Does Crypto Count As Income? Yes, cryptocurrency is considered property by the IRS, and gains from buying, selling, or exchanging it are taxable. Income-partners.net can guide you through understanding these tax implications and help you find strategic partners to maximize your financial growth. Let’s explore the ins and outs of crypto taxation, ensuring you’re well-informed and ready to navigate the digital asset landscape effectively. Understanding how crypto is taxed, including capital gains, mining income, and payments received in crypto, is crucial for financial planning and strategic partnerships.
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1. How Does The IRS View Cryptocurrency?
The IRS views cryptocurrency as property, not currency. This means that buying, selling, or exchanging crypto is a taxable event, generally resulting in a capital gain or loss. According to IRS Notice 2014–21, gains and losses need to be reported on Schedule D and Form 8949 if necessary. Because the IRS treats crypto like property, your gains and losses in crypto transactions will typically affect your taxes.
2. How Is Cryptocurrency Taxed?
Cryptocurrency is taxed differently depending on how you acquire it and how you use it. Let’s explore the various scenarios:
- Capital Gains and Losses: If you buy, sell, or exchange crypto in a non-retirement account, you’ll face capital gains or losses. These gains or losses can be short-term or long-term, depending on how long you held the cryptocurrency before selling or exchanging it.
- Short-term capital gains (owned for one year or less) are taxed at your ordinary income rate.
- Long-term capital gains (owned for more than one year) are subject to long-term capital gains tax rates.
- Ordinary Income: You can also earn income related to cryptocurrency activities, such as mining or staking. This is treated as ordinary income and is taxed at your marginal tax rate, which could be between 10% and 37%.
- Calculating Gains and Losses: When you buy and sell capital assets, your gains and losses fall into two classes: long-term and short-term. How the IRS treats these two classes is very different in terms of the tax consequences you’ll encounter.
- Short-term capital gains and losses come from the sale of property that you held for one year or less. These gains are typically taxed as ordinary income at a rate between 10% and 37% in 2024.
- Long-term capital gains and losses come from the sale of property that you held for more than one year and are typically taxed at preferential long-term capital gains rates of 0%, 15%, or 20% for 2024.
3. What Are The 2024 Short-Term Capital Gains Tax Rates?
The 2024 short-term capital gains tax rates depend on your taxable income and filing status. These rates are the same as ordinary income tax rates. Use the following table to calculate your capital gains taxes:
| Tax Rate | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
|---|---|---|---|---|---|---|---|
| Filing Status | Taxable Income | ||||||
| Single | Up to $11,600 | $11,601 to $47,150 | $47,151 to $100,525 | $100,526 to $191,950 | $191,951 to $243,725 | $243,726 to $609,350 | Over $609,350 |
| Head of Household | Up to $16,550 | $16,551 to $63,100 | $63,101 to $100,500 | $100,501 to $191,950 | $191,950 to $243,700 | $243,701 to $609,350 | Over $609,350 |
| Married Filing Jointly | Up to $23,200 | $23,201 to $94,300 | $94,301 to $201,050 | $201,051 to $383,900 | $383,901 to $487,450 | $487,451 to $731,200 | Over $731,200 |
| Married Filing Separately | Up to $11,600 | $11,601 to $47,150 | $47,151 to $100,525 | $100,526 to $191,150 | $191,151 to $243,725 | $243,726 to $365,600 | Over $365,600 |
4. What Are The 2024 Long-Term Capital Gains Tax Rates?
If you held your cryptocurrency for more than one year, use the following table to calculate your long-term capital gains. Long-term capital gains rates are generally lower than short-term rates.
| Tax Rate | 0% | 15% | 20% |
|---|---|---|---|
| Filing Status | Taxable Income | ||
| Single | Up to $47,025 | $47,026 to $518,900 | Over $518,900 |
| Head of Household | Up to $63,000 | $63,001 to $551,350 | Over $551,350 |
| Married Filing Jointly | Up to $94,050 | $94,051 to $583,750 | Over $583,750 |
| Married Filing Separately | Up to $47,025 | $47,026 to $291,850 | Over $291,850 |
5. How Do I Calculate Capital Gains And Losses On Crypto?
Calculating your capital gains and losses on crypto involves determining your cost basis and the sale amount. Here’s a step-by-step breakdown:
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Determine Your Cost Basis: Generally, this is the price you paid, which you adjust (increase) by any fees or commissions you paid to engage in the transaction. This final cost is called your adjusted cost basis.
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Determine the Sale Amount: Adjust (reduce) the sale amount by any fees or commissions you paid to close the transaction.
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Calculate the Gain or Loss: Subtract your adjusted cost basis from the adjusted sale amount to determine the difference.
- If the amount exceeds your adjusted cost basis, you have a capital gain.
