Guide: The Ultimate Cryptocurrency Tax Guide for US Citizens

TAX GUIDE

Guide: The Ultimate Cryptocurrency Tax Guide for US Citizens

Updated January 2, 2020

Cryptocurrency tax rules vary from country to country. In this guide, we will focus on the US and crypto tax rules for US citizens. You will learn how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by the IRS. You will also learn how to generate and file your crypto tax reports.

Coinpanda is provided for informational purposes only. We do not guarantee that our understanding of the cryptocurrency tax rules detailed below is in fact correct, or up to date according to latest regulations. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. Please see our full disclaimer.


1. How are cryptocurrencies taxed in the US?

Do I need to pay taxes on cryptocurrencies such as bitcoin?

The Internal Revenue Services (IRS) released guidance for cryptocurrencies in 2014 and declared it to be taxed as property. This means that cryptocurrencies such as bitcoin and ethereum will be taxed with capital gains similar to other property transactions.

If you have bought a cryptocurrency and its value appreciates before you sell it later, the gain will be taxed. Similarly, if the crypto depreciates in value before you sell it, you may be able to reduce your taxes by deducting the losses against other capital gains. All capital gains from cryptocurrencies should be reported on Form 8949 as a minimum.

What transactions are considered taxable events?

Not all transaction types are considered taxable events. The following are examples of taxable events:

  • Selling cryptocurrency for US dollar
  • Selling cryptocurrency for other fiat currency (EUR, CAD, AUD etc.)
  • Buying cryptocurrency and paying with another cryptocurrency (trading)
  • Paying for a good or service with cryptocurrency
  • Receiving cryptocurrency from mining, airdrop or hard fork

These are however not considered taxable events: 

  • Buying cryptocurrency with US dollar
  • Buying cryptocurrency with other fiat currency (EUR, CAD, AUD etc.)
  • Transfer of cryptocurrency between two wallets/exchanges you own
  • Gifting cryptocurrency to another person (small amounts)
  • Receiving cryptocurrency as gift
  • Donating cryptocurrency to tax-exempt organizations

How do I calculate capital gains?

If you buy a cryptocurrency, and later sell the same cryptocurrency at a higher price (price has appreciated), the profits generated are treated as a capital gain. On the other side, if the cryptocurrency has depreciated in value before you sell it, you may be able to reduce your taxes by deducting the losses against other capital gains. You should always consult a tax professional before doing so to make sure you comply with all rules from the IRS.

Capital gains are generally calculated as the price of what you sold minus the purchase price (cost basis). There are several methods for calculating cost basis, and the IRS allows both FIFO (“First In First Out”) and LIFO (“Last In First Out”) to be used.

The most common cost basis method to use is FIFO which is also what we will consider in most of the following examples throughout this guide.

Short & Long term capital gains

The amount of time you have held a cryptocurrency before you sell it can influence how much tax you will pay. The following are general rules regarding hold time:

  • If you sell a cryptocurrency within one year of original purchase date, this will be considered short term capital gains tax. Such gains will be considered as normal income for tax purposes and are therefore also subject to your ordinary income tax rate.
  • If you sell a cryptocurrency after one year of original purchase date, this will be considered long term capital gains tax which can vary between 0% and 20% depending on your individual tax situation.

Since the long term capital gains tax will in most cases be lower than your short term capital gains tax, you should always consider the holding period of a cryptocurrency before you decide to sell to optimize your tax situation.

EXAMPLE 1

– Buying and selling cryptocurrency

David is a libertarian and came across bitcoin in early 2015. Finding the concept of a decentralized currency quite fascinating, David decides to buy 5 bitcoin at that time. Later in 2017, David noticed the hype and media coverage starting to rise and he decides to buy bitcoin again. In the beginning of 2018 he decides to sell most of his holdings. His transaction history can be seen in below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2015-07-065 BTC1,500 USD1,500 USD
Buy2017-04-172 BTC2,400 USD2,400 USD
Buy2017-09-243 BTC12,000 USD12,000 USD
Sell2018-02-018 BTC80,000 USD(?)(?)

David can calculate his capital gains using either FIFO or LIFO cost basis method. We will show how both methods can be used:

Method 1: FIFO

FIFO is an abbreviation for “First In First Out”, and as the name suggests we are selling the coins first bought (the oldest coins) using this method. His cost basis for selling 8 BTC is therefore found as 1,500 USD + 2,400 USD + (1/3) * 12,000 USD = 7,900 USD.

