Understanding & Calculating Cryptocurrency Taxes: Everything You Need to Know

Cryptocurrency is one of the most exciting new investment opportunities to come about in the new millennium. There has been such a tremendous growth of interest and speculation in cryptocurrency, that it’s caused the IRS to pay far more attention to it in recent years. In 2014, the IRS issued Notice 2014-21, which marked the first (and so far, only) time the government has issued guidelines and enforcement policies concerning crypto.

If it’s your first year investing in crypto, you should learn how the IRS treats virtual currencies. Although you only have to report your investments around tax time, there are items you need to keep track of throughout the year to give the IRS a full and accurate summary of your crypto investments. You could face huge tax penalties if you don’t properly report them.

Here’s everything you need to know about cryptocurrency taxes:

How does the IRS Treat Taxes on Cryptocurrency?

On Notice 2014-21, the IRS determined that virtual currencies would be taxed as property. It’s a fair valuation. A crypto coin, after all, is not so much a currency as it is an asset that can gain or lose value. Thus, cryptocurrency transactions are subject to capital gains tax.

Here’s a quick review of capital gains and losses, for the uninitiated:

  • Capital Gain: When you sell an asset for more than what you originally bought it for
  • Capital Loss: When you sell an asset for less than what you originally bought it for

Basically, if you bought an asset for $100 and sold it for $150, then $50 would be subject to capital gains tax. Capital losses aren’t subject to tax.

Whenever you sell a coin position for cash, you have to report whether the transaction resulted in a capital gain or capital loss. You’ll report each transaction on Form 1040 Schedule D and Form 8949 when you file your taxes.

You’re responsible for reporting your own gains or losses. You could face tax penalties or even prison time if you intentionally don’t report them, or if you inaccurately report them. So don’t wait for the IRS to tell you about your mistake…

Let’s review the types of transactions that you can make with cryptocurrency, and how you’ll report them when you file your taxes:

Cryptocurrency for cash

Savvy investors buy crypto for a low price, wait for the value to rise (appreciate), and then sell the crypto for a higher price. When you sell your cryptocurrency for cash, you have to report whether or not you had a capital gain or capital loss on the transaction.

Standard capital gains laws apply to cryptocurrency. How much you’re taxed depends on whether the coin you sold is considered “short-term” or “long-term.”

  • Short-Term Capital Gain: Coin position held for one year or less
  • Long-Term Capital Gain: Coin position held for more than one year

Short-term capital gains are taxed at the rate as the income tax for your federal tax bracket.

Long-term capital gains are taxed at either 0%, 15%, or 20%, depending on your tax bracket and your filing status:

Single Filers

  • 0%: $0 to $39,375
  • 15%: $39,376 to $434,550
  • 20%: $434,551 or more

Married, filing jointly

  • 0%: $0 to $78,750
  • 15%: $78,751 to $488,850
  • 20%: $488,551 or more

Head of Household

  • 0%: $0 to $52,750
  • 15%: $52,751 to $461,700
  • 20%: $461,701 or more

Married, filing separately

  • 0%: $0 to $39,375
  • 15%: $39,376 to $244,425
  • 20%: $244,426 or more

Standard laws apply for capital losses, too. You can use capital losses to offset capital gains. Let’s look at an example of this to get a better understanding of what this strategy would look like in real life:

Let’s say you profited $3,000 in capital gains. But you also suffered $2,000 in capital loss. In that case, your capital losses would offset your capital gains so only $1,000 would be subject to capital gains tax. If you made $2,000 in capital gains, and suffered $2,000 in capital loss, you wouldn’t have to pay any capital gains tax.

Capital losses roll over to the next year. Say you made $500 in capital gains in 2019, but you incurred $1,000 in capital loss in the same year. The $500 gain would be offset, and the remaining $500 loss would roll into 2020. In 2020, you could use the $500 loss to offset any gains you make in that year.

