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Cryptocurrency & Bitcoin Taxes: Complete Tax Guide 2020
The taxation of Bitcoin and cryptocurrency can be both very unclear and confusing. This guide will explain everything you need to know about cryptocurrency taxes, and how to report your taxes for 2020/2021.
More specifically, these are the topics and questions we will address in this guide:
- The fundamentals of crypto taxes
- How is cryptocurrency taxed?
- How much tax do I need to pay?
- How to calculate gain/loss (examples)
- Crypto tax forms
- How to file crypto taxes
- What happens if I don’t report my crypto taxes?
- Solution: Cryptocurrency tax software
- Frequently asked questions
This guide looks at taxation rules in the US, but it is also meant to be a general guideline since the tax treatment of cryptocurrencies is very similar in most countries.
Most people that have bought and sold cryptocurrencies like Bitcoin did perhaps not consider the tax implications when first discovering the world of cryptocurrency. In fact, many people were not even aware that you have to report your capital gains to the tax authority each year. If you have received any cryptocurrency in the form of an airdrop, staking reward, or hard fork, things start to become even more complicated!
With increasing attention to cryptocurrencies from tax authorities around the world today, including the IRS in the US, it has become even more important than ever to understand the tax implications to avoid potential fines and trouble with tax authorities.
Starting next year, the IRS is now likely to ask every American tax filer if they have dealt in virtual currency in 2020 on the very top of Form 1040, and this will be a major change in how the IRS is tracking down people who have not reported their capital gains from cryptocurrencies.
If you check “Yes” on Form 1040, the IRS can now double-check that you have in fact reported the capital gains from cryptocurrencies correctly. If you have bought or sold any cryptocurrency during 2020 and you check “No“, you might get in trouble with the IRS in the future if they discover you have been lying.
It should be safe to say that every taxpayer should now report their capital gains from Bitcoin and other cryptos to avoid fines or even more severe consequences.
Bitcoin and other cryptocurrencies are a form of digital money. It is in many ways similar to US dollars ($) and Euro (€), but the most important distinctions are:
- Cryptocurrencies are exclusively digital. No physical coins or bills exist
- A 100% decentralized form of money without any central authority
Cryptocurrency is taxed as property in most countries, including the US. This means that if you buy a crypto asset like Bitcoin, then later sell it when the price has appreciated, you will need to pay capital gains tax on the gains you made. If the crypto asset depreciates in value after acquiring it, you can sell it and deduct the losses against other capital gains to reduce your taxes. This means that you are only paying taxes on the net capital gains from all transactions with cryptocurrencies.
This also means that owning crypto is similar to owning other assets like stocks, gold or real estate for tax purposes. Just as you would report capital gains from buying and selling stocks, you are also required to report capital gains from cryptocurrency transactions.
So what are the taxes that you need to pay?
What Taxes do I pay on Cryptocurrencies?
There are two types of taxes you might need to pay if you own any cryptocurrency, and that is capital gains tax and income tax. In the US, capital gains are either short-term or long-term depending on how long you held the asset before selling and are taxed at different rates.
Which taxes you need to pay and how much depends on several factors:
- The type of transactions you have made (buying, selling, trading)
- If you have used cryptocurrency to pay for goods or services
- Crypto received from airdrops, staking, mining, or hard forks
- How long you held the asset before selling
- Specific regulations in your country
How is Cryptocurrency Taxed?
The general formula for calculating capital gain is:
capital gain = selling price – purchase price
The selling price is simply the value of what you sold (disposed of) at the time when you made the transaction. The purchase price is what you originally paid when you acquired the coins earlier and is also referred to as the cost basis. The cost basis should also include any associated costs such as commissions and trading fees.
Example: Capital gains & cost basis
You buy 1 BTC for $10,000 plus a fee of $150. The cost basis for your 1 BTC is now $10,150. A few months later, you sell your Bitcoin and receive $12,000 in return.
The capital gain is now easily found as $12,000 – $10,150 = $1,850. This will need to be reported on your annual tax return and you must pay capital gains tax on the profit you made.
We will go into more detail about the amount of tax you will pay in Section 3.
