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What You Need to Know About Bitcoin and Cryptocurrency Taxes

It’s an exciting (and frustrating) time for Bitcoin and cryptocurrencies. The cryptocurrency industry has grown exponentially since 2009, but, come tax season, Bitcoin fans are often left scratching their heads wondering, “Who pays taxes on cryptocurrency profits?”

This article is written for the 2022/2023 tax year for United States residents and may not apply to other countries. Please note that this article is NOT meant as a substitute for legal tax advice and guidance. If you hold crypto, we highly recommend consulting a certified tax professional.

So, should you pay taxes on your cryptocurrency?

How the IRS Views Cryptocurrency

IRS Notice 2014-21 states that cryptocurrencies are treated as property, not currency, and all applicable federal tax laws for property transactions apply. Many rules and guidelines that apply to stocks in taxable brokerage accounts also apply to cryptocurrencies.

Taxation on cryptocurrency refers to the taxes levied on profits realized from buying, selling, or transferring crypto assets. The IRS considers the following scenarios to be taxable events:

  • Trading cryptocurrency for a fiat currency such as the U.S. dollar
  • Trading one cryptocurrency for another
  • Purchasing goods or services with cryptocurrency
  • Earning cryptocurrency as income or payment for a service or product

You’ll incur a capital gains tax if any of these taxable events apply to you. For example, if you buy a coin for $1,000 and sell it later for $2,000, you would be required to pay taxes on your $1,000 profit at your marginal tax rate. If you held the coin for longer than a year before selling, you may be eligible for a lower long-term capital gains tax rate.

Paying Taxes on Traded Cryptocurrency Coins

For every time you sell cryptocurrency holdings, you must report that transaction by filling out Form 8949 [PDF]. However, you can combine all of those transactions at the end of the year to determine whether you had a net gain or net loss, then use this figure to determine the tax impact.

If you have a net gain, you will owe taxes on the amount you gained. If you have a net loss, then the amount you lost will decrease your overall tax liability, meaning you’ll owe less money come tax time.

When trading cryptocurrencies, you must track the following details to be referenced on your Form 8949:

  • Description of the property
  • The price you paid to acquire it
  • The date on which you acquired it
  • The date on which you sold it
  • The amount you earned from selling the property

You do not need to report cryptocurrencies until you sell your holdings. If you bought a bunch of Bitcoin in 2017 and haven’t touched them since then, you can relax for now. If you have sold only a portion of your holdings, you only need to pay taxes on that portion.

After completing Form 8949, United States residents with capital gains from cryptocurrency transactions should complete a Schedule D (Form 1040) [PDF], which should be attached to your federal income tax return. The Schedule D form may only be available in more expensive versions if you use tax software to file taxes.

If you trade a cryptocurrency for something that isn’t money (e.g., a different cryptocurrency), the IRS still views that as if you first sold the cryptocurrency and then bought the item with the proceeds. This means you have to pay taxes on the amount of cryptocurrency that was traded.

Paying Taxes on Mined Cryptocurrency Coins

Every time you successfully mine a bit of cryptocurrency, this counts as a taxable event in the eyes of the IRS, and these taxable events are classified as ordinary business income. You must track every single day on which you had a successful mining event, then determine the fair market value of the cryptocurrencies you mined on those days.

  • If mining is a hobby, report the amount earned as “Other Income” on your Individual Income Tax Return Form 1040 [PDF].
  • If mining is a business, report your income by filling out Schedule C (Form 1040) [PDF].

Suppose you built an energy-efficient rig for mining Ethereum as a fun weekend project; maybe you ran it for a while and actually walked away with a few coins in your pocket. You just experienced a taxable event, according to the IRS. You can learn more about distinguishing between a hobby and a business venture on the IRS website.

Paying Taxes on Airdrops and Hard Forks

An airdrop is a cryptocurrency marketing ploy typically used to promote awareness of a new currency. It involves the unsolicited deposit of a cryptocurrency token or coin into multiple wallet addresses.

A hard fork is a radical change to the protocols of a blockchain network or essentially the splitting of a single cryptocurrency.

The IRS has been slow to publish advice on crypto earnings, especially airdrops and hard-forked cryptocurrencies. However, a 2019 notice from the IRS [PDF] states that airdrops and hard forks are taxed as ordinary income.

Short-Term Gains vs. Long-Term Gains

The type of capital gain determines the tax rate. The IRS recognizes two types of capital gains and losses:

  1. Short-term gains or losses occur when the time between buying and selling is one year or less, and they are taxed at your marginal income tax rate. If you have multiple short-term gains (or losses), net them together.
  2. Long-term gains or losses occur when the time between buying and selling is at least one year and one day or longer, and they are taxed at capital gains tax rates. If you have multiple long-term gains (or losses) in a given year, net them together.

Capital gains are taxed at a rate of 0%, 15%, or 20%, depending on your tax bracket:

Unmarried Individuals Married Individuals Filing Jointly Heads of Households
0% Less than $41,675 of taxable income Less than $83,350 of taxable income Less than $55,800 of taxable income
15% Minimum $41,675 of taxable income Minimum $83,350 of taxable income Minimum $55,800 of taxable income
20% Minimum of $459,750 of taxable income Minimum $517,200 of taxable income Minimum $488,500 of taxable income

Note: These rates differ from those of ordinary income. The IRS has more information on capital gains.

Consequences of Not Reporting Cryptocurrency Earnings to the IRS

If you don’t report your cryptocurrency earnings, you’re at risk of penalties, including having to pay interest or face criminal charges. If you bought coins months ago, before heeding this article’s advice, and don’t have the right records or complete information, don’t panic. Collect any historical information you can, make reasonable estimates to fill in the gaps, and start tracking from this day forward. If and when you’re audited in the future, having these records will show the IRS you exercised due diligence.

Lastly, tax avoidance is a felony offense. Don’t buy into the notion that paying crypto taxes is unnecessary because cryptocurrency’s anonymity makes it impossible for the IRS to trace transactions back to you and hold you accountable for any gains you may have realized. The same arguments have been made about working jobs that pay cash under the table. Regardless of whether the transactions are feasibly traceable, paying taxes is the lawful and ethical thing to do.

Expanding Your Knowledge of Crypto—But Pay Your Taxes!

As crypto continues an up-and-to-the-right trend in popularity, it’s important to understand the tax implications. Keep a record of all crypto-related taxable events, and fill out your applicable forms when tax season comes around, and you’re golden.

That said, there’s more to the world of cryptocurrencies than buying and selling Bitcoins. You may want to look into Ethereum, Tether, USD Coin (USDC), or some other emergent cryptocurrency. The advice shared in this article applies to taxable events for any cryptocurrency, not just Bitcoin, so you’re ahead of the game for the next tax season.

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