Cryptocurrency is considered "property" for federal income tax purposes, meaning the IRS treats it as a capital asset. This means the crypto. Yes, you'll pay tax on cryptocurrency profits in the US. You'll pay up to 37% tax on short-term capital gains and crypto income and between 0% to 20% tax on. Cryptocurrency is treated as property for tax purposes," says Shaun Hunley, a tax consultant at Thomson Reuters. "So anytime you're going to. CRYPTOS THAT PAY DIVIDENDS
Just because your Coinbase portfolio drastically grew in value last year doesn't mean that you'll be writing out a check to Uncle Sam come April. Similar to trading stocks, you only need to list gains you earn from bitcoin as income when you decide to sell. It depends on how long you held the bitcoin and whether you sold it for a profit or a loss. If you owned your bitcoin for more than a year, you will pay a long-term capital gains tax rate on your profit, which is determined by your income.
This IRS worksheet can help you do the math. If you owned your crypto for less than 12 months, the taxes you pay will be the same as your normal income tax rate. If you sold your crypto for a loss, there's some good news. A profit of any amount needs to be reported to the IRS. For the first time, this tax season's form includes a question about virtual currencies on the front page asking taxpayers if "at any time during , did [they] receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
Indeed, the cryptocurrency question is the first item on the form, just below the individual's contact information. In the past, taxpayers may have been able to feign ignorance about their obligation to report crypto gains, but that won't fly anymore. Spending your bitcoin isn't all that different from selling it in the eyes of the IRS, especially if your holding has greatly increased in value since you first purchased it. Once you know your cost basis - simply subtract it from the value of the asset on the day you disposed of it to calculate whether you have a capital gain or loss.
If you have a gain, you'll pay Capital Gains Tax on that gain. If you have a loss, you won't pay Capital Gains Tax - but you do want to keep track of these because you can offset capital losses against gains more on this later.
Let's look at an example to figure out how much tax you could pay on cryptocurrency. You need to calculate whether you've made a capital gain or loss, so subtract your cost base from your sale price. American crypto investors can benefit from a few tax free allowances that can help them pay a little less tax on their crypto.
You don't pay Capital Gains Tax on any crypto capital losses. But don't just write these off as a bad investment, instead offset your capital losses against your capital gains to reduce your overall tax bill. Long-term capital losses for those assets held more than one year can be used to offset long-term capital gains; while short-term capital losses for those assets held one year or less can be used to offset short-term capital gains. There's a few different scenarios that can play out with losses, so let's take a look at each.
The IRS does not let crypto investors claim lost or stolen crypto as a capital loss. It's a harsh stance and it wasn't always this way. Prior to the Tax Cuts and Jobs Act, crypto investors could claim theft and casualty losses as a capital loss. However, since this bill came into effect, casualty and theft losses are no longer tax deductible.
So if you've lost your crypto due to a hack, scam or because you've lost your private keys - you're out of luck. Losses that occurred prior to may be deductible as long as you can prove ownership of the assets and can provide a declaration or receipt of some kind from the exchange which specifies how much you lost in the hack.
So if you lose crypto - whether that's from losing your private keys or to a scammer - you can't claim any kind of deduction for it. The best thing you can do is simply write it off and disregard it from your calculations entirely. Now we've covered capital gains, let's look at when your crypto might be taxed as income instead. There are many crypto transactions that can be viewed as income and subject to Income Tax. The simplest way to look at this is any time you're seen to be 'earning' crypto, it'll be subject to Income Tax instead of Capital Gains Tax.
The IRS has quite a lot of guidance about when cryptocurrency could be seen as income instead of a capital gain. This includes:. With the dawn of DeFi - there are many more ways to earn crypto. The IRS hasn't released specific guidance on many of these transactions just yet, but that doesn't mean you won't pay tax on them.
Examples of new ways you can earn crypto from DeFi include:. There's also many earn-to-engage platforms that have sprung up in recent years where the crypto you receive could be considered income. As we said above, for many of these transactions - particularly newer DeFi protocols - there is not yet any clear IRS guidance on the tax these may be subject to. However, as earning crypto through staking and mining is considered income, it is highly likely that earning through these other platforms would be considered income from a tax perspective as well.