As we can see from this simple example, calculating capital gains and losses for your cryptocurrency trades is relatively straightforward. Next, we will look at different transaction types and taxable events that you might encounter.
Buying cryptocurrency (Ex: USD → BTC)
Buying cryptocurrency with any type of fiat currency (USD, EUR, AUD, etc) is not a taxable event. This means if you bought BTC and never sold it, you don’t have to worry about any taxes!
Selling cryptocurrency (Ex: ETH → USD)
If you have sold any cryptocurrency and received fiat in exchange, you need to calculate the gain/loss and pay capital gains tax if you made a profit.
The cost basis is what you originally paid when you acquired the crypto earlier, while the selling price is the amount of fiat received (converted to your fiat currency).
Capital gains tax
Trading cryptocurrency (Ex: BTC → LINK)
Trading a cryptocurrency for another cryptocurrency is a taxable event similar to selling.
You need to first calculate the fair market value (FMV) of the cryptocurrency received when you made the transaction, and then figure out the cost basis of the cryptocurrency sold.
Example: you buy 1 BTC for $8,000, and later you go all-in on Chainlink and buy 1000 LINK with the 1 BTC. You need to calculate the FMV of 1000 LINK first which we assume is $9,500 at the time of the transaction. The capital gains for disposing 1 BTC is therefore found as: $9,500 – $8,000 = $1,500 (profit).
Capital gains tax
Note: Stablecoins like USDT and USDC are considered equal to other cryptocurrencies. This means that there is no difference between trading with stablecoins or other cryptocurrencies for tax purposes.
Paying for goods or services
Using any cryptocurrency to buy a good or service is equal to selling and is therefore considered a taxable event.
For example, if you are buying a cup of coffee for $4.5 with Bitcoin, you need to calculate the gain/loss on the Bitcoin you sent to the coffee shop. The same rules also apply if you are using a crypto debit card like the MCO visa card from Crypto.com.
There is no difference between buying a physical good (coffee, laptop, car) or a service (flight, hotel booking, Spotify subscription) for tax purposes.
Capital gains tax
Investing in ICO/IEO
When investing in a new project through an ICO/IEO you are always exchanging a crypto for another crypto. In most cases, you will either send ETH, USDT, or BTC and receive token XYZ sometime in the future. Participating in an ICO or IEO is therefore no different than trading cryptocurrency and is a taxable event.
It is important to note that you are not taxed before you actually receive the new tokens in your wallet as clarified in the latest guidance from the IRS. This means that if you participated in an ICO in 2019 and the tokens were distributed in 2020, you should report this on your tax return for 2020 (which you file in 2021).
Capital gains tax
Cryptocurrencies are sometimes conducting what is called a token swap. This can happen when a project launches its own mainnet and needs to migrate all the tokens over to the new blockchain. This is usually done at a 1:1 ratio so that if you send 100 tokens you will also receive 100 tokens, or it can be a totally different ratio so that your new token balance is changed after the swap.
For example, VeChain did a 1:100 token swap in 2018 which means that you would receive a 100x amount of the coins you owned previously. Token swaps are in general not taxed, but remember that it’s important to make any necessary adjustments to your holdings if the number of coins you own has changed after the token swap event.
Any cryptocurrency received to your wallet from mining or staking is taxed as ordinary income. There is no difference if you are mining in a pool or solo, or if you are using your own mining hardware or a cloud mining service. You need to calculate the fair market value (FMV) of the coins at the time when you received them and report the total sum on your tax return.
You should also be aware that you need to report any capital gains when you sell the coins later. In this case, the FMV when you received the coins will become the cost basis so that you are only paying capital gains tax if the cryptocurrency has appreciated in value.
We have written specific guides to taxes on both cryptocurrency mining and staking if you want to learn more:
Airdrops and Hard forks
There has been a lot of confusion surrounding the taxation of hard forks in the past because of the complicated nature of how new coins are actually created. When the IRS published Rev. Rul. 2019-24 in 2019, this was finally a lot more clearer to all cryptocurrency holders:
Crypto received from a hard fork is taxed as ordinary income at the time when the coins become available to you, which is usually when they were deposited in your wallet or exchange account. Airdrops are generally taxed in a similar manner. Because many airdrops are of negligible value and sometimes impossible to sell on an exchange, it’s still not 100% clear if you are required to report such airdrops as income or not.
