2024 Guide to Cryptocurrency Taxes

Crypto taxes can be difficult, but our complete crypto tax guide makes it easy. (Or at least, easier.)

In the U.S., the IRS treats cryptocurrencies as property, so we’ll help you understand what that means for both income and capital gains tax.

We’ll also cover what are taxable and non-taxable events, show you how to calculate capital gains and losses, and highlight the best tax forms to use.

We’ll delve into the specifics of cost basis methods, providing insights on FIFO, LIFO, HIFO, and Specific Identification to help you potentially reduce your tax bill.

Whether you’re a novice crypto investor trying to figure out how to report a simple bitcoin profit, or a seasoned trader looking to explore advanced strategies like tax loss harvesting, it’s all below.

How Does the IRS Tax Crypto?

While crypto taxes can be complicated, the key principles are not. Fix these ideas in your head:

Taxable events:

• Selling crypto.
• Trading crypto.
• Buying stuff with crypto.
• Receiving crypto from airdrops, hard forks, staking rewards, etc.

Not taxable events:

• Buying crypto.
• Donating crypto to a tax-exempt organization.
• Gifting cryptocurrency (though large gifts may trigger a gift tax)
• Transferring crypto from one address to another.

In the US, the Internal Revenue Service (IRS) treats cryptocurrency as property, suggesting that crypto income and capital gains are taxable, while crypto losses may be tax deductible.

Can the IRS Track my Crypto?

Centralized crypto exchanges operating in the US report to the IRS. With KYC rules implemented across all reporting exchanges, crypto traders should never ignore their crypto tax obligations. Pay your taxes.

Capital Gains and Losses on Crypto

The IRS treats digital currencies as subject to rules on capital gains and losses, similar to stocks. When you purchase cryptocurrency, the original cost becomes its basis. Once you sell it, you are taxed based on the difference between the basis and the sale price.

Capital gains and losses are calculated based on the net total of all transactions in a year. For example, if you sold four different cryptocurrencies for a net profit of $2,000 and two digital assets for a loss of $6,000, you would end up with a net capital loss of $4,000.

You can deduct up to $3,000 in capital losses from your taxable income each year and carry over any remaining losses to the following years. For instance, a net capital loss of $4,000 in 2023 allows you to deduct $3,000 from your taxable income that year and apply the remaining $1,000 to your 2024 taxes.

The tax rate for capital gains depends on how long you hold the asset before selling it. If you hold your cryptocurrency for less than a year, then you’re subject to short-term capital gains, which are treated the same as income.

Otherwise, long-term capital gains apply, and the taxes in this case come at a significantly lower rate compared to short-term gains.

Your tax rate will depend on your filing status and taxable income, and you may not have to pay any capital gains tax.

Necessary Crypto Tax Forms

To begin with, crypto exchanges like Coinbase send Form 1099-MISC (miscellaneous income) to traders who earn $600 and up through crypto rewards and staking. These forms are also sent automatically to the IRS.

Additionally, the Infrastructure and Investment Jobs Act enforced by the Biden administration in November 2021 requires crypto exchanges to issue a Form 1099-B (Proceeds from Broker and Barter Exchange Transactions).

To report crypto on your taxes, you have to fill out the following forms and attach them to your Individual Income Tax Return Form 1040 (which is used to determine the total taxable income):

• Form 8949 is used to report capital gains or losses from selling or disposing of your crypto.
• Form Schedule D (1040) reports the overall capital gains and losses. You should list the totals for your short- and long-term capital gains and losses separately here.
• Form 1040 Schedule 1 covers instances where crypto is reported as ordinary income from mining and staking, airdrops, hard forks, and lending interest.
• Form 1040 Schedule C is required if you received crypto in the form of salary as a self-employed person (freelancer).

Finding Your Tax Basis

Defining the tax basis is essential, given that it determines the amount of capital gains or losses. As a rule, the tax basis of cryptocurrency is the amount at which it was purchased, including exchange or transaction fees.

United States Cost Basis Methods

There are different cost basis methods you may consider for calculating capital gains. For example, if you purchased 1 BTC for $5,000 in 2019 and another for $20,000 in 2020 and then decided to sell one in 2021 for $50,000, your capital gain could vary depending on the accounting method. Using the 2019 purchase for calculation, your gain is $45,000, but with the 2020 purchase, it’s $30,000.

It makes sense to keep a record of your cost basis to ensure the accuracy of your capital gain or loss. And remember, if you have no record, you can estimate by looking up the historical price of the asset at the time of purchase.

The cost basis for crypto obtained from mining or staking is determined by the fair market value when you receive the crypto.

Thankfully, US-based crypto investors have the opportunity to select from multiple cost basis methods to potentially reduce taxes, with the IRS allowing the following options:

• First In First Out (FIFO) assumes that the first crypto asset you purchase is the first asset you sell.
• Last In First Out (LIFO) assumes the last crypto asset you purchased is sold first.
• Highest In First Out (HIFO) assumes the most expensive crypto asset you purchase is the first one you sell.
• Specific Identification (Spec ID)  allows you to pick the crypto asset you plan to sell, provided you can identify it with records.