It is advisable to speak to a crypto tax accountant for bespoke advice on these investments. Examples of potential crypto income include:. Yes and no. It all depends on what you're buying your crypto with as to whether you'll pay tax. Let's break it down. However, it's really important you keep records of your crypto transactions. This is so you can keep a detailed account of your cost base, so you can later calculate your crypto capital gains and losses accurately when you later dispose of crypto assets.
Good news, if you're simply buying and HODLing crypto, you don't need to pay tax even if the value of your crypto increases. You'll only have a taxable event when you sell, trade or spend that crypto. Swapping one crypto for another and thinking you'll avoid paying tax? Think again. Swapping crypto for crypto is taxable. Wondering if crypto to crypto is taxable or whether you pay taxes on crypto trades?
The answer is a resounding yes. The IRS views this as two separate transactions. You're then buying ETH at market value. Even though you never received any fiat currency, you still need to pay tax on the sale of the BTC - not the purchase of the ETH. Buying crypto with stablecoins is viewed the same way as swapping crypto for another crypto - so it's subject to Capital Gains Tax. Of course, you may not actually pay any tax on this specific transaction.
This is because your cost base and your disposal value are likely to be the same - because stablecoins are pegged by a reserve asset like USD. So for example, let's say you wanted to buy 0. The price of 0. Despite this, you'll still need to record and report these transactions to the IRS as taxable events. Yes - you'll pay tax when you sell crypto in the US. But the amount you pay will vary depending on how long you've held your asset and your regular income.
You'll pay short-term Capital Gains Tax on crypto held for under a year and long-term Capital Gains Tax on crypto you've held for more than a year. If you sell your crypto asset for fiat currency after owning it for less than a year, you'll pay short-term Capital Gains Tax. This will be at the same tax rate as your Income Tax rate.
If you sell your crypto asset for fiat currency after owning it for more than a year, you'll pay long-term Capital Gains Tax. So even though you made a larger capital gain from your second transaction - you paid less tax thanks to the long-term Capital Gains Tax rate. Selling your crypto for another crypto is viewed exactly the same as selling your crypto for a fiat currency.
It doesn't matter which cryptocurrency you're selling it for - whether it's a stablecoin or an altcoin - it's still a taxable event. You'll pay short or long-term Capital Gains Tax on any capital gain you make from the transaction. The IRS has confirmed that when you're moving crypto around between your own wallets - this isn't seen as a disposal and you don't need to report it or pay Capital Gains Tax.
However, nothing is quite so straightforward in the world of crypto and transactions like adding and removing liquidity may get a little more confusing from a tax perspective. Moving crypto between your own wallets is a tax free event. You don't need to record these or report them to the IRS.
Having said that, it's important to keep track of these transactions because if you're paying a transfer fee in crypto - this is subject to Capital Gains Tax. Chances are if you're transferring crypto from one wallet to another - you may pay a transfer fee for the privilege. If you're paying this in fiat currency, this is tax free. However, more often than not you're going to be paying for this transfer fee in cryptocurrency.
In other words, you're spending crypto. This is a taxable event. So while transfers are tax free, transfer fees are not if you paid the fee in cryptocurrency. You'll need to calculate your cost basis and capital gain or loss. The IRS has not yet issued clear guidance on whether transfer fees could be added to the cost base of an asset.
While transaction fees definitely can be, it is unclear whether transfer fees would fall into the category of maintaining an asset - which are not allowable as part of a cost basis. You're charged a flat fee of 0. You're paying in ETH - so you're disposing of your cryptocurrency. So you need to calculate your cost basis and the fair market value of your crypto at the point of disposal.
To keep it simple, let's say the price of ETH hasn't changed since you bought it. This is your disposal - you need to report this to the IRS as a disposal, regardless of the fact you have no capital gain or loss. Of course, doing this for every transaction can be time-consuming, but Koinly can help you do this with our "treat transfer fees as disposals" setting.