What’s worth noting is that in many cases, the price of a forked crypto is zero right after the blockchain split occurs because no one has bought the new coin from someone else yet. In this case, you will not pay any income tax because the FMV is basically zero, but instead pay capital gains tax with cost basis equal to 0 when you sell the coins later.
Received interest (DeFi, lending, masternodes)
Cryptocurrency received as interest payments from DeFi protocols, lending on exchanges, or in other ways like masternode rewards or from funding payments (eg. BitMEX), is also taxed as ordinary income. Similarly to income from mining/staking, airdrops, and hard forks, you should report the fair market value (FMV) at the time when you received the coins.
Some exchanges use incentives like sign-up or referral bonuses to get more customers to use their platform. Any type of bonus you have received should be declared and taxed as ordinary income.
Receiving or sending gifts
The annual gift exclusion is $15,000 for 2019 in the US, meaning that if you have either received or sent gifts below this threshold, the cryptocurrency is in general not taxed for both the receiver and sender.
The general rule is that the receiver simply acquires the sender’s cost basis including the holding period. Neither the sender nor receiver is therefore taxed on the date of the transaction, but the receiver is instead first taxed when/if selling the coins later in the future.
Recommended reading: Are Cryptocurrency Gifts & Donations Taxed?
The IRS has clarified the taxation on donations in the latest guidance released in 2019. The guidance specifically says that you will not trigger any capital gains or income tax if you donate cryptocurrency to a charitable organization.
How much deductions you are allowed depends on a few things: The original cost basis, the fair market value at the time of donating the cryptocurrency, and for how long you have owned the asset.
Sending crypto between wallets
You don’t have to worry about taxes if you are simply sending cryptocurrency between your own wallets or exchange accounts. Keep in mind that the IRS might ask you to provide a full breakdown of which addresses you have sent or received crypto from, so remember to keep full records of all your transactions.
When you are trading on margin you are raising your buying power by borrowing funds to buy or sell a cryptocurrency. This means that you have an increased opportunity to make more profit, but also a higher risk of losing all your money.
No specific tax guidance has been issued by the IRS regarding taxes on margin trading for cryptocurrencies, but the general agreement among CPAs and tax professionals is that gains and losses should be treated as capital gains.
Recommended reading: How to Report Taxes on Cryptocurrency Margin Trading
Capital gains tax
Derivatives trading (futures & options)
Similarly to margin trading, derivatives trading will in most cases increase your buying power through the use of leverage. Instead of buying or selling the actual asset, you are trading what is referred to as derivative contracts. The contract always represents a real asset so that the price should not be very different than what is present on other exchanges. There are many cryptocurrency derivative exchanges today, and you can trade contracts representing popular cryptos including Bitcoin, Ethereum, Binance Coin, and Chainlink on platforms like BitMEX, FTX and Bybit.
Because of the complicated tax environment surrounding derivatives today, the conservative approach for traders is to report all gains and losses from cryptocurrency trading as capital gains similarly to margin trading.
Tip: It is very challenging to work out the capital gains arising from crypto margin trading and futures manually, so most people prefer to use a cryptocurrency tax software like Coinpanda to do this automatically for them.
Capital gains tax
How Much Tax Do I Need to Pay?
The two types of taxes you might need to pay from your crypto activity are income tax and capital gains tax.
Crypto received as income is taxed at your ordinary income tax rate which depends on both your marital status and total income amount during the tax year.
The income tax brackets and tax rates for 2020 in the US are as follows:
|Tax Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
Example: Assuming you are a single tax filer and had a taxable income of $35,000 during 2020, any additional income will now be taxed according to the 12% tax bracket. This means that if you have received crypto from airdrops, staking, or mining, you will pay a 12% tax on the FMV of the coins received.
Capital Gains Tax (CGT)
In the US, the CGT rate depends on how long you held the asset before you sold it. The gain is classified as long-term capital gains if you own a cryptocurrency for 1 year or longer before you sell. On the contrary, the gain is classified as short-term capital gains if you sell the cryptocurrency within 1 year of purchase.
