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Crypto tax rules can be overwhelming, but staying on top of it doesn’t have to be a headache. This crypto tax guide is here to break everything down in plain, simple terms. From knowing what’s considered a taxable event to figuring out how to save on your taxes, we’ve got you covered. Whether you’re selling, trading, or earning crypto, the IRS will want its cut, but this guide will help you understand it all. You may also want to check out our article on the Best Crypto Tax Tools to make your tax season as painless as possible.
If you’re unsure how crypto taxes affect you or just need help tracking everything, don’t worry—we’ll walk you through it step by step so you’ll be ready when tax season hits.
Crypto Tax 2024: Summary
This article is a straightforward guide to understanding crypto taxes in 2024, covering everything from taxable events to strategies for reducing your tax bill. It explains how different crypto activities are taxed, the latest regulatory updates, and why using crypto tax software can make life easier. Staying organized and following these tips can help you avoid common tax mistakes.
Disclaimer: This article is not intended to be tax advice, nor are we qualified tax professionals. It is simply meant to help guide and act as a general framework. We highly recommend consulting with a tax professional for help with any matter of taxation.
Key Highlights
Understanding the Basics of Crypto Taxes in the US
Crypto taxes in the US are all about understanding how different transactions are treated. Knowing the rules can save you from surprise bills, whether you’re holding or actively buying and selling. It’s not just about big trades—smaller moves like swapping one coin for another or gifting crypto can have tax implications, too.
What is Crypto Tax?
Crypto tax refers to the tax obligations that arise from cryptocurrency activities, including trading, earning, and holding digital assets. The IRS considers crypto as property, meaning crypto trading taxes are similar to those for stocks.
So, when you buy, sell, or earn crypto, you may have a taxable event. For instance, if you earn crypto from mining or staking, it is considered gross income.
In addition to trading, how is crypto taxed for income? If you earn cryptocurrency from mining, staking, or as payment for services, it is taxed as ordinary income at the fair market value when you receive it.
Does this sound a bit overwhelming? Don’t worry. We’ll break it down so you know what to look out for during tax time.
What Constitutes a Taxable Event in Cryptocurrency?
Simply put, a taxable event occurs when you do something with your crypto: crypto trading, selling, or earning it—that the IRS considers taxable.
Let’s break down the main scenarios where taxes apply:
Selling crypto for cash
Suppose you bought $2,000 worth of Ethereum and later sold it for $4,000. Congrats on the $2,000 profit! But that profit is taxable; you need to report it since it counts toward your net capital gain.
Trading one crypto for another
You don’t need to cash out to trigger taxes. If you swap your Bitcoin for Ethereum, it’s still a sale. For example, if you bought Bitcoin for $3,000 and traded it when it was worth $4,500, that $1,500 gain is taxable.
Using crypto to buy something
Have you ever bought something using crypto, like a computer or coffee? That’s a sale. Let’s say you bought 0.1 Bitcoin for $4,000 and used it to buy a laptop worth $5,000. The $1,000 difference is a taxable gain.
Earning crypto through mining or staking
If you’re mining or staking, any crypto you earn is considered income when you receive it. So if you staked some coins and earned 1 Bitcoin when it was worth $2,000, you need to report that $2,000 as income even if you haven’t sold the Ethereum yet.
Airdrops or tokens from hard forks
Free crypto from an airdrop? Sounds awesome, right? Just remember, it’s also taxable. If you received tokens worth $500, that’s $500 in income that needs to be reported for the year.
Using a simple example, I’ll explain the idea of using crypto to pay for things as a taxable event.
When you buy anything with crypto, you exchange your coins for goods; you sell it to get a product or service in return. If you make a profit or loss on that exchange, you must report it since the difference in value could result in crypto losses or gains.
For example, if you bought 0.06 Bitcoin for $4,000 and later used it to buy a laptop worth $5,000, you’ve “sold” the Bitcoin for $5,000.
The difference between what you paid ($4,000) and what it’s worth when you spent it ($5,000) is $1,000. That $1,000 is a taxable gain.
Note: Before engaging in any transactions on a cryptocurrency exchange, it’s wise to check the platform’s legitimacy. You can verify brokers through FINRA’s BrokerCheck tool.
The Difference Between Short-term and Long-term Capital Gains
The IRS cares about how long you hold your crypto before selling it because that affects the amount of tax you’ll pay. There are two types of capital gains—short-term and long-term—and each is taxed differently.
