How Does Cryptocurrency Taxation Work?

Cryptocurrency is an investment, subject to ordinary income tax rates like other investments. When buying, selling, mining, or spending cryptocurrency each transaction counts as a capital transaction and should be reported during tax season.

When using cryptocurrency, any fair market value of goods and services you purchase with it are subject to tax as realized capital gains.

Cost basis

As you buy or sell cryptocurrency, it’s vitally important that you understand your cost basis. This figure refers to the total of what was spent in US dollars to acquire an asset plus any fees related to its purchase, which should then be factored into any associated taxes. There are a variety of approaches you can use for calculating this figure including FIFO, LIFO and HIFO but the one most suitable depends on your trading habits and personal circumstances.

As with stocks and mutual funds, crypto transactions do not receive 1099s from the IRS; however, you still must report your profits or losses on your tax return. Cryptocurrency taxes are calculated using the difference between purchase price and sale price; this method has proven more accurate and will hold up under scrutiny from tax authorities than other methods as it’s easy to use and saves you both time and effort!

At the core of calculating crypto taxes lies its cost basis – this includes any crypto-to-crypto trades, mining operations, staking, airdrops, hard forks, interest earned and rewards received during acquisition of any form. Therefore, keeping track of your cost basis allows for accurate assessment of gains or losses over time.

If your asset has been held for longer than one year, its gains qualify as long-term capital gains and are therefore subject to lower tax rates than short-term ones. Unfortunately, this can be difficult to keep track of if you trade frequently; to simplify this process use crypto tax software for tracking transactions as this will also make selecting an accounting method simpler for your crypto assets.

Crypto tax software can help ensure that you’re filing your bitcoin taxes correctly, enabling you to avoid costly errors and find opportunities to save money by trading more efficiently. Plus, this will prepare you for the new 1099 rules coming into effect in 2020!

Capital gain

Cryptocurrencies are assets, so any time you realize a gain from selling, exchanging, or using cryptocurrency that has increased in value, it must be reported on your tax return. Gains will depend upon its fair market value compared to your initial cost basis – any profits will be subject to capital gains tax rates which tend to be significantly lower than ordinary income taxes; any taxable gains can be offset against cryptocurrency investment losses to reduce tax liability.

In most instances, when selling or exchanging one type of cryptocurrency for another you will experience a capital gain. For example, if you purchased Litecoin and later traded it for Ethereum you would realize a $700 capital gain on exchange. To determine your new cost basis for Ethereum you must subtract original purchase price of Litecoin from current fair market value of it at time of exchange.

Use of cryptocurrency for buying goods and services triggers tax events. The IRS considers this a sale, so you’ll need to know its published value at the time of transaction as well as any associated transaction fees to calculate a basis for future sales of your investment.

Other activities requiring reporting include receiving payment in cryptocurrency and mining it yourself. When cryptocurrency is exchanged for goods or services, its income should be reported and taxed according to your regular income tax bracket; any earnings from staking or mining should be treated as business income and reported with its fair market value at the time it was earned.

When it comes to filing cryptocurrency taxes, the rules can be quite murky. For best results, seek assistance from an experienced tax accountant familiar with cryptocurrency – specifically one who specializes in them – in order to complete and submit your forms properly and pay the appropriate amount in taxes. Also keep in mind that the IRS is becoming increasingly adept at tracking transactions and individuals involved with cryptocurrency trading.


Cryptocurrency is an emerging investment form, and traders should be mindful that trading it may have tax repercussions. The IRS views cryptocurrency as property like stocks or real estate; as a result, standard property tax rules apply and your capital gain or loss will determine your tax liability for crypto trading on centralized exchanges; trading may even expose you to know-your-customer rules and withholding taxes which could reduce privacy while making reporting your gains or losses more complicated.

Crypto trading can be an intricate and unpredictable process, and without accurate records you could lose money or end up owing the IRS – who have even penalized traders who don’t pay their crypto taxes in time! Therefore, it’s crucial that traders keep accurate records and employ tax-loss harvesting as part of their tax-saving strategy.

Traders must take special caution when trading non-fungible tokens (NFTs). These investments do not fall under the same tax rules as traditional securities; depending on their regulations and mainstream adoption they could either be taxed as ordinary income or treated as capital gains – this situation could change though as NFTs become more regulated and mainstream.

Taxing cryptocurrency transactions is often confusing. While the IRS has yet to provide definitive guidance on this topic, most tax rulings follow a 2014 ruling which defines them as capital assets whose values become taxable when sold at a profit.

Another key tax consideration for cryptocurrency transactions is their cost basis, which can be determined by adding up their purchase and sales prices of each transaction and multiplying that number by your tax rate in order to determine tax liability on each individual trade.

As far as tax liability goes, there are various strategies you can employ to minimize it – such as using tax loss harvesting strategies or taking advantage of the wash sale rule – although no legal way exists for cryptocurrency traders to evade paying their taxes altogether. Although anonymity of cryptocurrency makes tracking losses and profits challenging for the IRS.


Cryptocurrency is a virtual medium of exchange, store of value and unit of account that’s classified as property by the Internal Revenue Service (IRS), meaning any gains and losses on cryptocurrency are taxable for tax professionals. Due to the rapid pace of cryptocurrency development and changes, tax professionals need to stay abreast with latest trends including how gains/losses are calculated by subscribing to reliable news sources that focus on crypto issues; reviewing official regulatory announcements regarding cryptocurrency regulation updates; attending cryptocurrency taxation webinars etc.

Investing in cryptocurrency presents certain unique tax issues for those who own multiple coins at once. They may be stored on exchanges, private wallets or third-party platforms and their tax status determined by cost basis methodologies – first-in, first-out is one such model but other approaches may work just as effectively.

Taxpayers also face difficulty when trying to ascertain the fair market value of cryptocurrency assets, which can be an arduous and complex task. This becomes especially important when exchanging one cryptocurrency for another with greater value; otherwise a gain would occur and taxes must be withheld accordingly. It applies equally well when exchanging digital assets for cash or physical goods and services.

Cryptocurrency traders should be mindful of the IRS’ increased scrutiny on potential tax evasion. Failure to follow IRS rules could result in severe penalties; furthermore, cryptocurrency‘s complex nature makes it hard for tax professionals to provide advice regarding its management.

Cryptocurrency trading is an emerging area, and many individuals are confused as to how best report their transactions and gains. Luckily, the IRS has provided some helpful guidance regarding this matter – although not legally binding; at least this gives some direction as to what steps should be taken when trading cryptocurrency for cash or digital assets – such as if you realize a gain when you trade each crypto for cash/digital asset at different price levels based on cost basis and price of sale.