- If the amount is less than your adjusted cost basis, you have a capital loss.
To estimate your potential tax liability, you can use a Crypto Tax Calculator.
6. Is Buying Or Selling Cryptocurrency As An Investment A Taxable Event?
Buying cryptocurrency isn’t a taxable event by itself. You can choose to buy and hold cryptocurrency for as long as you’d like without paying taxes on it, even if the value of your position increases. Taxes are due when you sell, trade, or dispose of your cryptocurrency investments in any way that causes you to recognize a gain in your taxable accounts. This doesn’t apply if you trade cryptocurrency in a tax-deferred or tax-free account like an individual retirement account (IRA).
For example, if you buy $1,000 worth of Bitcoin and later sell it for $1,200, you’d need to report this $200 gain on your taxes. The gain, whether it’s a short-term or long-term capital gain, will depend on how long you’ve held the cryptocurrency. If you instead sold the same $1,000 worth of Bitcoin for $800, you’d recognize a loss that can offset other gains and up to $3,000 of your taxable income if your total losses are greater than your total gains. Any unused loss can roll forward to future years as an offset to future gains or up to $3,000 of your taxable income per year.
7. How Is Mined Cryptocurrency Taxed?
If you earn cryptocurrency by mining it, it’s considered taxable income and might be reported on Form 1099-NEC at the fair market value of the cryptocurrency on the day you received it. You need to report this even if you don’t receive a 1099 form as the IRS considers this taxable income and is likely subject to self-employment tax in addition to income tax. This is because mining is often seen as a business activity.
8. What If I Receive Cryptocurrency As Payment For Goods Or Services?
If someone pays you cryptocurrency in exchange for goods or services, the payment counts as taxable income, just as if they’d paid you via cash, check, credit card, or digital wallet. For tax reporting, the dollar value that you receive for goods or services is equal to the fair market value of the cryptocurrency on the day and time you received it.
9. What Happens If I Sell Or Spend Cryptocurrency?
If you mine, buy, or receive cryptocurrency and eventually sell or spend it, you have a capital transaction resulting in a gain or loss just as you would if you sold shares of stock. This is where cryptocurrency taxes can get more involved. Each time you dispose of cryptocurrency you are making a capital transaction that needs to be reported on your tax return.
Let’s look at an example for buying cryptocurrency that appreciates in value and then is used to purchase plane tickets.
- First, you receive $200 worth of the cryptocurrency Litecoin in exchange for services on January 15.
- Six months later, on July 15, the fair market value of your Litecoin has increased to $500, and you use it to buy plane tickets for a vacation.
- On your tax return for that year, you should report $200 of ordinary income (either as wages if reported on a W-2 or as self-employment income if you are not an employee getting paid in crypto) for receiving the Litecoin in January and a short-term capital gain of $300. That’s the $500 value of your Litecoin when you purchased the plane tickets, minus your $200 basis when you received the Litecoin.
When you calculate your basis in the Litecoin for capital gains tax, you need to account for the $200 worth of ordinary income included in your taxes. That same Litecoin position, now worth $500, gets used to purchase the plane tickets, meaning you wouldn’t pay capital gains tax on the original $200. If you paid capital gains tax on the full $500, the initial $200 would be taxed twice: once as ordinary income and once as a capital gain. Therefore, you subtract your original $200 basis from the $500 balance.
10. How Are Crypto Transactions Taxed When Exchanging One Type Of Cryptocurrency For Another?
Cryptocurrency enthusiasts often exchange or trade one type of cryptocurrency for another. For example, say you have $1,000 worth of Litecoin and exchange it for $1,000 worth of Ethereum. If you originally paid $300 for the Litecoin, you have to recognize a $700 capital gain when you make the exchange. You established a $300 basis at the time of purchase for your original Litecoin position but recognized a $700 capital gain as a result of the coin’s appreciation between your purchase and the exchange for Ethereum. Your Ethereum’s basis is its fair market value at the time of exchange, making your new cost basis $1,000 after paying the $700 capital gain on the exchange.
It’s important to note that all of these transactions are referenced back to United States dollars since this is the currency that is used for your tax return. So, even if you buy one cryptocurrency using another one without first converting to US dollars, you still have a taxable transaction.
11. How Are Airdrops And Forks Taxed?
- Airdrops: An airdrop occurs when a new crypto project launches and sends out several free tokens to early adopters and their communities to encourage adoption. If you receive airdrops of new tokens in your account, these new coins count as a taxable event, causing you to pay taxes on these virtual coins.
- Forks: A hard fork is a wholesale change in a blockchain network’s protocol. A hard fork doesn’t always result in new cryptocurrency issued to the taxpayer and doesn’t necessarily generate a taxable event as a result. However, in the event a hard fork occurs and is followed by an airdrop where you receive new virtual currency, this generates ordinary income.