His capital gains using FIFO cost basis method will be: (selling price) – (cost basis) = 80,000 USD – 7,900 USD = 72,100 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2015-07-065 BTC1,500 USD1,500 USD
Buy2017-04-172 BTC2,400 USD2,400 USD
Buy2017-09-243 BTC12,000 USD12,000 USD
Sell2018-02-018 BTC80,000 USD7,900 USD72,100 USD

Method 2: LIFO
LIFO is an abbreviation for “Last In First Out”, and using this method we are selling the coins bought last (the newest coins) which is the opposite of FIFO cost basis method. David’s cost basis for selling 8 BTC using LIFO is found as 12,000 USD + 2,400 USD + (3/5) * 1,500 USD = 15,300 USD.

His capital gains using LIFO cost basis method will be: (selling price) – (cost basis) = 80,000 USD – 15,300 USD = 64,700 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2015-07-065 BTC1,500 USD1,500 USD
Buy2017-04-172 BTC2,400 USD2,400 USD
Buy2017-09-243 BTC12,000 USD12,000 USD
Sell2018-02-018 BTC80,000 USD15,300 USD64,700 USD

As we can see from these two examples, David would minimize his capital gains by using LIFO over FIFO cost basis method.


2. Taxes on Buying, Selling & Trading crypto

In this Section we will look at different transaction types and the taxable implications.

Buying cryptocurrency (Ex: USD → BTC)

This is not considered a taxable event. Note that it’s important you keep track of all your purchases and complete transaction history so that you can calculate your cost basis when you later sell the cryptocurrency you bought.

Selling cryptocurrency (Ex: BTC → EUR)

Selling any type of cryptocurrency is considered a taxable event and you will need to calculate your capital gain for each transaction.

Trading cryptocurrency (Ex: ETH → LTC)

A crypto-to-crypto transaction (trading) is considered a taxable event similar to selling cryptocurrency for fiat currency.

EXAMPLE 2

– Trading cryptocurrency (crypto-to-crypto)

Jake buys 2 bitcoin in April of 2017. Later that year, he sees the price of ethereum go up and trades half his bitcoin holdings for 15 ethereum. After the summer, Jake decides to buy 10 litecoin with 5 of his ethereum. His transaction history can be seen in below table:

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-04-062 BTC4,200 USD4,200 USD
Sell2017-06-171 BTC3,500 USD(?)(?)
Buy2017-06-1715 ETH3,500 USD3,500 USD
Sell2017-09-055 ETH8,100 USD(?)(?)
Buy2017-09-0510 LTC8,100 USD8,100 USD

Notice that we have split each trade into two separate transactions. This is done to make it easier to calculate cost basis and resulting capital gains.

Jake can calculate his capital gains using either FIFO or LIFO cost basis method. In this example we will consider FIFO only:

Transaction 2: Selling 1 BTC

Cost basis is (1/2) * 4,200 USD = 2,100 USD. Notice that since Jake only have bought bitcoin one time in the past before selling 1 BTC, both FIFO and LIFO method would yield same cost basis. His capital gains will be: (selling price) – (cost basis) = 3,500 USD – 2,100 USD = 1,400 USD.

Transaction 4: Selling 5 ETH

Cost basis is (5/15) * 3,500 USD = 1,167 USD. His capital gains will be: (selling price) – (cost basis) = 8,100 USD – 1,167 USD = 6,933 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2017-04-062 BTC4,200 USD4,200 USD
Sell2017-06-171 BTC3,500 USD2,100 USD1,400 USD
Buy2017-06-1715 ETH3,500 USD3,500 USD
Sell2017-09-055 ETH8,100 USD1,167 USD6,933 USD
Buy2017-09-0510 LTC8,100 USD8,100 USD

Selling cryptocurrency for stablecoins (Ex: BTC → USDT)

Stablecoins, even though they are often supposed to be pegged to the US dollar, are treated similar to any other cryptocurrency and such transactions will therefore also be considered a taxable event.

Paying for goods or services with cryptocurrency

Paying for a good or service with cryptocurrency is considered as selling your cryptocurrency, and will therefore also be considered as a taxable event.

