How Does Cryptocurrency Taxation Work?

Cryptocurrencies come with real tax implications that must be addressed, or you could face IRS penalties.

Purchase, sale, mining and spending cryptocurrency are all taxable events because the fair market value in dollars of your cryptocurrency at receipt (determined using blockchain timestamp or ledger record) constitutes taxable income.

Capital Gains

If your cryptocurrency increases in value, you may be required to report and pay taxes on them. This applies regardless of whether they’re sold on a crypto exchange or used for purchases; capital gains taxes apply similarly. They vary based on how long an investment asset has been held by its owner, with rates that vary according to how long ago they’ve held it. Non-fungible tokens (NFTs) that increase in value also constitute capital gains and must be reported to the IRS.

To determine your capital gain on cryptocurrency investments, it’s essential to know both its fair market value and what was paid in cash or crypto on purchase day. After deducting your cost basis (the amount paid for the cryptocurrency) from sales proceeds, subtract your cost basis (cost basis is equal to amount paid for cryptocurrency). As most crypto trades take place peer-to-peer without being reported to central exchanges, software solutions may be necessary in order to track transactions and calculate an appropriate tax amount.

Additionally, in addition to capital gains, any income earned from mining or earning cryptocurrency must also be reported. This could include fees, rewards and dividends received as crypto. Furthermore, any transaction using your cryptocurrencies as currency for goods or services purchased either online marketplaces or directly with vendors requires reporting.

Cryptocurrency taxes can be intricate, evolving alongside the cryptocurrency space as regulation develops and grows. While these challenges may seem formidable, there are legal methods you can employ to lower your crypto tax liabilities.

Move to a state with low or no income taxes in order to minimize taxes and keep more of your crypto earnings. Also consider using software designed specifically to minimize crypto taxes by automatically importing trades from popular crypto platforms; alternatively you could manually track trades and submit them with your tax forms each year.

Ordinary Income

Cryptocurrency transactions take place virtually, yet their effects can have real-life tax ramifications. Cryptocurrencies are treated both as property for capital gains taxes and as currency for sales/VAT taxes, so unless using a centralized exchange that reports directly to the IRS you’ll need to keep track of all purchases/sales to report them on your tax returns.

As with other assets, cryptocurrency‘s fair market value can fluctuate with price changes and cause capital gains and losses to occur. Therefore, cryptocurrency tax accounting software that automatically calculates cost basis, sales proceeds, holding period and holding period as well as choosing an accounting method such as FIFO (first in, first out) or average cost basis will help ensure accurate accounting records are kept.

There are various events that could trigger crypto taxes, including selling for cash or exchanging one cryptocurrency for another. Furthermore, receiving any crypto as compensation from an employer or payment for goods or services requires reporting this on your taxes as well. Mining crypto should also be reported and any earnings taxed based on its fair market value upon receipt.

If you make a profit when trading cryptocurrency, taxes on the difference between its sale price and your cost basis must be paid to the IRS. Conversely, any losses can be deducted from your income taxes as expenses. Generally speaking, IRS only requires payment on events when earning or selling cryptocurrency.

Mining, staking and receiving payments in cryptocurrency from employers or clients are just some of the ways people make cryptocurrency, with taxation depending on both your income tax bracket and its fair market value when received – either as short-term capital gains or long-term gains depending on what activity was undertaken to earn this currency.


Since 2009, cryptocurrency‘s rapid rise has had real tax ramifications. The Internal Revenue Service treats cryptocurrency like any property and requires taxes be paid when sold or traded; additionally, using it to purchase goods and services also incurs taxes.

The IRS has provided several accounting methods for calculating the cost basis of cryptocurrency sales or purchases, trades or other dispositions. One popular way is using software programs which import your transaction history and automatically calculate cost basis, sales price and holding period values – this way ensuring you don’t overlook any potential deductions associated with trading crypto assets.

One common misperception about cryptocurrency transactions is that simply moving between wallets or exchanges that you own does not constitute taxable events. In reality, however, any movement of virtual currency must be tracked and recorded to provide a proper cost basis record when making donations to charity. This step should never be ignored when tracking and recording virtual currency movements.

Participating in DeFi liquidity pools and receiving rewards tokens from the platform constitutes income that must be reported on your tax forms, possibly subject to both capital gains and ordinary income tax liability depending on how the rewards were acquired.

As much as the anonymous nature of cryptocurrency can appeal to many users, it is still wise to remember that the IRS can still monitor your activities through subpoenas or other means. They have obtained information on thousands of users through these exchanges through such subpoenas and means.

As can be seen, cryptocurrency carries numerous tax implications, and the IRS is striving hard to stay abreast of this rapidly developing sector. If you fail to properly report your crypto transactions, penalties could include substantial understatement of income or even criminal charges; with proper planning and guidance from a tax professional however, you can feel secure that your investments are being taxed properly so that you can focus on optimizing returns.


Cryptocurrency transactions are recorded using blockchains, and are taxed as ordinary income in the US. The IRS considers cryptocurrency assets for tax purposes, taxing gains or losses according to their cost at time of sale. Determining the original cost can be challenging due to blockchain timestamps only being as accurate as their network, potentially leaving room for manipulation by malicious actors. To address this issue, blockchain companies and users have developed tools to determine the initial cost of coins. One method includes calculating an asset’s “basis” using transaction data compared with block rewards or any other source of information; another way involves “first in, first out” (FIFO), where selling coins you purchased first is considered part of their cost basis calculation.

taxpayers should also keep track of transaction costs and fees to determine their true profit from sales. To do this, use a cryptocurrency tax calculator that connects directly to an exchange and compiles all necessary data – some programs provide multiple accounting methods including FIFO and averaging while others feature user-friendly interfaces for easily entering transaction histories.

Calculating profits requires knowing how long you held the cryptocurrency you’re selling; gains only become tangible once sold for cash. If you own cryptocurrency for less than a year, your gains will be taxed as short-term capital gains at rates similar to stocks and bonds; long-term gains will be taxed at lower rates.

No matter your status as either an enthusiast or business owner, it is crucial that you remain informed on cryptocurrency taxes. This includes understanding the tax repercussions associated with airdrops, hard forks and staking transactions as well as how the IRS tracks them – for instance they could freeze your crypto if they suspect any unlawful activity!