If you're adding or removing liquidity from various DeFi protocols, on the surface, this doesn't look like a taxable event. You're not disposing of your crypto and these transactions are more akin to a transfer. However , if you receive a token in exchange for your share in the liquidity pool, this could be viewed as a crypto-to-crypto trade and subject to Capital Gains Tax. Each DeFi protocol works slightly differently - your best bet here is to speak to an experienced crypto accountant to ensure you remain tax compliant.
Airdrops and hard forks are taxed as income in the US - so you'll pay Income Tax. The bad news keeps on coming because when you later dispose of an crypto asset you received through an airdrop or hard fork - you'll also pay Capital Gains Tax. To figure out how much Income Tax you need to pay, calculate the fair market value of your airdropped crypto on the day you receive it and apply your income tax rate.
You receive 1INCH tokens from an airdrop. Your tokens are subject to Income Tax, so you need to calculate their total worth. You've already paid Income Tax on your airdropped coins and you later decide you want to sell them so you can invest in something else. Airdropped coins or tokens are viewed exactly the same way as any other cryptocurrency from a tax perspective, so you'll pay Capital Gains Tax when you later dispose of airdropped crypto by selling it, trading it or spending it.
Your cost base for your airdropped coins will be the fair market value on the day you received them. We'll use the same example as above to explain. You sell your airdropped 1INCH tokens a couple of days after. You'll pay the short-term Capital Gains Tax rate as you haven't held your asset for more than a year. You won't pay any tax as a result of a soft fork because you don't receive any new coins or tokens as a result of a soft fork.
So you don't have any income to recognize from a tax perspective. The IRS is very clear that when you receive new coins or tokens due to a hard fork, you'll pay Income Tax as well as Capital Gains Tax for any disposals later on. On the day you receive your new coins, you'll pay Income Tax.
Like with airdrops, to calculate the amount of income, you'll identify the fair market value of the coins or tokens on the day you received them. This figure is also your cost basis. When you later spend, sell or trade coins from a hard fork, you'll pay Capital Gains Tax.
Your cost basis the fair market value of the coins or tokens on the day you received them. Subtract your cost basis from your sale price to figure out your capital gain. This is your capital gain. It's good news for US crypto investors when it comes to giving the gift of crypto or spreading the love with a crypto donation.
In most instances, these events are tax free and even tax deductible. This allowance is per person, so you can give multiple gifts up to the limit to different people. You may also need to file a Form if you gift more than the allowance. Rather, the cost basis is inherited by the recipient which will be used to calculate capital gains if they eventually sell the asset. The good news keeps on coming because whoever you gift your crypto to also doesn't need to pay tax on receipt of the gift. The recipient will inherit the cost basis of the crypto when they're given the gift, so if you're sending a gift, make sure to send this information over to them too.
If you don't have this information yourself, then their cost basis will be the fair market value of the gift on the day they receive it. You'll pay Capital Gains Tax if you dispose of your gifted crypto by selling it, trading it or spending it. The cost base of gifted crypto is inherited. This means the recipient takes on the cost base of the original asset from the sender.
If the cost base of the sender is unknown, you can use the fair market value of the crypto on the day you received it as the cost base. The IRS is very clear that when you donate crypto to a registered charitable organization - you won't realize a capital gain or loss, so you won't pay Capital Gains Tax.
You can even claim charitable donations as a tax deduction. Your charitable contribution deduction will be the fair market value of the crypto on the day you donated it. However, in the United States, check a charity's c 3 status with the IRS' exempt organization database. A charity must have c 3 status if you plan to deduct your donation on your federal taxes. However, the Income Tax benefits of non-cash donations differ to the tax benefits of cash donations and any donations of crypto will be considered non-cash donations, including stablecoins.
Any unused amounts can be carried forward to the following 5 tax years. This was a temporary measure as part of the CARES act; the standard deduction rules apply again from Because of the enhanced deduction available for cash donations, a taxpayer may wish to cash out their crypto first before donating in fiat. Whether this would be preferable from a tax perspective will depend on the potential Capital Gains Tax owed on the cash-out.
