposes. This is true whether you are holding cryptocurrency as an investment, using cryptocurrency as a payment method (for buying goods and services or for employee compensation), mining cryptocurrency, or treating cryptocurrency as inventory (if say you are in the odd position of acting as a cryptocurrency retailer). Meanwhile, there are some specific rules that apply when using crypto for transactions and not just as an investment.
- When you spend a Bitcoin or other crypto, for example on a good or service, that is a “realization event” (same as trading crypto to crypto or crypto to fiat). At that point, you owe the capital gains tax on the fair market value of the goods or services provided. So if you bought $100 worth of pizza for 1 bitcoin, and you bought the bitcoin for $110, you lost $10 and would tally that loss (or, if you paid $10 for the Bitcoin, you realized $90 in gains and would tally that). When buying goods and services, you may also owe other taxes like the sales tax. Likewise, if you use crypto in business, you could owe other taxes (like payroll or state and local taxes) as well.
- Cryptocurrency is subject to capital gains taxes (and you should report it as such to the IRS), but as with other investment properties, the tax implications can differ depending on how the property is treated “in the hands of the taxpayer.” That means you’ll need to deal with short and long-term capital gains and losses and make sure you are paying the appropriate rates and writing off capital gains against capital losses the right way.
- Crypto is generally treated as an investment property and subject to the short and long-term capital gains tax and the rules for investment properties apply.
- Capital gains count toward your total taxable income and affect your tax bracket.
- Independent capital losses and capital gains in a year can be written off against each other.
- The “wash rule” does not apply to cryptocurrency (it is a rule for stocks, not investment property).
- Understand the difference between long-term and short-term capital gains.
- Know that you should treat all exchanges from one crypto to another or crypto to USD as a taxable event (calculated based on the value of the trade in USD at the time).
DON’T WAIT TO FIGURE THIS OUT. You’ll need some time to get your accounting sorted out and may want to conduct some transactions before the end of the calendar year to end the year in a favorable situation regarding taxes. Only a small amount of capital losses can be carried over in-between years.
TIP: Each country has their own rules for cryptocurrency. The rules on this page apply to the United States specifically, so make sure to check out the rules of other countries if paying taxes somewhere else.
NOTE: You could, in the worst case, lose all your money and still get a giant tax bill if you trade a lot of cryptocurrencies over the course of a two year period with heavy gains one year and heavy losses the other.
Bottomline: You need to report the dollar value of each trade and/or transaction throughout the year at the time of the trade and pay the capital gains tax based on that. So if you traded BTC to ETH once, you need to go back and figure out the dollar value of that trade. That trade is then considered a capital gain or loss depending on if you made or lost money. Keep in mind you may need to file quarterlies. If you can’t figure it all out, then consider getting assistance and at the very least make a good faith effort to report and pay.
- How Bitcoins Are Taxed The tax implications of bitcoins and staying organized
- IRS Virtual Currency Guidance : Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply
- Sales and Trades of Investment Property
- Like-Kind Exchanges Under IRC Code Section 1031
- thetaxadviser.com. Cryptocurrency and Taxes
- Cryptocurrency and taxes A John Doe summons from the IRS to Coinbase is the latest development in the IRS’s attempt to deal with these new forms of currency. By Craig W. Smalley April 20, 2017
- IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply