How Does Cryptocurrency Taxation Work?

Cryptocurrency is considered property by the IRS, so property tax rules apply when selling, trading or disposing of cryptocurrency. Every time this occurs creates a taxable event.

Value of Tokens can CHANGE Over TimeYour tax liability depends on the length of time that you own them; here are five cryptocurrency transactions which incur taxes.

Capital Gains

The IRS classifies cryptocurrency as property rather than currency. When you buy crypto that increases in value and sell it or exchange it for goods and services later, this counts as a capital transaction that requires reporting earnings similar to shares of stock or property sales; you will then face either short- or long-term capital gain tax rates depending on how it was acquired and sold.

Calculate the cost basis of your coins when purchasing them; this is usually determined using the first-in, first-out (FIFO) method. If you are mining, fair market value of mining rewards earned when cashing them out or trading them is also subject to income taxes; it should be treated like earned wages in terms of Social Security, Medicare, Federal Unemployment Act withholding and federal income tax withholding rates.

No matter how you are exchanging or selling your cryptocurrency, if any fees associated with its sale can be deducted to offset taxable gains and can help keep from having to pay taxes on too many gains in one year.

One way to lower taxable crypto gains is to offset them with losses from other investments or cryptocurrency trading, but due to new tax laws implemented in 2018, casualty or theft losses on crypto are no longer deductible between 2018-2025.

One final way to reduce your taxable crypto gains is to include them as part of your estate, giving your heirs the ability to “step up” your investment’s basis at its fair market value at the time of your death, thus lowering their tax bill upon selling it later. Though this might not be feasible for everyone, keeping this method in mind if you plan on passing on crypto to family is worth bearing in mind; keep meticulous records so you can use tax software tools correctly when calculating costs and profits accurately.

Long-Term Gains

Cryptocurrency taxes can be complex, making it important for traders to track their transaction histories. When selling or exchanging cryptocurrency or using it to purchase something else, the IRS treats this transaction as a capital transaction and calculates gains or losses accordingly – similar to when buying and selling stocks or real estate; gains or losses depend on whether its value increases or decreases over time.

Dependent upon how long you owned cryptocurrency before selling or exchanging it, cryptocurrency investments may generate either short-term or long-term capital gains. If held for less than one year before selling or exchanging it, profits are taxed at ordinary income rates – which are higher than long-term capital gain rates. Likewise, mining cryptocurrency incurs taxes tied to its fair market value based on how often you mine coins.

If you receive cryptocurrency as a gift, its initial receipt does not result in taxable gains or losses. When selling it later on however, any taxable gains or losses are calculated using both price sold at and cost basis method of calculation – with first-in-first-out (FIFO) being the IRS recommended approach; alternatively you could also use last-in-first-out (LIFO), which works similarly but doesn’t always line up with purchase order.

Many businesses accept Bitcoin payments for goods or services, and its dollar value should be treated as taxable income, just like when receiving cash payments. When donating crypto to charity, however, its appreciated fair market value could potentially be deducted as tax relief.

Tracking cryptocurrency transactions can be difficult, but with the appropriate software this task becomes simpler. Look for programs that provide documentation similar to what would be filed on Form 8949 with the IRS return and consult an accountant if unsure about your crypto taxation status.

Short-Term Gains

Cryptocurrency may seem virtual, but its tax implications are real-world. Any time you buy, sell or trade cryptocurrency for profit – such as cashing it out at an exchange or using it to purchase goods and services – or dispose of it – you must report this transaction for taxes. Failing to do so could incur interest penalties or even criminal prosecution.

When you realize a gain from cryptocurrency investment, the IRS treats it in much the same manner as it would any other capital asset. Your basis – which is determined by where and when you bought your crypto – will be used to calculate your tax liability. Short-term gains incurred within one year of initial purchase will incur ordinary income tax rates while long-term gains accrue lower capital gains taxes rates.

Mining, lending and accepting crypto in exchange for goods or services all carry similar tax liabilities. If cryptocurrency is received as a gift, however, the IRS considers it taxable upon sale or disposition; your own cost basis or fair market value at time of receipt are used as bases respectively.

Finally, it is imperative that any cryptocurrency received as payment or as part of your work (like mining) should be reported as earned income on your tax returns. This is particularly relevant if your employer pays you in cryptocurrency; any payment should be treated as wages subject to Social Security, Medicare and Federal Unemployment Tax Act taxes withheld and withheld from each payment received as well.

As with any investment, keeping detailed records of every crypto transaction is of utmost importance. If you lack the time or ability to keep up with everything yourself, professional accounting firms that specialize in cryptocurrency taxes should be sought out to assist. Doing this will give you peace of mind knowing your tax liabilities have been calculated accurately and filed on time – giving you confidence in knowing your investment and earnings are fully legitimate.


Cryptocurrency may seem like an abstract asset, but it must still abide by real-world tax law. When people buy and sell coins, they are obliged to report capital gains or losses with the IRS as is required of all investments. Although these rules may seem complicated at first, the IRS recently issued guidance which clarified some of them.

Crypto traders and investors should understand how the new guidelines operate to remain compliant, and may benefit from finding software that automatically tracks investments and transactions to give accurate reporting to the IRS. Such software will streamline this process and prevent costly mistakes which could cost taxpayers money.

When selling cryptocurrency, one must calculate their profit or loss according to its original purchase price, known as its cost basis. When purchasing something using cryptocurrency, that amount is added onto its cost basis; when sold at market, their value compared against selling price determines profit or loss taxable profit or loss according to IRS methods such as first-in, first-out (FIFO).

Tax regulations become somewhat more complicated when people receive cryptocurrency through hard forks or airdrops. When blockchains split and create new tokens, usually their original owner receives one of these new coins and in some instances these newly formed coins have higher values than their predecessors; as a result, those receiving free coins must pay taxes on them when sold later on.

People who mine crypto or earn it through other activities may incur additional tax liability. Mining is considered a taxable activity and the value of coins mined must be reported as income; this can be offset by taking business deductions for equipment and resources used for mining. As with any asset, capital gains and losses must be balanced out appropriately to reduce overall tax bills for an entire year.