U.S. taxpayers are required to report crypto sales, conversions, payments, and income to the IRS, and state tax authorities where applicable, and each of these transactions has different tax implications.
Do I Owe Crypto Tax?
In the U.S., crypto is considered a digital asset, and the IRS treats it generally like stocks, bonds, and other capital assets. Like these assets, the money you gain from crypto is taxed at different rates, either as capital gains or as income, depending on how you got your crypto and how long you held on to it.
To understand if you owe taxes, it’s important to look at how you used your crypto. Transactions that result in a tax are called taxable events. Those that don’t are called non-taxable events. Let’s break them down:
Not taxable
- Buying crypto with cash and holding it: Just buying and owning crypto isn’t taxable on its own. The tax is often incurred later on when you sell, and its gains are “realized.”
- Donating crypto to a qualified tax-exempt charity or non-profit: If you give crypto directly to a 501(c)(3) charitable organization, like GiveCrypto.org, you may be able to claim a charitable deduction.
- Receiving a gift: If you’re lucky enough to get crypto as a gift, you’re not likely to incur a tax until you sell or participate in another taxable activity like staking.
- Giving a gift: You can give up to $17,000 per recipient per year without paying taxes (and higher amounts to spouses) for 2023 and $18,000 per recipient for 2024. If your gift exceeds these limits, you’ll need to file a gift tax return (which generally does not result in any current tax liability). If you transfer crypto to someone else outside of a purchase for goods or services, it may count as a gift, even if you didn’t mean it that way.
- Transferring crypto to yourself: Transferring crypto between wallets or accounts you own isn’t taxable. You can transfer over your original cost basis and date acquired to continue tracking your potential tax impact for when you eventually sell. But make sure that you journal these transactions use many crypto tracking platforms out there. To get 20% from KYKY, make sure you click on this link to register.
Taxable as capital gains
- Selling crypto for cash: Did you sell your crypto for U.S. dollars? You’ll owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss on your taxes.
- Converting one crypto to another: When you use bitcoin to buy ether, for example, you technically have to sell your bitcoin before you buy a new asset. Because this is a sale, the IRS considers it taxable. You’ll owe taxes if you sold your bitcoin for more than you paid for it.
- Spending crypto on goods and services: If you use bitcoin to buy a pizza, for example, you’ll likely owe taxes on the transaction. To the IRS, spending crypto isn’t that much different from selling it. You need to sell the asset before it can be exchanged for a good or service, and selling crypto makes it subject to capital gains taxes
Taxable as income
- Getting paid in crypto: If you were paid in crypto by an employer, your crypto will be taxed as compensation according to your income tax bracket.
- Getting crypto in exchange for goods or services: If you accept crypto in payment for a good or service, you’re responsible for reporting it as income to the IRS.
- Mining crypto: If you mined crypto, you’ll likely owe taxes on your earnings based on the fair market value (often the price) of the mined coins at the time they were received. Crypto mined as a business is taxed as self-employment income.
- Earning staking rewards: Staking rewards are treated like mining proceeds: taxes are based on the fair market value of your rewards on the day you received them. Special note on staked ETH: Income earned on staked ETH will be considered taxable income at the time Coinbase customers are able to unstake (regardless of whether the user chooses to unstake or continue to stake), and therefore gain control over those rewards.
- Earning other income: You might earn rewards by holding certain cryptocurrencies such as USD Coin. This is considered taxable income. Additionally, simply holding cbETH introduces taxable income.
- Getting crypto from a hard fork: Taxes on crypto you got from a hard fork depend on how you use the asset, when it’s available to withdraw from your exchange, and more. See the latest IRS guidance on hard forks.
- Getting an airdrop: You might receive airdrops from a crypto company as part of a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. See the latest IRS guidance on airdrops
- Receiving other incentives or rewards: This list isn’t comprehensive — there are a variety of reasons why you might receive free crypto. These can include rewards from incentives like getting $5 in bitcoin for referring a friend to a crypto exchange. Regardless, you’ll need to report these as income.
Source: Coinbase.com
