The Most Trusted Crypto Tax Guide

Produced by Cryptocurrency Tax Attorneys and Blockchain CPAs

Overview

TaxBit has helped thousands of taxpayers automate and file their cryptocurrency taxes.

The IRS released its first cryptocurrency guidance in 2014 and specified this asset class is taxed as property. Since that time, the crypto community has seen increased enforcement, audits, and pending regulations.

Notably, the IRS released a question on 2019 tax forms that asked every taxpayer “[A]t any time during 2019, did you sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This question has been present for all subsequent years. Whether you only need to file crypto taxes for this upcoming year, or if you need to amend previous tax years, TaxBit provides all historical cryptocurrency tax forms for its users included in its Plus+ and Pro plans. TaxBit’s team of tax experts and software developers are here to make the process simple and easy for you to file.

How does the IRS classify crypto?

Cryptocurrency fits within what the IRS calls virtual currency. Virtual currency is treated as property for tax purposes. The IRS defines cryptocurrency as the following:

“Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.”

This definition includes most cryptocurrency but notably doesn’t include non-fungible tokens (NFTs). NFTs generally don’t function as money or a store of value like other cryptocurrency. Although NFTs aren’t virtual currency, they’re likely to be treated as property for tax purposes even though the IRS hasn’t explicitly said so.

For more information on how NFTs are taxed, please see our NFT Guide.

How is cryptocurrency taxed in the US?

In 2014, the IRS issued Notice 2014-21 to clarify that virtual currency is treated as property for tax purposes; cryptocurrency is taxed as a capital asset and the gain or loss of every taxable event must be reported on Form 8949.

In 2019, the IRS started asking taxpayers about their virtual currency activity on their tax returns. Now, the question appears on the front of the Form 1040 and asks taxpayers “[a]t any time during [the current tax year], did you receive, sell, exchange, or dispose of any financial interest in any virtual currency?”

By placing this question front and center, the IRS indicated there’s no longer room for taxpayers to claim they were unaware that crypto transactions need to be reported. If a taxpayer checks Yes, then the IRS looks to see if Form 8949 has been filed. If the taxpayer fails to report their cryptocurrency taxes, the IRS may impose a penalty on any underreported taxes.

Are all crypto transactions taxable?

No, not every crypto transaction is taxable. The following activities aren’t considered taxable events:

  • Buying cryptocurrency with fiat currency like USD

  • Transferring units of a particular cryptocurrency between wallets or accounts you control

  • Gifting cryptocurrency excluding large gifts that could trigger other tax obligations

  • Donating cryptocurrency which is tax deductible

What crypto transactions are taxable?

The following crypto activities are taxable events:

  • Selling crypto for cash

  • Trading one type of crypto for another

  • Using crypto as payment

  • Mining or staking crypto

  • Receiving airdropped tokens

  • Getting paid in crypto

When you sell, trade, or use crypto as a form of payment, you dispose of cryptocurrency; that disposal could result in gain or loss depending on your cost basis in the units disposed of and the value of the cryptocurrency at the time of disposal. Regardless of whether you had a gain or loss, these transactions need to be reported on your tax return on Form 8949.

When you receive cryptocurrency from mining, staking, airdrops, or a payment for goods or services, you have income that needs to be reported on your tax return. The amount of income you report establishes your cost basis.

How do I determine my crypto gains or losses?

Whether you have a gain or loss on the disposal of cryptocurrency depends on the value of the cryptocurrency at the time of disposal measured against the cost basis of that cryptocurrency.

Cost basis is the acquisition cost of your cryptocurrency; this includes your purchase price, the value of other crypto given up in exchange for this crypto, or amount reported as income if the crypto was earned.

In late 2019, the IRS issued guidance on acceptable cost-basis methods for calculating gains and losses on cryptocurrency.

Prior to IRS guidance, there was nothing indicating what rules applied to assigning cost basis to particular cryptocurrency units that were disposed of. However, the IRS guidance specifically allows for only two cost-basis assignment methods:

  • First in First Out (FIFO)

  • Specific Identification

What is FIFO?

Under FIFO, the first unit of a cryptocurrency you purchased will be the first unit disposed of. In the example below, using FIFO for the disposition of 2 bitcoin (BTC) would result in taxable gains of $7,000.

The IRS guidance doesn’t address whether FIFO should be applied universally across all accounts and wallets controlled by an individual as if they were all one wallet or applied on a per wallet or per account basis.

The lack of guidance indicates either approach is acceptable.

What is Specific Identification?

Taxpayers can also elect to use Specific Identification. Specific Identification allows a taxpayer to select which particular cryptocurrency unit is being disposed of in a transaction. This allows a taxpayer to optimize the tax calculation in order to minimize any gains or obtain losses.

In the example above, the taxpayer is able to identify they’re disposing of assets acquired on July 1 and September 1. Using Specific Identification would result in a $2,000 net capital loss as opposed to a $7,000 net capital gain under FIFO as shown above. Here, it’s preferable to use Specific Identification to dispose of assets with the highest cost basis first, an approach known as highest in first out (HIFO).