It's important to note that if you're self-employed and running a crypto mining business, you'll also need to pay Self Employment Tax to cover your Medicare and social security contributions. Any crypto you receive as a result of mining - you'll pay Income Tax based on the fair market value of the crypto on the day you received it.
You'll also pay Capital Gains Tax if you later sell, trade or spend any crypto you received as a result of mining activities. Confusing - the term staking gets used interchangeably in crypto. It can refer to both DeFi lending and proof-of-stake cryptocurrencies.
From a tax perspective, this matters because they may have different tax implications. It's very similar to mining crypto as part of a PoW mechanism - a network participant gets selected to add the latest batch of transactions to the blockchain and earn crypto in exchange. There is an argument that because you are creating newly generated coins, you should not be taxed on the receipt of the coins - the argument uses the analogy of creation of other property such as a manufacturer creating a computer who would not be taxed on the value of the computer following the completion of manufacturing, but only once sold to an eventual customer.
On the other hand, DeFi lending lets you lend your crypto through a given protocol - like Aave - and receive interest in the form of crypto from borrowers on the other side of the transaction. DeFi lending is much more comparable to a typical lending arrangement whereby you provide capital in return for interest, with the interest rewards being taxable as income.
The IRS hasn't released any official guidance on staking rewards and how they're taxed. However, for a long time it was presumed that as proof of stake rewards were similar to mining rewards, they would be taxed in a similar vein. As above, mined coins are subject to Income Tax based on the fair market value at the point you receive them. However, a recent court case filed against the IRS suggests this might not be the case in the future. A couple who staked Tezos attempted to claim a refund on their staking rewards for - which the IRS denied with no clarification.
So they filed against the IRS and were offered a refund in December The couple have refused the refund, stating that they wish to set the legal precedent that staking rewards from PoS should be viewed as the creation of new property and subsequently only subject to Capital Gains Tax on disposal, not Income Tax on receipt of the newly created tokens.
The case is on-going and we'll update this guidance as soon as there is an outcome. The tax for crypto trading such as margin trading, futures and other CFDs is a little complicated, so let's break down the taxes on crypto trading. If you're seen to be trading as an individual investor - you'll pay Capital Gains Tax on profits from margin trades, futures and other CFDs. So when you open a position, you won't pay tax.
It's only when you close your position that you'll realize a capital gain or loss and pay Capital Gains Tax. The same short-term and long-term Capital Gains Tax rates apply to these transactions. When it comes to crypto futures in particular - if you're trading regulated crypto futures, these have a more favorable tax treatment. Of course, the majority of crypto futures products are unregulated so this rule would not apply, but for those trading at scale, it is well worth investigating regulated crypto futures products to benefit from this tax treatment.
In the instance of liquidation - when your collateral is sold - this is a disposal from a tax perspective and therefore should be reported to the IRS. DeFi is still pretty new and it's constantly evolving, offering investors new opportunities to make money.
All this to say, the IRS hasn't yet issued clear guidance on specific DeFi transactions and how they're seen from a tax perspective. Don't jump for joy just yet. That doesn't mean you won't pay any taxes on your DeFi transactions.
Instead, investors need to look at the current guidance on crypto transactions and infer the likely tax on their DeFi transactions. At a basic level, the tax you'll pay depends on whether you're seen to be 'earning' crypto or 'disposing' of crypto.
Remember, earning crypto is anytime you're receiving new coins or tokens as a result of your transactions. This would cover many DeFi transactions. Meanwhile, when you're trading, selling or spending tokens on DeFi platforms - this would be subject to Capital Gains Tax. In summary, we can infer that the tax treatment of DeFi would likely break down into the following tax treatments:.
We recommend speaking with an experienced crypto accountant for clear guidance on DeFi tax to remain compliant. Anytime you're seen to be 'earning' from DeFi - whether that's new coins or tokens - it's likely that the IRS will view this as additional income and you'll pay Income Tax based on the fair market value of the asset in USD on the day you received it.
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