The selected accounting method, such as FIFO or LIFO, can significantly change your crypto tax bill. For example, FIFO may be more convenient during declining crypto prices, while LIFO would lead to less taxable gains during an ascending crypto market.

Crypto Tax Types

Besides the profits made from price fluctuations, there are other crypto taxes that you should know about:

What Is the Tax on Spot Bitcoin ETFs?

This is the first year of bitcoin exchange-traded funds (ETFs), approved by the Securities and Exchange Commission (SEC) in January. This marks a significant milestone for crypto investors, who must pay taxes on capital gains from their ETF shares in 2024 and beyond.

The IRS will assess the bitcoin ETF-related capital gains based on the holding period, e.g., short-term gains are taxed differently from long-term gains, as explained earlier.

If you hold bitcoin ETF shares for less than a year before selling, the capital gains are taxed at ordinary income tax rates ranging from 10% to 37% based on your overall taxable income and filing status.

If bitcoin ETF shares are held for more than a year before selling, the long-term capital gains are taxed at lower rates: 0%, 15%, or 20%, subject to capital gains taxes instead of ordinary income taxes.

Additionally, if your income exceeds $200,000 for Single status or $250,000 for Married, you may also have to pay a 3.8% tax on top of the capital gains taxes.

Bitcoin ETF holders should be ready to prepare two types of reports at the end of the year: Form 1099-B and trust tax information statements.

What Are Crypto Mining Taxes?

The crypto generated through mining is taxed as earned income and capital gain or loss when sold. If you hold the mined crypto, the capital gain will be calculated based on the cost basis at the mining time. Individuals can report the crypto mining tax on Form 1040 Schedule 1 on Line 8 as “Other Income.” Crypto mining businesses can deduct certain costs, such as electricity and equipment.

What Are Airdrop Taxes?

The crypto funds received from an airdrop are taxed as regular income, which is reported as the asset’s value when it comes into your possession.

When you sell or trade an airdropped asset, you must report the capital gain/loss tax on any growth/loss in its value from the time of receipt to the time of disposal.

Are Blockchain Forks Taxed?

Similar to airdrops, crypto funds from hard forks are taxed as regular income at their fair market value (FMV) when deposited into your wallet.

Are There Taxes on Crypto Gifts or Donations?

If you receive crypto as a gift, you won’t be taxed, and you can receive a gift with a maximum value of $15,000 per person annually without incurring any taxes (with a higher limit for gifts to spouses). Going beyond that limit will require you to submit a gift tax return, although this usually doesn’t lead to immediate tax obligations.

Cryptocurrency Taxation Example

Analyzing all the steps during the year:

1. Bob buys 0.5 BTC, no taxable event.
2. Bob receives 0.1 BTC from mining, which is a taxable event and is treated as ordinary income.
3. Bob receives 100 USDC as a gift, which is not a taxable event.
4. Prices go up, but no assets are disposed so there is no taxable event.
5. Bob moves crypto holdings between his wallets, which is not a taxable event.
6. Bob sells his BTC, receiving a net income of $7,000.

Therefore, Bob has accumulated $6,000 of capital gains and $1,000 of ordinary income (from crypto mining).

What Is Crypto Tax Loss Harvesting?

Investors use crypto tax loss harvesting to reduce overall tax liability. They do this by selling crypto assets at a loss during market downturns or at the end of the tax year, effectively reducing their overall tax obligation by offsetting other capital gains.

This method allows for an unlimited number of assets to be sold at a loss, and if capital losses exceed capital gains, up to $3,000 per year can be claimed as a deduction to reduce ordinary income. As mentioned earlier, any remaining losses can be carried over to offset capital gains or income in future tax years, providing an ongoing benefit.

Cryptocurrencies may be even better candidates for tax loss harvesting than stocks, as they don’t fall under the wash sale rule imposed by the IRS. It prevents investors from claiming capital losses and instantly buying back the same stock. As per IRS guidelines, the wash sale rule currently applies only to securities, while cryptocurrencies are treated as property.

What Happens if You Don’t Report Cryptocurrency on Your Taxes?

In the US, it is mandatory to file taxes, and failure to do so may result in penalties, interest, confiscated refunds, audits, and even imprisonment. This applies even if you do not owe any taxes or are eligible for a refund.

Crypto Tax Help is Available

Managing and monitoring cryptocurrency transactions can be complex, particularly when conducting hundreds or thousands of trades during the year. This is where crypto tax services come into play.

These software tools are designed to sync with exchanges and wallets to track and calculate gains and losses automatically. You can use these programs to automatically generate a tax report that can be used to file with the government, simplifying the entire process for cryptocurrency traders.

Check our companion article on the Best Crypto Tax Software, which covers popular packages like Cointracker, TaxBit, and CoinTracking.

Investor Takeaway

Remember that most governments treat crypto as property, so every sale and trade is taxable. This means you either have to pay taxes on the profits (capital gains), or you can claim the loss (capital losses).

However, buying crypto is free.

You don’t pay tax on purchases, which is why steady-drip investing is so powerful. You can keep investing in crypto for as long as you like, and only pay taxes when you cash out. Traders must endure a tax nightmare, while long-term hodlers can sleep well at night.

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