Learn how cryptocurrencies are taxed in the US here. This crypto tax guide will cover capital gains and more.
*This post is intended as a summary of applicable IRS guidance and does not constitute tax advice. The laws discussed in this post are potentially subject to change —including with retroactive effect. You are strongly urged to consult your tax advisors to determine any federal, state, local or foreign tax consequences in light of your own particular circumstances.
The rise in popularity of various cryptocurrencies is also raising questions about related tax laws. Although the digital economy is growing rapidly, many tax rules for cryptocurrency remain uncertain. This blog post is intended to provide a high-level overview about how cryptocurrencies are taxed.
The IRS defines “virtual currency” (its preferred term for cryptocurrencies) as a digital representation of value that functions as a unit of account, a store of value, and a medium of exchange. This definition includes most cryptocurrencies, such as Bitcoin or Ethereum. The IRS has stated that virtual currencies are not treated like foreign currency, but instead are treated the same as personal property. Therefore, transactions involving cryptocurrency generally give rise to capital gains tax (as discussed below). However, if a person pays you cryptocurrency as compensation, then it will be subject to ordinary income tax (as discussed below).
Transactions involving cryptocurrency are subject to capital gains tax if the cryptocurrency is treated as a capital asset in the hands of the taxpayer. For individuals, investment property, such as stock and bonds, is generally treated as a capital asset. Any gain from a sale or exchange of capital assets is taxed at capital gains rates.
Transactions generally involving capital gains and losses include:
To determine if there is a gain or loss from a sale or exchange, you first take the fair market value of the tokens or coins at the time of the sale and then subtract the adjusted basis of the cryptocurrency. Generally, the adjusted basis is the original cost paid for the cryptocurrency plus or minus any required adjustments. The original cost for cryptocurrencies includes the amount you originally paid for the tokens or coins themselves as well as any related transaction fees.
Put simply, the calculation would look something like this:
[FMV at time of sale] – [adjusted tax basis] = [total gain/loss]
[Total gain] x [tax rate] = your tax liability
The applicable capital gains rate depends on the amount of time you owned the cryptocurrency. If, at the time of the sale or exchange, you have owned that cryptocurrency for a year or less, the gain will be taxed at the short-term capital gains rate. If you have held the cryptocurrency for over a year, the gain will be subject to tax at the lower long-term capital gains rate. Your short-term and long-term capital gains rate will depend on the graduated thresholds for taxable income set forth in the tax code. For 2021, the highest short-term capital gains tax rate was 37% and the highest long-term capital gains rate was 20% (plus certain additional taxes based on your total income).
If you have a capital loss, you may be able to use the amount of the loss to offset other capital gains from the same taxable year, and then up to $3,000 of ordinary income (such as wages).
You may be taxed at ordinary income rates for certain other transactions related to cryptocurrency, such as if a person pays you coins or tokens as compensation (for example, as part of your salary or a bonus). Such amounts will be taxed at ordinary income rates using the U.S. dollar fair market value of any cryptocurrency on the date you receive it.