This means that every time you buy something, for example a cup of coffee or flight tickets, and you pay with cryptocurrency, this is considered a taxable event.

EXAMPLE 3

– Buying coffee with bitcoin

Sara buys 1 bitcoin in early 2019 for 3,700 USD. One day she sees that her favorite coffee shop accepts payments with bitcoin. She decides to buy one coffee using her bitcoin mobile wallet and realizes only later that she might need to pay some tax since bitcoin has appreciated in value since her original purchase.

The fair market value of bitcon the day she pays for her coffee is 7,200 USD. The coffee costs 3.15 USD which equals 3.15 / 7,200 = 0.0004375 BTC. Her transactions can be summarized as the following:

TypeDateAmountPriceCost BasisCapital Gains
Buy2019-01-121 BTC3,700 USD3,700 USD
Sell2019-05-270.0004375 BTC3.15 USD(?)(?)

Cost basis is (0.0004375/1) * 3,700 USD = 1.61875‬ USD. Her capital gains will be: (selling price) – (cost basis) = 3.15 USD – 1.61875 USD = 1.53125 USD.

TypeDateAmountPriceCost BasisCapital Gains
Buy2019-01-121 BTC3,700 USD3,700 USD
Sell2019-05-270.0004375 BTC3.15 USD1.61875‬ USD1.53125 USD

Transfering cryptocurrency between two wallets/exchanges

Transfering cryptocurrency between two wallets or exchanges is not considered a taxable event. 


3. Tax on Margin Trading

Margin trading separates itself from normal spot trading by the fact that you don’t need to hold/own the asset or cryptocurrency you are selling when making a buy order. Margin trading is similar to trading futures/CFD contracts and there are no specific tax rules when it comes to such trading with cryptocurrencies. Opening a position in margin trading is similar to either buying or selling (going long or short) and paying with borrowed funds, and closing a position is when you pay back what you originally borrowed.

After closing a position you will either have a realized capital gain or loss, and should be declared in the same way as a regular trade. This means that with regards to tax purposes, margin trading is considered in the same way as regular trading (spot).

Margin Trading has become very popular the last year, and if you have traded on exchanges like BitMEX or Bybit you have also taken part in margin trading.


4. Tax on cryptocurrency Mining

Any cryptocurrency recevied from mining activity, such as bitcoin or ethereum, shall be reported as income in your annual tax return. However, different tax rules apply depending on if the activity is classified as a business or just a hobby. Each situation has to be investigated individually to determine this, but the following criteria are used in general:

  • Amount of profits generated from the mining activity
  • The miner’s previous history with regards to profit/loss from mining
  • The amount of time and resources invested into the activity
  • The expectation of future income from the activity

If your mining activity is classified as a hobby, and not a business, you will need to declare your mining income as additional income in your tax return. You will also be eligable to declare deductions for expenses directly related to your mining activity.

Businesses that conduct cryptocurrency mining need to report both income and expenses on Schedule C – Profit or Loss from Business. While hobby miners are not subject to 15.3% self-employment tax, businesses are. Businesses are also allowed to declare a wider range of deductions for expenses.


5. Tax on Airdrops & Hard Forks

Airdrops have been a popular marketing stunt performed by companies raising capital through either an ICO or IEO the last years. An airdrop is essentially free cryptocurrency, often given to people that either supports the company or project, or being rewarded for holding another cryptocurrency at a specific time.

In most cases, these airdrops will have very low value and thus the tax implications can be considered negligible. However, if you have received an airdrop of considerable value, the tax treatment is similar to income and should be reported as such on your tax return.

You might also have experienced receiving cryptocurrency from a hard fork in the past, such as the Bitcoin Cash hard fork that happened on 1st of August 2017. The IRS has so far not given any specific guidance on hard forks, but the general understanding is that hard forks should be considered equal to additional income on your tax return.

If you received the new coins as a result from the hard fork as soon as the blockchain went live, the value should be considered as 0. This means that you will not pay any capital gains before you sell such coins at a later time with cost basis equal to 0.


6. Tax on ICOs & IEOs

ICOs (“Initial Coin Offerings”) and IEOs (“Initial Exchange Offerings”) are a popular form of raising capital by companies and projects launching their own blockchain. The ICO mania phase peaked in late 2017 / early 2018, but even two years later, a considerable amount of money is still being raised through this funding mechanism.