Capital loss is limited to $3,000 ($1,500 for married taxpayers filing separately) per year. Excess capital loss carries over into the next year. So, if you made $6,000 in capital gains and $4,000 in losses, you’ll only be able to offset $3,000; you’ll owe taxes on $3,000 of your capital gains, while the remaining $1,000 in losses will carry over to the next year.

One final thing: taxpayers with modified adjusted gross incomes over $200,000 ($250,000 for married taxpayers filing separately) are subject to an additional 3.8% Medicare tax on cryptocurrency gains.

Crypto for crypto

Sometimes, one type of cryptocurrency is traded for another type of cryptocurrency—for example, one person trades Bitcoin for Litecoin. Many cryptocurrency traders think these exchanges aren’t subject to capital gains tax because there was no actual money received on either end.

But because cryptocurrency is treated as property, capital gains and losses still apply. If you trade a coin worth $10 for a coin worth $25, then you’ll owe capital gains tax on $15 of the transaction.

Cryptocurrency for goods and services

Nowadays, it’s becoming increasingly common to use cryptocurrency as a form of payment. If you pay employee wages with cryptocurrency, know that these wages are subject to income tax and must be reported on Form W-2. Similarly, cryptocurrency that’s paid to contractors is subject to self-employment tax.

Any taxpayer who receives cryptocurrency as payment for goods or services must report the currency to the IRS. The taxpayer must report the fair market value of the currency at the time they received it, and that will determine how much of it is taxable.

You can report earned currency on Form 1099 (you can view all tax documents in our tax form library).

Taxes as a miner

In cryptocurrency, a “miner” is someone who earns money by letting their computer be used to perform encryption calculations for the blockchain. The miner earns “mined coins” for their service.

Mined coins are taxable and that must be included in your gross income. They’ll be taxed based on the fair market value of the coins when the miner received them.

The IRS does make a distinction between hobbyist and business miners:

  • Hobbyist: Mines coins infrequently and only makes some profit
  • Business Mines coins regularly as a major source of profit

If you consider yourself a hobbyist, you’ll add your mining income on Form 1040. If you’re a business miner, you’ll add your mining income to Form 1040 Schedule C. Hobbyist income is not subject to self-employment tax, but business income is subject to 15.3% self-employment tax.

Be honest about your mining intentions—the IRS can weed out lies or exaggerations.

Coin hard forks

A coin hard fork occurs when a virtual currency is divided into two separate currencies. Does the value of the coin have to be divided by two? Or does each currency have the same taxable value?

Coin hard forks are a strange situation, and, as of mid-2019, there haven’t been any guidelines issued by the IRS. It might be best to consult with tax professionals when it comes to this particular situation.

What isn’t taxable?

When you buy cryptocurrency with cash, you don’t have to pay any taxes on that transaction. You also don’t have to pay taxes when you donate cryptocurrency or give cryptocurrency as a gift.

Taxpayers can donate cryptocurrency directly to charity, and the charity isn’t required to sell the cryptocurrency (and, thus, pay tax on it). Donating crypto is beneficial to the taxpayer because the taxpayer can claim a tax deduction that’s equal to the fair market value of the donated coins.

In order to donate cryptocurrency tax-free, you must have held the coins for over a year.

How Do I Report Cryptocurrency Investments on my Taxes?

When you’re preparing to file your taxes, you’ll need these forms to report your cryptocurrencies:

  • Form 1040 Schedule D
  • Form 8949 (basically an extension of Form 1040 Schedule D)

If you earned cryptocurrency as a form of payment, you’ll also need Form 1099.

You might have realized by now that you need to keep precise records of all your cryptocurrency transactions. Throughout the year, it’s important that you document the following information for each transaction:

  • When you bought the crypto
  • How much you paid for the crypto
  • When you sold the crypto
  • What you received for the crypto

Bookkeeping is a complex task in and of itself, and if you find it too difficult to take on by yourself, you should consider hiring a professional accounting service. CommunityTax, in particular, can help you keep accurate records of all your crypto transactions, and we can use your records to prepare your taxes for filing. Our team of tax experts can eliminate all the stress that comes from having to figure out capital gains on cryptocurrency.