What are the requirements for Specific Identification?

The IRS, however, has imposed requirements upon taxpayers that want to use Specific Identification.

First, a taxpayer must, “show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”

In simpler terms, the IRS requires a complete set of transaction records when a taxpayer wants to use Specific Identification.

Second, the IRS guidance requires that Specific Identification be done on a per account and per wallet basis. Specific Identification shouldn’t be used when universally pooling assets.

TaxBit provides support for Specific Identification on a per account or wallet basis in order to legally minimize users' taxes and reconcile to any Forms 1099 issued by exchanges. TaxBit automates the process by specifically identifying, by exchange, the assets with the highest cost basis for disposition to reduce taxable gains.

TaxBit also is able to provide the complete records necessary to support your use of Specific Identification. TaxBit supports a massive amount of cryptocurrencies so all of your information can be housed in a single, easy to navigate location.

Although HIFO by exchange is the most common approach for optimizing taxes under the Specific Identification method, HIFO isn’t the only option. Taxpayers could choose to assign their cost basis under a different method such as Last In, First Out (LIFO), but this approach typically makes little sense because they would likely end up with a larger tax bill.

What tax forms are issued by cryptocurrency exchanges?

A cryptocurrency exchange could issue Forms 1099-MISC, 1099-B, and Forms 1099-K.

1099-MISC

This form provides information for a wide range of income payments such as crypto earnings, referral bonuses, and other income. If you’ve received $600 or more this year in crypto earnings or bonuses, the 1099-MISC will be made available by the platform that issued the payments.

You’re responsible for reporting the income on Form 1099-MISC when filing your tax return.

1099-B

Forms 1099-B report cost basis when available. Gains reported on Forms 8949 are taxed pursuant to capital gains treatment instead of ordinary income.

1099-K

A few cryptocurrency exchanges have issued Forms 1099-K—an information return that sums up the total value of electronic payments a user has received throughout the year, such as those made with a debit card, credit card, or an online payments system like PayPal. Form 1099-K is intended for users accepting payments through electronic means rather than individuals selling property such as cryptocurrency.

Forms 1099-K issued by some exchanges report only the total value exchanged and fail to include proper adjustments for cost basis. For example, if a user purchases $100,000 of cryptocurrency and then sells it a month later for $90,000, both the user and the IRS will receive a Form 1099-K form showing $90,000 of income received.

Many taxpayers don’t report the improperly characterized Form 1099-K amount as income on their tax return. As a result, if the IRS cross checks Form 1099-K information against the taxpayer’s income, it may issue a CP2000 audit letter for failing to report the income.

TaxBit has helped many taxpayers whose accountants weren’t aware that their client’s Form 1099-K was inaccurate and actually reported the amount listed as income.

It should be noted, most exchanges have ceased issuing Forms 1099-K for trading activity; many exchanges have already made the switch to 1099-B reporting as: it’s the accurate tax form; provides a better user experience; leads to more accurate tax reporting; and eliminates the automatic IRS audits sent out to Form 1099-K recipients related to unreported income.

How can investors save money on cryptocurrency fees?

Prior to 2018, certain investment-related expenses were eligible for itemized deductions. For tax years 2018 through 2025, these deductions have been eliminated due to changes made in the Tax Cuts and Jobs Act (TCJA) of 2017.

However, fees incurred when conducting cryptocurrency trades still provide a tax benefit. A fee incurred in conjunction with the acquisition of cryptocurrency can be added into the cost basis of those units. Conversely, a fee paid upon the disposition of a cryptocurrency unit can be deducted from the proceeds received.

Example of Fees when Purchasing Cryptocurrency

If you buy $10,000 worth of BTC and pay $500 in fees, then the IRS will allow you to report a cost basis of $10,500.

Adjusting for fees allows a lesser realized taxable gain.

Example of Fees when Selling Cryptocurrency

If you sell BTC for $11,000 and pay $500 in fees, the IRS will allow you to deduct $500 from the proceeds amount and report proceeds of $10,500.

If you didn’t account for the fees, you’d have a cost basis of $10,000 and proceeds of $11,000—resulting in a $1,000 taxable gain.

However, if you account for the fees, you’d have a cost basis of $10,500 and proceeds of $10,500—no taxable gains.

What is the tax rate for crypto?

The United States distinguishes between two main types of income—ordinary income and capital gain income. Capital gain income can be long-term or short-term. If you’re receiving crypto as payment for goods or services or through an airdrop, the amount you received will be taxed at ordinary tax rates.

If you’re disposing of your crypto, the net gain or loss amount will be capital gains.

What are short-term capital gains?

If you hold a particular cryptocurrency for one year or less your transaction will constitute short-term capital gains. Short-term capital gains are added to your income and taxed at your ordinary income tax rate.

What are long-term capital gains?

If you held a particular cryptocurrency for more than one year, you’re eligible for tax-preferred, long-term capital gains, and the asset is taxed at 0%, 15%, or 20% depending on your taxable income and filing status.