Short-term capital gains are added to your income and therefore taxed at your ordinary income tax rate discussed above. This means that depending on your other income, you will pay anywhere between 10% and 37% tax on capital gains from cryptocurrencies you held less than 1 year.
If you have been hodling or invested long term in a crypto project or token and you waited more than 365 days before you sold, you are eligible for the long-term capital gains tax rate. Your CGT tax rate depends on your taxable income:
|CGT Tax Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
As we can see from this table, long-term capital gains are actually tax-free if your taxable income is less than $78,750! This is certainly a huge tax advantage, so it can be a good strategy to always consider your holding period before selling your Bitcoin or other cryptocurrencies.
Tip: Free Cryptocurrency Tax Software
It can be very challenging to keep track of all crypto transactions and calculating your short- and long-term capital gains correctly. That’s why most people use a cryptocurrency tax calculator like Coinpanda to handle this and generate all required tax reports and forms automatically.
With Coinpanda, you can import transactions with the click of a button from all exchanges. You will also see a breakdown of your short-term vs. long-term capital gains for each tax year. You can sign up for a free account and download your tax reports in under 20 minutes.
How to Calculate Gain/Loss (Examples)
Calculating capital gains and losses is actually not so complicated if you only have a few transactions. However, most people that have bought cryptocurrencies have hundreds if not thousands of transactions spread on different exchanges and wallets, and that’s when things start to become a bit more complicated.
We have already defined the general formula for calculating capital gain as:
capital gain = selling price – purchase price
To find the capital gain we need to first calculate the selling price and purchase price (cost basis) for each transaction, and then classify the gain as either short-term or long-term. This can be done in 3 steps:
- Step 1: Calculate the selling price as the fair market value (FMV) on the date of the transaction
- Step 2: Calculate the cost basis using either FIFO, LIFO, or HIFO accounting method
- Step 3: Determine the holding period to classify the capital gain as either short-term or long-term
Next, we will show how to calculate capital gains with a practical example. For simplicity, we will consider only First-in First-out (FIFO) cost basis method, but you can learn more about the different accounting methods allowed by the IRS and how they are used in this article.
Example 1: Buying and selling on Coinbase
Paul has been dipping his toes in the cryptocurrency world this year after creating his Coinbase account. These are his transactions in 2020:
- Bought 1 BTC for $9,200 on 15th of July
- Sold 0.5 BTC for $6,000 on 1st of September
- Traded 0.3 BTC for 8.5 ETH on 10th of September
- Received 6 XTZ from Coinbase Earn on 5th of October
The fair market value (FMV) of 8.5 ETH at the time of the transaction was $3,100. Paul’s transactions are summarized in the table below:
|Tx No.||Type||Date||Amount||Price||Fees||Cost Basis||Capital Gains /|
Now, John needs to do some calculations to work out his capital gains and income that he needs to report to the IRS next year.
- Tx 2: Cost basis for selling 0.5 BTC is 0.5/1.0 * $9,200 = $4,600. The capital gain is therefore found as $6,000 – $4,600 = $1,400.
- Tx 3: Cost basis for trading 0.3 BTC is 0.3/1.0 * $9,200 = $2,760. The capital gain is therefore found as $3,100 – $2,760 = $340.
- Tx 4: The price of Tezos (XTZ) is $2.0 this day, so the FMV of 6 XTZ is equal to $12.
The updated table including resulting capital gains will now look like this:
|Tx No.||Type||Date||Amount||Price||Fees||Cost Basis||Capital Gains /|
Example 2: Margin/futures trading
Kevin bought some BTC on Coinbase before trading futures on BitMEX. He has closed three futures trades in total. These are his transactions:
- Buying 0.6 BTC for $5,000 (Coinbase)
- Transferrig 0.6 BTC from Coinbase to BitMEX
- Trade #1: 0.085 BTC profit
- Trade #2: 0.045 BTC loss
- Trade #3: 0.100 BTC profit
Buying and transferring cryptocurrency between two wallets/exchange accounts is tax-free, but Kevin needs to calculate his capital gains for the trades he did on BitMEX:
- Trade #1: FMV of 0.085 BTC on the date he closed the trade was $750 which is also his capital gains
- Trade #2: We find the capital loss directly from the cost basis this way: 0.045/0.6 * $5,000 = $375
- Trade #3: FMV of 0.1 BTC on the date he closed the trade was $900 which is also his capital gains
Kevin’s net capital gains is therefore equal to $750 – $375 + $900 = $1,275.