This counts as taxable income on your tax return and you must report it to the IRS, whether you receive a 1099 form reporting the transaction or not.
12. How Is Staking Cryptocurrency Taxed?
Staking cryptocurrencies is a means for earning rewards for holding cryptocurrencies and providing a built-in investor and user base to give the coin value. Earning cryptocurrency through staking is similar to earning interest on a savings account. In exchange for staking your virtual currencies, you can be paid money that counts as taxable income.
You treat staking income the same as you do mining income: counted as fair market value at the time you earn the income and subject to income and possibly self-employment taxes.
13. How Are Charitable Contributions And Gifts In Crypto Taxed?
If you itemize your deductions, you may donate cryptocurrency to qualified charitable organizations and claim a tax deduction. You typically can deduct the fair market value of your cryptocurrency at the time of charitable contribution, and you don’t have to pay capital gains taxes when you donate. Cryptocurrency charitable contributions are treated as noncash charitable contributions. A charitable organization may assist in documenting your crypto-charitable contribution by providing a written acknowledgement if claiming a deduction of $250 or more for the virtual currency deduction.
14. Can I Deduct Lost Or Stolen Crypto On My Taxes?
Typically, you can’t deduct losses for lost or stolen crypto on your return. The IRS states two types of losses exist for capital assets: casualty losses and theft losses. Generally speaking, casualty losses in the crypto world would mean having damage, destruction, or loss of your crypto from an identifiable event that is sudden, unexpected or unusual. As an example, this could include negligently sending your crypto to the wrong wallet or some similar event, though other factors may need to be considered to determine if the loss constitutes a casualty loss. Theft losses would occur when your wallet or an exchange are hacked.
In either case, you can’t deduct these losses to offset your gains. Due to tax reform laws going into effect in 2018, most all casualty and theft losses aren’t deductible between 2018 and 2025. In the future, taxpayers may be able to benefit from this deduction if they itemize their deductions instead of claiming the Standard Deduction.
15. Are There Tax-Free Crypto Transactions?
You can make tax-free crypto transactions under certain situations, depending on the transaction you make, the account you transact in, your income, and filing status.
When you buy cryptocurrency, this doesn’t create a taxable event even if the value increases over time. Tax consequences don’t result until you decide to sell or exchange the cryptocurrency.
For crypto transactions you make in a tax-deferred or tax-free account, like a Traditional or Roth IRA, respectively, these transactions don’t get taxed like they would in a brokerage account. These trades avoid taxation.
Depending on your income each year, long-term capital gains rates can be as low as 0%. For 2024, you can also avoid paying taxes when selling your cryptocurrency if your table income is less than or equal to $47,025 if you file as Single, as Married Filing Separately, or your taxable income is less than or equal to $94,050 if you file as Married Filing Jointly.
16. Why Is It Important To Keep Records Of My Crypto Transactions?
The IRS is stepping up enforcement of cryptocurrency tax reporting as these virtual currencies grow in popularity. As a result, you need to keep track of your crypto activity and report this information to the IRS on the appropriate crypto tax forms.
The IRS estimates that only a fraction of people buying, selling, and trading cryptocurrencies were properly reporting those transactions on their tax returns. The agency provided further guidance on how cryptocurrency should be reported and taxed in October 2019 for the first time since 2014.
Beginning in tax year 2020, the IRS also made a change to Form 1040 and began including the question: “At any time during 2024, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
If you check “yes,” the IRS will likely expect to see income from cryptocurrency transactions on your tax return.
Crypto tax software helps you track all of these transactions, ensuring you have a complete list of activities to report when it comes time to prepare your taxes. The software integrates with several virtual currency brokers, digital wallets, and other crypto platforms to import cryptocurrency transactions into your online tax software. This can include trades made in cryptocurrency but also transactions made with the virtual currency as a form of payment for goods and services.
Depending on the crypto tax software, the transaction reporting may resemble documentation you could file with your return on Form 8949, Sales and Other Dispositions of Capital Assets, or can be formatted in a way so that it is easily imported into tax preparation software. Often, you’ll pay for tiers of service for the number of transactions reported.
17. Can The IRS Track My Crypto Activity?
Despite the anonymous nature of cryptocurrencies, the IRS may still have ways of tracking your crypto activity. For example, if you trade on a crypto exchange that provides reporting through Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, they’ll provide a reporting of these trades to the IRS.
Further, the IRS makes use of blockchain analytics tools for identifying crypto activity of digital wallets and ties them to individuals in instances where they suspect tax evasion and/or money laundering may be occurring. As a result, you’ll want to make sure you report all crypto activities during the year on your tax return.
