This article is written by CryptoTrader.Tax
Depending on what country you live in, your cryptocurrency-related income will be subject to slightly different tax rules. The questions below address implications within the United States, but similar issues arise around the world.
How are cryptocurrencies taxed?
The IRS classifies cryptocurrencies as property for tax purposes. This means that you incur capital gains and capital losses whenever you sell, trade, or otherwise dispose of your cryptocurrency. The capital gains and losses from your cryptocurrency trading and investing activity need to get reported on your taxes.
John purchases 1 bitcoin on Kucoin for $8,000. Two months later, John sells that 1 bitcoin for $10,000. In this simple example, John realizes a $2,000 capital gain that must be reported on his taxes.
Depending on what income tax bracket John falls under, he pays a certain percentage of tax on the gain. Rates fluctuate based on tax bracket as well as short term vs. long term gains.
If I just buy and hold, do I owe taxes?
No! Simply buying and holding onto your crypto does not realize a taxable event. You only realize gains and losses once you dispose of your crypto (sell, trade, or use it to purchase goods or services). As defined by the IRS, you incur a taxable event when any of the following occur:
1. Trading cryptocurrency to fiat currency
2. Trading cryptocurrency for another cryptocurrency
3. Using cryptocurrency to purchase goods and service
4. Earning cryptocurrency as income
How do I calculate my gains and losses from my crypto trades?
To calculate your capital gains or losses for whenever you dispose of your cryptocurrency, you simply subtract your cost basis in the asset from the fair market value. The equation below shows how this works.
Fair Market Value - Cost Basis = Capital Gain/Loss
Are crypto-crypto trades taxable events?
Yes. As mentioned above, trading one cryptocurrency for another is treated as a sale of the first coin and a buy of the second. This means you need to report the associated gain or loss from the sale of the first coin on your taxes.
If I earn cryptocurrency from mining or staking, do I need to pay taxes?
Yes. Earning cryptocurrency from mining, staking, or other related transactions is a form of income that needs to be reported on your taxes. The amount of income you recognize is equal to the fair market value of the received cryptocurrency in your home fiat currency at the time of receiving the reward/payout.
How do I report my cryptocurrency gains and losses on my taxes?
To report all of your capital gains and losses, you need to complete IRS Form 8949. This form details each of your cryptocurrency taxable events.
On Form 8949, list all cryptocurrency trades and sells along with the date you acquired the crypto, the date sold or traded, your proceeds (Fair Market Value), your cost basis, and your gain or loss. Once you have each trade listed, total them up at the bottom, and transfer this amount to your 1040 Schedule D. Include both of these forms with your yearly tax return.
If I lost money and have capital losses, can those be written off to reduce my tax liability?
Yes! Just like if you were to lose money when trading stocks, capital losses from your cryptocurrency transactions deduct from your capital gains and income. In effect, they reduce your taxable income and put money back in your pocket!
How can crypto tax software like CryptoTrader.Tax help?
Cryptocurrency tax software tools integrate directly with exchanges, wallets, and native crypto platforms to allow users to pull in all of their historical transactions. With this data, the software can generate your required tax reports. As seen in the video below, CryptoTrader.Tax natively integrates with Kucoin so that users can import transactions and generate their needed tax reports with the click of a button. Getting started is completely free.
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The leading platform for cryptocurrency tax reporting. For more information on the tax implications of cryptocurrencies, please refer to this guide.