Crypto Tax Forms
There are quite many IRS tax forms today but only a handful of these are applicable for reporting your cryptocurrency-related activity. The three most important forms you need to know about if you are from the US are:
- Form 8949: This form should include a complete list of all crypto disposals (eg. sell, trade, margin gains) for both long-term and short-term holding periods.
- Schedule D: A summary of the disposals entered on Form 8949 showing the total long-term and short-term capital gains.
- Schedule 1: Income from cryptocurrency should be reported on line 8 of this form.
For each disposal, you need to first calculate the fair market value (FMV) of the cryptocurrency received when you made the transaction, and then figure out the cost basis of the cryptocurrency sold. This is how Form 8949 looks like with this information:
How to File Crypto Taxes
The most important thing is to note the tax deadline for filing your taxes. The deadline for reporting taxes on cryptocurrencies is the same as your ordinary tax return which is normally the 15th of April. Because of the COVID-19 pandemic, the deadline was extended to the 15th of July in 2020.
You need to include both Form 8949, Schedule D, and Schedule 1 (if you have income from crypto) with your yearly tax return.
Form 8949 should include all your trades and sell transactions together with the date you acquired the crypto, the date when it was disposed of, your proceeds, your cost basis, and the resulting capital gain/loss. After adding all trades, simply summarize the gain/loss on each page at the bottom, and transfer the total sum to your Schedule D.
This can definitely involve a lot of manual work and seem almost impossible if you have many transactions. Luckily, Coinpanda can help with filing your crypto taxes and be compliant by generating Form 8949 and Schedule D automatically for you. Get started with Coinpanda today.
What Happens if I Don’t Report My Crypto Taxes?
It is a common belief among cryptocurrency traders that the government and the IRS will not get knowledge about their crypto activity such as trading on exchanges, but this is far from true.
While the IRS didn’t do much effort around crypto tax reporting in the beginning (up until 2016), the agency is now actively tracking down people that either own or have transacted with cryptocurrencies. For example, since 2018, the IRS has received records of individuals that have bought crypto on Coinbase directly from the exchange.
Not only that, more than 10,000 warning letters were sent in 2019 to US taxpayers who had either not correctly reported their gains from cryptocurrency investments, or ignored it completely.
It should be clear now that it’s quite literally impossible to hide completely from the IRS if you have ever bought or sold cryptocurrency. Failing to report your crypto taxes is very risky and can get you in a lot of trouble down the road including penalties or even criminal prosecution if you have been committing tax fraud.
Solution: Cryptocurrency Tax Software
The first step to generate accurate tax reports is to aggregate all your crypto transactions into the same platform. You need to take into account every single transaction since the first time you converted fiat to cryptocurrency to calculate your capital gains correctly. This includes all your buys, sells, trades, airdrops, staking rewards, swaps and other received or sent crypto.
Doing this manually is perhaps possible but most certainly the hardest way. If you prefer to not spend days or weeks doing your crypto taxes, you can use a tool like Coinpanda to automatically aggregate all transactions and generate accurate and audit-ready tax reports in under 20 minutes.
Here is how Coinpanda works:
- Step 1: Import transactions by connecting your exchange accounts and wallets with API keys (or upload CSV files if you prefer)
- Step 2: Verify that your data is matching. Coinpanda will tell you if there are any transactions missing so you can manually make adjustments if necessary.
- Step 3: Download your tax reports, Form 8949, and Schedule D directly from the Tax Reports page
It is actually that easy! Get started with Coinpanda today.
Frequently Asked Questions
Why can’t the exchange provide me with accurate tax reports?