An IEO differs from an ICO that it is conducted by an exchange, and the token is in most cases listed on the exchange immediately after the IEO has concluded.

With regards to tax purposes, investing in an ICO / IEO is a taxable event because you are selling a cryptocurrency for a token that will be issued at a later time.

It is worth noting that the date of transaction is not the date when you transferred your cryptocurrency or participated in the token sale, but rather the date when you received the tokens.


7. Tax on Staking Rewards

Cryptocurrency received from staking in a “Proof of Stake” network must also be reported to the IRS, and is in general treated similar to cryptocurrency received from mining (See Section 4). Activity from staking will be classified as either a hobby or business which could have an impact on the tax implications.


8. Tax on Gifts & Donations

Gifting or donating cryptocurrency is under most conditions not considered a taxable event and depends on the amount being gifted/donated.

Gifts

It is allowed to gift up to $15,000 without being considered a taxable event. For all gifts exceeding this value, Form 709 must be filled out by the giver as part of the annual tax return.

The $15,000 threshold applies to each person receiving the gift, hence you are allowed to gift this amount to as many people you wish, as long as no single person is gifted more than $15,000, to avoid tax obligations.

The person receiving the gift will also take on the cost basis of the cryptocurrency from the original owner.

Donations

If you have donated cryptocurrency to any tax-exempt qualified organization, you will be able to deduct the value at the time of the contribution in your tax return. How much you are allowed to deduct depends on how long you have held the asset donated:

  • For cryptocurrencies held more than 1 year, you are allowed to deduct up to 30% of your Annual Gross Income.
  • For cryptocurrencies held less than 1 year, you are allowed to deduct up to 50% of your Annual Gross Income.

All donations above $500 needs to be reported on Form 8283. Donations are also not subject to any capital gains tax.


9. Tax on Cryptocurrency Loans

Interest received from lending out your cryptocurrency is treated similar to cryptocurrency received from mining and staking, hence it is subject to income tax and you will also need to determine whether your activity is considered a hobby or business.


10. How to minimize your Taxable Gains

Have you invested in a cryptocurrency that has depreciated in value since you bought it? Or have you been hacked or for some other reason lost access to your crypto holdings? Continue to read to learn more about what actions you can take to potentially reduce your final tax obligation.

Losses and Trading Fees

As already mentioned in this guide, your capital losses from cryptocurrency trading is fully deductible against your capital gain profits. A lot of crypto investors have made large gains from some cryptocurrencies, while other investments might still be at a loss (unrealized losses). By selling the crypto holdings that are currently at a loss you are realizing your capital losses which can reduce your total tax obligation! You are also free to buy back the crypto asset right after selling it without being considered as wash trading which is the case for US securities.

Selling cryptocurrencies at a loss to reduce your total tax obligation is known as Tax Loss Harvesting and is fully compliant with the IRS since cryptocurrencies are still treated as property and not securities.

If you have been trading cryptocurrencies on different exchanges chances are that you have paid a significant amount of trading fees throughout the year. Trading fees are considered a cost for acquiring the crypto asset and are therefore fully deductible aginst your capital gains.

Hacked or Stolen cryptocurrency

As of the tax year 2017, losses due to theft or hacks are no longer deductible. Losses prior to 2017 are however still deductible if you can prove both the ownership at the time of incident, and how much was lost/stolen.

Mining Expenses

For people mining cryptocurrencies and where the activity is considered a hobby (not a business), the IRS has stated that it is allowed to make deductions for “typical hobby-related expenses”. In the case of mining, this would typically be:

  • Electricity (only electricity used by your mining hardware)
  • Expenses for mining hardware
  • Fees related to accounting/bookeeping
  • Internet service

If the mining activity is considered a business, other rules apply for what expenses can be deducted. Such deductions must be reported on the Schedule C – Profit or Loss from Business form and gives in general freedom to make even more deductions compared to mining considered as a hobby.