18. How Are Crypto Transactions Reported?
When you place crypto transactions through a brokerage or from using these digital currencies as a means for payment, this constitutes a sale or exchange. As a result, you’ll need to document your crypto sales details, including how much you bought it for and when. These transactions are typically reported on Form 8949, Schedule D, and Form 1040.
19. How Do Form 1099-B, Proceeds From Broker And Barter Exchange Transactions, Relate To Crypto?
If you traded crypto in an investment account or on a crypto exchange or used it to make payments for goods and services, you may receive Form 1099-B reporting these transactions. In other investment accounts like those held with a stockbroker, this information is usually provided on this 1099 Form. However, not every platform provides these forms. In this case, they can typically still provide the information even if it isn’t on a 1099-B.
However, starting in tax year 2023, the American Infrastructure Bill of 2021 requires crypto exchanges to send 1099-B forms reporting all transaction activity. And, scheduled to begin for tax year 2025, the IRS will require Form 1099-DA to be sent to taxpayers for certain sale and exchange transactions of digital assets.
20. What Are Form 1099-MISC Or 1099-NEC And How Do They Relate To Crypto?
If you mined crypto or received crypto as an award, then you might receive either Form 1099-MISC, Miscellaneous Income, or 1099-NEC, Nonemployee Compensation. These forms are used to report how much ordinary income you were paid for different types of work-type activities. The information forms can be used to help you prepare Schedule C, Profit or Loss from Business and Schedule SE, Self-Employment Tax.
When any of these 1099 forms are issued to you, they’re also sent to the IRS so that they can match the information on the forms to what you report on your tax return.
21. Does Coinbase Report To The IRS?
Coinbase was the subject of a John Doe Summons in 2016 that required it to provide transaction information to the IRS for its customers. As a result, the company handed over information for over 8 million transactions conducted by its customers.
Today, the company only issues Forms 1099-MISC if it pays out rewards or bonuses to you for taking specific actions on the platform. Further, you may need to exceed the $600 minimum payment threshold for the company to issue both you and the IRS a Form 1099-MISC documenting their payments to you.
However, starting in tax year 2023, the American Infrastructure Bill of 2021 requires crypto exchanges to send 1099-B forms reporting all transaction activity. And, scheduled to begin for tax year 2025, the IRS will require Form 1099-DA to be sent to taxpayers for certain sale and exchange transactions of digital assets.
Even though Coinbase doesn’t supply this information through direct reporting to the IRS, you still must report this activity on your tax return as it is taxable income. You can access account information through the platform to calculate any applicable capital gains or losses and the resulting taxes you must pay on your tax return.
FAQ: Cryptocurrency Taxes
Here are some frequently asked questions about cryptocurrency taxes:
| Question | Answer |
|---|---|
| Is buying crypto a taxable event? | No, buying crypto is not a taxable event. Taxes are only due when you sell, trade, or dispose of your cryptocurrency in a way that results in a gain. |
| How are crypto airdrops taxed? | Crypto airdrops are taxed as ordinary income based on the fair market value of the tokens when you receive them. |
| What form do I use to report crypto gains? | You typically report crypto gains on Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses). |
| Can I deduct losses from stolen crypto? | Generally, no. Due to tax reform laws, casualty and theft losses are not deductible between 2018 and 2025. |
| What if I receive crypto as payment for services? | Receiving crypto as payment for services is considered taxable income, just like receiving cash. The amount you report is the fair market value of the crypto at the time you received it. |
| How are crypto staking rewards taxed? | Crypto staking rewards are taxed as ordinary income based on the fair market value of the cryptocurrency when you receive it. |
| What is the difference between short-term and long-term capital gains for crypto? | Short-term capital gains are from assets held for one year or less and are taxed at your ordinary income rate. Long-term capital gains are from assets held for more than one year and are taxed at lower long-term capital gains rates. |
| Do I need to report crypto transactions if I don’t receive a 1099 form? | Yes, you are required to report all crypto transactions on your tax return, even if you don’t receive a 1099 form. The IRS expects you to keep accurate records and report your gains and losses accordingly. |
| Can I donate crypto to charity and claim a deduction? | Yes, you can donate crypto to qualified charitable organizations and claim a tax deduction for the fair market value of the crypto at the time of the donation. This is treated as a noncash charitable contribution. |
| Are there any tax-free crypto transactions? | Buying crypto is not a taxable event. Also, crypto transactions within tax-advantaged accounts like Roth IRAs are generally tax-free. Additionally, if your taxable income is below certain thresholds, long-term capital gains rates can be 0%. |
Understanding how cryptocurrency is taxed is essential for anyone involved in the digital asset market. By staying informed and keeping accurate records, you can navigate the complexities of crypto taxes with confidence. For more insights into strategic financial partnerships and income growth opportunities, visit income-partners.net.
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