This is the main problem with crypto tax reporting today. As soon as you either transfer cryptocurrency out from the exchange or purchase a crypto on a different platform, the exchange no longer knows when, how, or at what cost basis you acquired all your cryptocurrencies. This information is critical for generating tax reports, which is why the only solution is to use a crypto tax software to do the job in most cases.
Are there any methods I can use to pay less tax on my crypto?
There are basically two methods you can use to reduce your tax liability:
1. Hodl (ie. buying and not selling) your crypto for one year or longer to be considered long-term capital gains instead of short-term capital gains. The long-term gains are actually tax-free if your ordinary taxable income is less than $78,750.
2. Practice wash-selling by selling crypto assets that are currently at a loss and then simply buy them back shortly after if you still want to maintain ownership. This is normally not allowed for other asset classes like equities but is completely legal for cryptocurrencies since it’s considered property by the IRS. This is also referred to as tax-loss harvesting.
Coinpanda is one of very few crypto tax calculators that come with built-in functionality for tax-loss harvesting today.
What if I have lost money from crypto trading?
Losses that arise from selling or trading cryptocurrency are considered capital losses and can be used to offset your capital gains both from crypto and other assets.
If you have a net capital loss at the end of the year, then that loss can be deducted from your ordinary taxable income up to the maximum allowed amount. This amount is currently $1,500 for individuals filing as single, or as married and filing separately. If you are married and filing jointly, the maximum amount is currently $3,000.
Can I deduct losses from exchange hacks or scams?
It was possible to claim tax deductions on casualty losses in the past, but this changed after the passing of the Tax Cuts and Jobs Act in 2017. The current ruling says that you are now only allowed to claim deductions if “the loss is caused by a federally declared disaster declared by the President”.
This is obviously not the case if you have lost your crypto from an exchange hack or from a scam attempt. In any case, we recommend that you consult a tax professional for advice if you are in doubt about your particular situation.
How can I report my taxes from DeFi?
Decentralized Finance (DeFi) has been a hot topic in the cryptocurrency world lately and especially since May of this year. All transactions from interaction with DeFi protocols such as Uniswap, Aave, Compound, or Yearn Finance are taxed since they are considered trades. This means you need to work out the capital gains and losses for each transaction.
This can become a very tedious process which is why most crypto traders prefer to use crypto tax software like Coinpanda which allows you to simply add your public ETH addresses and auto-sync the entire trade history.
How is crypto taxed in other countries than USA?
Generally speaking, most of the tax rules explained in this guide apply also to other countries. This means that you most likely have to pay both income tax on cryptocurrency received as income, and capital gains tax on your disposals from selling and trading.
The actual tax rate varies a lot between different countries and is often also dependent on your ordinary income and other capital gains. Some countries have special rules for calculating capital gains, like the Superficial Loss Rule (Canada) and Share Pooling with bed and breakfasting rule (United Kingdom). See also our country-specific crypto tax guides for more information:
The most important take-away message from this article should be that tax authorities around the world including the IRS are now enforcing strict measures so that individuals are reporting and paying their taxes according to the law. Starting from next year, every American tax filer will also be forced to answer Yes or No on whether they have dealt with cryptocurrency during the last year. Failing to report your crypto taxes is very risky and can result in penalties, or worse.
Here are some of the key points from this guide:
- Buying, transferring crypto between wallets, donations, and gifting is tax-free
- Selling, trading, investing in ICOs, and margin trading is taxed as capital gains
- Cryptocurrency received (mining, staking, airdrops, etc) is taxed as ordinary income
- Capital gains are considered either short-term (< 1-year holding period) or long-term (> 1-year holding period)
- In the US, you typically have to file Form 8949, Schedule D, and Schedule 1 if you have bought and sold cryptocurrency during the tax year
If you have been using different exchanges like Coinbase and Binance it will quickly become very challenging to report your crypto taxes manually. That’s why we built Coinanda which helps thousands of cryptocurrency traders solve the tax problem today. Not only can you import transactions automatically from all exchanges that exist today, but the software also allows you to download all required tax documents including IRS form 8949 and Schedule D.
Are you not from the US? No problem, you can also download a general international tax report since the software supports more than 65+ countries today. You can sign up for a free account and download your tax reports in under 20 minutes.
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