How Does Crypto Tax Work?
Updated on April 1, 2025
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Table of Contents
Do I have to pay taxes on cryptocurrency?
It depends on how you transact with crypto. Generally, acquiring and disposing of cryptocurrency can have tax implications for the IRS, and many people don’t realize how their crypto activity can lead to a tax bill.
How is crypto taxed in the US?
If you invested in crypto last year, you must report that activity to the IRS. The IRS considers cryptocurrency holdings as ‘property’ for tax purposes. This means that any virtual currency you have is taxed the same way as any assets you own, such as stocks or gold.
US taxpayers are required to report any crypto sales, payments, conversions, and income to the IRS and state authorities (if applicable). Crypto is taxed in two ways: as income or as a capital gain.
What crypto transactions are taxable?
When assessing how you used your crypto, you are looking out for taxable events, either as income or as a capital gain.
Taxable as capital gains
- Selling crypto for fiat money such as US dollars
- Cashing out crypto
- Spending crypto on goods and services. (Purchasing with crypto)
- Trading in crypto: converting one cryptocurrency to another, or ‘buying crypto with crypto.’
You owe taxes on crypto when you sell or trade it for a profit. If your crypto is worth more than what you paid for it, that profit is called a capital gain.
The same principle of capital gains also follows crypto gains. So, how much tax you pay depends on how long you held the crypto before selling:
- Short-term (less than a year): 10% to 37% tax rates, and it is taxed like regular income.
- Long-term (over a year): Tax rates depend on your income level, but most of the time, holding your crypto longer can help reduce your tax bill with a lower rate.
Taxable as income
- Receiving crypto in exchange for goods or services. (being paid in crypto)
- Mining crypto
- Earning staking rewards
- Acquiring crypto as incentives or rewards, such as getting US$5 in bitcoin for referring a friend.
- Getting crypto from a hard fork
You owe income tax on crypto when you earn it instead of buying it. So, the IRS treats this just like a paycheck, with tax rates between 10% and 37%, depending on your total income.
When it comes to taxing crypto as income, you will generally base the amount on the fair market value of the coins at the time that you received them, which should be converted into USD.
Are there tax-free crypto transactions?
Yes, crypto is not taxed when you buy and hold it. You only owe taxes when you sell and make a profit later on. Other types of cryptocurrency transactions may be exempt from taxation under certain conditions, such as:
- Transferring crypto between your own accounts.
- Donating crypto to a qualified charity (which may even qualify for a tax deduction).
- Receiving crypto as a gift is usually tax-free until you sell or use it in a taxable way.
- Gifting crypto is also tax-free up to US$19,000 (2025 amount). You may need to file a gift tax return if you gift more than this.
How do I calculate my crypto tax?
To calculate your crypto tax, you first need to determine your taxable transactions whether they fall under income or capital gains. You also need to address how to calculate capital gains and losses from cryptocurrency transactions, including the determination of cost basis and proceeds.
Any crypto that you receive as income is subject to the same income taxes that your salary is. Be cautious, as if you have earned a lot from your crypto activity, it may bring you into a higher tax bracket and you could end up paying a higher tax rate on your earnings.
When you calculate capital gains or losses, you need to determine your cost basis or the price you paid for it. So, subtract your cost basis from your sale price and you can check whether you have a capital gain or a capital loss.
What are the crypto tax rates?
For capital gains tax:
- Short-term (less than a year): Taxed as regular income (10%–37%).
- Long-term (more than a year): Usually at 0%, 15%, or 20%.
For income tax: This should be taxed like wages at 10% to 37%, based on your income bracket. If you receive crypto through mining, staking, or as payment, you owe tax on its value at the time it is received.
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How do I report crypto on my tax return?
Here is a guideline on reporting your crypto to the IRS:
- Gather documentation on your crypto transactions: This includes your transaction history from brokers, exchanges, hard wallets, and accounts used for your crypto.
- Calculate your capital gains or loss: Using the formula above
- Fill out Form 8949: Any gains or losses must be reported to the IRS on Form 8939.
- Fill out Schedule D: This is used to summarize your total capital gains/losses.
- Report crypto income on Schedule C: Some exchanges issue Form 1099-MISC, but you should report all earnings even if you don’t receive one.
- Get professional help if needed: Crypto tax laws can be complex. Consulting a tax professional with crypto expertise can help ensure accurate reporting and maximize deductions.
You’ll also need to fill out Form 709 if you gifted crypto over US$19,000 (2025 limit).
How can I minimize my crypto tax liability?
Here are some strategies to help you minimize your crypto tax liability:
- Hold your crypto for over a year before selling to qualify for lower tax rates.
- Harvest losses to offset gains.
- Use tax-advantaged accounts like crypto IRA or 401(k) to defer your tax liability.
- Consult with a tax professional to maximize other pathways to minimize your crypto tax liability.
What crypto records should I keep for tax purposes?
You can keep detailed records of:
- Transaction dates & times
- Crypto type & amounts
- USD value at transaction time
- Cost basis (purchase price + fees)
- Exchange/wallet details
- Receipts, invoices, & tax forms (e.g., 1099s)
It’s important to maintain accurate records of cryptocurrency transactions for tax purposes. Keeping these records for at least 3 years can make your tax planning and filing easier and help you stay compliant with the IRS.
How does the IRS track crypto transactions?
Many crypto exchanges like Coinbase, Binance US, and Crypto.com report their transaction details to the IRS through Form 1099-MISC or 1099-DA. In addition, the IRS partners with blockchain analytics firms to trace transactions on public blockchains like Bitcoin and Ethereum.
So, it’s important to ensure your tax reporting is accurate because the IRS can trace your digital tracks.
How about NFTs?
NFTs (Non-Fungible Tokens) are digital assets on a blockchain that prove ownership of unique items. You can buy, sell, trade, or mint NFTs on digital marketplaces.
Just like crypto, NFT transactions are taxed, but buying NFTs with regular money (fiat) is not taxable. If you create NFTs as a business, you can deduct related expenses, such as minting fees and marketing costs.
Are there recent crypto tax changes this 2025?
Since cryptocurrency is relatively new, there are ongoing changes in the IRS regulations for taxing it, which is affecting US taxpayers. Here are some of the notable changes:
- New crypto tax form: Starting January 1, 2025, all US crypto exchanges must report transactions to the IRS using Form 1099-DA, specifically for digital assets.
- Tracking crypto transfers: Unlike stocks, crypto exchanges don’t yet share cost basis information when you transfer assets. Until this changes, you must track your transfers manually to report taxes correctly.
- Wallet-by-wallet cost basis: Before 2025, investors could calculate their crypto cost basis using a universal method. From 2025 onward, they must track it wallet by wallet.
It’s important to stay informed, seek professional advice, and consider filing for a tax extension if needed.
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