11. How to file your Crypto Tax Reports

How to generate and file your crypto tax report can be summarized in 6 steps:

  1. Download the transaction history from all exchanges where you have bought or sold any cryptocurrency. To calculate your cost basis correctly it is important to include the history for ALL previous years.
  2. Review your transaction data and make sure that you have enough in your balance to realize all your sells.
  3. Determine the cost basis value for each transaction which later will be used to calculate your capital gains and losses.
  4. Calculate your capital gains using either FIFO or LIFO cost basis method
  5. File your capital gains (Form 8949 and Schedule D)
  6. Declare any income (mining, staking, airdrops etc.) under “Other Income” section of Schedule 1 – Additional Income and Adjustments to Income

This can be a very tedious and complicated process for most people that have had more than a few transactions during the year. Most crypto investors and traders prefer to use a cryptocurrency tax calculator such as Coinpanda to help them with calculating and filing their annual tax report. Coinpanda simplifies this process by carrying out step 1 to 4 automatically.

Save your transaction history

It is important to maintain good practice for bookeeping and to save all your transaction history in a safe place that can be accessed later in case you get audited by the IRS.

Deadline for filing cryptocurrency tax report

The deadline for filing and submitting all your tax reports to the IRS is the 15th of April each year.

It is possible to apply for an extension if you need more time.


12. How can Coinpanda help?

Coinpanda is a cryptocurrency tax calculator built to simplify and automate the process of calculating your taxes and filing your tax report. Coinpanda lets you do this in four simple steps:

  1. Import all your transactions via API or CSV files
  2. Verify that your data is matching (and make necessary adjustments if required)
  3. Coinpanda calculates your capital gains for each cryptocurrency
  4. Download your Form 8949 ready to be filed

Coinpanda allows you to also track your cryptocurrency portfolio for free! You can track your portfolio value from day to day on your personal Dashboard page, and also get information about your unrealized gains or losses. Learn more.


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Learn How to Claim Tax Deductions on Crypto Losses

Learn How to Claim Tax Deductions on Crypto Losses

September 27, 2019

The cryptocurrency market experienced a brutal bear market during 2018, and many investors have now either realized or unrealized losses from their investments in cryptocurrencies such as Bitcoin or Ethereum. Some people might even have invested in outright scams or lost their funds due to exchange hacks. On the positive side, most countries allow you to deduct some of these losses against income to reduce your tax bill. In this article we will explore how different types of losses can be used to claim tax deductions, and if there are any special considerations to make.

Capital Losses

Most countries calculate your tax based on the net capital gain from the whole tax year. If you sell your cryptocurrency at a lower price than what you purchased it for, this becomes a capital loss. This can be used to reduce your total net capital gains from investing in cryptocurrencies, or in some cases also used to reduce your capital gains in other types of assets like stocks or commodities.

If your total capital losses exceeds the capital gains, you can even roll the amount forward to future tax years. There are some specific differences between countries with regards to this, so it is adviced to always consult with your local tax office to make sure this rule applies to you.

Coinpanda calculates your capital losses automatically after connecting your wallets and exchanges to the platform. You can even export tax reports that help you claim tax deductions on capital losses from cryptocurrencies.

Exchange Hacks

We have unfortunately witnessed several exchange hacks in both 2018 and 2019. In some cases users lost all their funds that were held on the exchange, and are now maybe wondering if they can claim tax dedcuctions on the losses. It is important to be able to document the funds held on the exchange, and also the actual incident of the exchange hack. In most cases, the exchanges sent out an information letter by email to affected users which you can use to document the incident if requested by your tax office or in case of an audit.

Most countries will consider funds lost from exchange hacks as capital losses, which can then be used to offset your capital gains from cryptocurrency or other types of assets.

Casualty and Theft Losses

We do know today that a significant amount of cryptocurrency is lost forever due to lost access to private keys. Some people have stored large amounts of Bitcoin on their laptop computer in the past when cryptocurrency was almost worthless, only to find out later when prices were skyrocketing that they don’t have access to it anymore. Some people have also been victims of theft in their personal home where burglars might have gotten away with access to their crypto assets.

Similar to exchange hacks explained above, you can most likely deduct some of these losses against income to reduce your tax bill. In the US, however, casualty and theft losses are deductible only if the losses are attributable to a federally declared disaster for tax years 2018 through 2025. These rules apply to individuals and not businesses.

Conclusion

As we have seen in this article, there might be several scenarios where you can claim tax deductions on your cryptocurrency losses from either capital loss, exchange hacks, or casualty and theft losses. If you are a victom of this, it is always recommended to contact your local tax office to make sure you follow the latest up-to-date regulations which can change quite frequently.

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

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