Short-term capital gains
Any profit will be taxed as ordinary income if you sell your crypto within a year of buying it. For example, if you made $50,000 from your job and $2,000 from short-term crypto trades, your taxable income is now $52,000, and the $2,000 gain will be taxed at your regular income tax rate.
Long-term capital gains
On the other hand, if you hold your crypto for more than a year before selling, the IRS will reward your patience with a lower tax rate. Let’s say you bought Ethereum for $3,000 and sold it two years later for $6,000. That $3,000 gain will be taxed at the long-term capital gains rate, which is lower—0%, 15%, or 20%, depending on your overall income.
Timing matters, so holding onto your crypto for a little longer might save you some cash.
The Essential Guide to Reporting Your Crypto Taxes
Tax time and reporting your crypto does not have to be a total nightmare if you’ve been buying, selling, trading, or earning crypto all year.
The key to making this painless is knowing what you need to report and keeping records. Additionally, using a crypto tax calculator and understanding your accounting method will help you report your transactions accurately.
CoinLedger has a free calculator that takes into consideration your location in the United States, length of ownership, and filing status.
Below is a quick example using CoinLedger. As you can see in the screenshot below, I’ll owe $60.78 for this transaction.
For the investment amount, I added $10,000, a buy price of $59,669.06, and a sell price of $62,965.78 to show an example of a trader buying BTC early in the day on October 11th, 2024, and selling later that same day.
When it comes to the investment and exit fees, I added 0.1%, the standard maker/taker fee for spot trading on Binance. These are basically fees for the average user who buys and sells crypto.
Next, I Googled the average income in the US, which is $37,585, which was added in as well.
Finally, for the length of ownership, I chose “1 Year Or Less” since both trades were completed in one day; for the location, I chose California and chose “Single” for the filing status since I’m not married (yet!), so I’m not filing jointly.
Identifying Your Tax Obligations for Crypto Activities
Not all crypto activities are taxable, but it’s good to know when they are.
Here’s what you need to report:
- Trading crypto for fiat: Anytime you sell crypto for cash (like selling Bitcoin for USD) it’s a taxable event. You’ll need to report any gain or loss based on the difference between the price you paid (cost basis) and the sale price.
- Trading one crypto for another: Even if no fiat currency is involved, trading one crypto for another is still a taxable event. For example, if you trade Bitcoin for Ethereum, you’ll need to report any gain or loss based on the value of the Bitcoin at the time of the trade.
- Using crypto to buy things: If you use crypto to buy something, whether it’s a car or just a cup of coffee, you’re essentially selling that crypto. So, you’ll need to report any gain or loss based on the value of the crypto when you bought it versus when you spent it.
- Earning crypto from mining or staking: Any rewards you earn from mining or staking are income, and you’ll need to report them. When you receive the value of the crypto, you’ll report it as income.
- Receiving crypto as a gift: If you receive crypto as a gift, you don’t need to report it until you sell or trade it. But if you gift crypto to someone else, you should be aware of the annual gift tax exclusion, which allows you to give up to a certain amount tax-free.
Knowing what’s taxable you’ll avoid the surprise when it’s time to file.
Documents and Records You Need to Keep
When reporting crypto taxes you need to keep detailed records. To calculate your taxes, you’ll need to track the cost basis method for each crypto asset. This refers to the original purchase price and is used to calculate your capital gains or capital loss.
Here’s what you need:
- Transaction history: Whether you’re buying, selling, or trading crypto, you need to keep a record of each transaction, including the date, amount, type of transaction, and the value of the crypto at the time. Most exchanges will allow you to download this information, which makes life much easier.
- Cost basis and acquisition date: For each crypto asset you own, you need to know the original purchase price (your cost basis) and the date you acquired it. This is used to calculate your capital gains or losses when you sell or trade the crypto.
- Fair market value of received crypto: If you’re earning crypto from mining, staking, or receiving airdrops, you need to know the fair market value of the crypto at the time you received it. This is for income reporting.
- Receipts for purchases made with crypto: If you buy goods or services with crypto, keep receipts showing what you bought and the value of the crypto at the time of purchase. This will help with capital gains or losses.
- Donation and gift documentation: If you donate crypto to a charity, ensure you have documentation from the charity acknowledging the donation. If you give or receive crypto as a gift, keep records of the transaction for future reference.
By keeping these documents organized throughout the year, you’ll save yourself a lot of stress when it’s time to report your crypto taxes.
How Crypto Transactions Are Taxed
So you’re in crypto now? Well, not all transactions are taxed the same. Whether you’re buying, selling, trading, mining or even gifting crypto, the IRS has rules for each. Earlier this April, the IRS uploaded an update on digital assets, which you can check out for a full breakdown of taxable crypto transactions.