The specific income levels change annually, but we’ve provided a general breakout below:

  • If you’re in the 10% or 12% tax brackets based on your filing status, you’ll generally pay a 0% capital gain rate.

  • If you’re in the 22%, 24%, or 32% tax brackets based on your filing status, you’ll generally pay a 15% capital gain rate.

  • If you’re in the 35% and 37% income tax brackets, you’ll generally pay a 20% capital gain rate.

What is a tax loss carryforward?

The difference between capital gains and losses is called net capital gain or loss.

If you have a net capital loss, you can deduct that loss on your tax return—up to $3,000 per year.

If your net capital losses exceed $3,000, the portion over $3,000 is a capital-loss carryforward and can be included in your capital gain calculation for the following tax year.

For example, if you had a net capital loss of $5,000 for tax year 1, you would deduct $3,000 of that amount on your tax return for tax year 1.

The remaining $2,000 would be carried forward and used to calculate your net capital gain or loss for tax year 2.

If you also had a loss in tax year 2, then the $2,000 carryforward could be used in tax year 3 along with any carryforward from tax year 2.

How can investors offset capital gains with capital losses?

The IRS allows investors to claim deductions on cryptocurrency losses that can lessen their tax liability or potentially result in a tax refund.

Crypto losses must be reported on Form 8949; you can use the losses to offset your capital gains—a strategy known as tax-loss harvesting—or deduct up to $3,000 a year from your ordinary income.

When offsetting your capital gains with losses, pay attention to the holding period of the assets:

  • You’re only allowed to offset long-term capital losses against long-term capital gains and short-term capital losses against short-term capital gains.

  • Once you’ve offset losses of the same type, you can then use either long-term or short-term capital losses against short-term capital gains.

How are crypto taxes enforced?

The IRS doesn’t say how it decides which tax returns to examine, but the assumption is that it will review information provided on a tax return; such as the answer to the virtual currency question on Form 1040 or the information on a Form 8949.

The IRS appears to pay close attention to individuals that received a Form 1099 from an exchange and will use its computer system to check the Form 1099 information against what a taxpayer reports on their tax return.

Notably, if a taxpayer answers No to the virtual currency question, or doesn’t include a Form 8949, and is issued a Form 1099 from an exchange, that taxpayer is more likely to be audited; the IRS now has information that may result in penalties on top of whatever additional tax may be owed. Honest answers are always recommended.

TaxBit is experienced in resolving cryptocurrency audits. The IRS is actively sending taxpayers CP2000 notices where information shown on a Form 1099 didn’t match what was reported on a tax return.

Many cryptocurrency tax softwares will provide a taxpayer with tax forms, but offer no additional information about how gains and losses were calculated. Because of the lack of an audit trail, it can be difficult to adequately address the IRS’s questions without a trusted provider. Learn more about responding to CP2000 notices in our article.

Foreign Reporting Requirements

There has been much debate whether assets held on a foreign virtual currency exchange are required to be reported on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

The American Institute of Certified Public Accountants (AICPA) Virtual Currency Task Force reached out to Treasury’s Financial Crime Enforcement Network (FinCEN) to answer whether cryptocurrency on offshore exchanges requires FBAR reporting.

FinCEN responded that virtual currency does fall within the scope of the governing regulation 31 C.F.R. §1010.350(c). Therefore, cryptocurrency doesn’t need to be reported on an FBAR.

FinCEN, however, has indicated it may expand FBAR reporting to virtual currency held in foreign cryptocurrency accounts in the future.

About TaxBit

TaxBit automates the process of producing the necessary tax forms for cryptocurrency traders. After a taxpayer downloads Forms 8949 from their TaxBit account, they can incorporate the completed forms in their full tax return.

If a taxpayer is filing their own taxes, Forms 8949 easily can be uploaded onto popular tax-filing software such as TurboTax, TaxAct, or TaxSlayer. Alternatively, if the taxpayer uses an accountant to file their tax return, they can provide their accountant with the completed tax forms.

Keeping up with all the paperwork and reporting regulations for digital asset transactions can be laborious and time-consuming. The more complex your crypto portfolio becomes, the more complicated your tax liabilities can get.

That’s why TaxBit is here.

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Previous tax years available

As a cryptocurrency tax software founded by CPAs and tax attorneys, we believe in helping taxpayers comply with their tax obligations. To this end, TaxBit’s Basic, Plus+, and Pro plans include all prior year tax forms.

Some users wish to amend prior year tax returns to account for their cryptocurrency activity. TaxBit wants to lessen the burden of being retroactively tax compliant.

Security

Cryptocurrency traders by nature are security and privacy oriented.

TaxBit uses read-only API keys that don’t grant access to custody or trading. We never sell or share our users’ information. TaxBit uses database servers hosted by AWS RDS. All data is encrypted using AES 256 in transit and at rest.

TaxBit is SOC 2 Type 2 certified, and we’ve undergone in-depth security reviews with many of the most reputable cryptocurrency exchanges.

Partnerships

TaxBit is the preferred partner of many leading cryptocurrency exchanges.