Let’s go through the most common types of transactions and how they’re taxed so you can keep it all straight when tax time comes.
Buying, Selling, and Trading Cryptocurrencies
When you buy cryptocurrency, there’s no immediate tax event. You only need to worry about taxes when you sell or trade it. Here’s how it works:
- Buying crypto: There’s no tax involved when you buy crypto with cash (say you use $1,000 to buy Bitcoin). But be sure to keep track of the price you paid—this is your cost basis, and it’s important to calculate any future gains or losses.
- Selling or trading crypto: If you sell that Bitcoin for $1,500, you’ve got a $500 gain that needs to be reported. The IRS wants to know about every time you sell or trade crypto because each transaction can lead to a capital gain or loss. Even trading one crypto for another counts. For example, if you trade your Bitcoin for Ethereum and the value of your Bitcoin has gone up since you bought it, the difference in value is a taxable event.
So whenever you sell or trade crypto, make sure you know your cost basis and what your crypto is worth at the time of the transaction—that’s how you calculate your gain or loss.
Crypto Mining and Staking Taxes
If you earn crypto through mining or staking, the IRS considers this income, and you’ll need to report it when you receive the crypto, not when you sell it.
Mining
Let’s say you’re mining Bitcoin and you receive 0.1 BTC as a reward. The value of that Bitcoin when you receive it is ordinary income. So if 0.1 BTC is worth $2,000 when you mine it you’ll report $2,000 as income. Then if you sell the Bitcoin later any increase in value will be subject to capital gains tax.
Staking
Staking works the same way. When you earn rewards from staking your crypto, the fair market value of the rewards when you receive them is taxable income.
For example, if you receive staking rewards worth $500, that $500 should be added to your yearly income. And just like with mining, if you sell the staked tokens later, you’ll pay capital gains tax on any increase in value.
Track the value of your rewards when you receive them so you know how much to report. Also, remember that any income as the result of staking is treated as gross income. Coinbase also offers tax tools that can generate reports like Form 1099-MISC for income from staking or rewards. If you are interested in staking, feel free to check out our article on the Best Crypto Staking Platforms for 2024.
Tax Implications of Crypto Gifts and Donations
Crypto can also be used for gifts and donations, and the rules are a little different. When gifting or donating crypto, it’s important to understand your financial interest in virtual assets. The IRS considers gifts tax-free unless the recipient sells the crypto, at which point the cost basis is transferred. Here’s a breakdown of the rules:
Gifting crypto
If you give someone crypto as a gift, the IRS doesn’t consider this a taxable event. However, the person receiving the gift might have to pay taxes if they later sell or trade the crypto. The cost basis of the crypto (what you paid for it) is passed on to the recipient. So if you gift your friend Bitcoin you bought for $1,000 and sell it later for $2,000, they’ll report the $1,000 gain.
Donating crypto
Donating crypto to a registered charity can be a win-win. If you donate crypto that has appreciated in value, you can avoid paying capital gains tax on the appreciation. You may be able to deduct the fair market value of the crypto on your taxes as long as you’ve held the crypto for more than a year.
For example, if you bought Ethereum for $500 and it’s now worth $2,000, you can donate it to charity, avoid paying capital gains on the $1,500 increase, and claim a deduction for the $2,000 donation.
If you’re considering donating your cryptocurrency, charities like GiveCrypto offer an opportunity to make a positive impact while potentially reducing your tax liability. When you make a donation, make sure to get proper documentation, as the IRS requires proof of charitable deductions.
Beginner’s Guide to Crypto Taxes
New to crypto and taxes? Don’t worry, you’re not alone! Crypto and taxes can seem overwhelming at first, but with the right steps, you can get it all sorted without too much hassle. This guide will take you through the basics, from your tax bracket to reporting your crypto gains and losses. We’ll also cover how important it is to track the value of your crypto to ensure accurate tax reporting.
What You Need to Get Started
Before we get into crypto taxes, you’ll need to gather some information.
Now you have all that info, and you’ll be ready to tackle your crypto taxes.
Step 1: Understanding Your Tax Bracket
The first step in crypto taxes is knowing your tax bracket and determining the rate you’ll pay on your crypto income or gains. Check out the table below for a detailed run down of the 2024 US Income Tax Rates.
Tax Rate
Single Filers
Married Filing Jointly
Married Filing Separately
Head of Household
10%
$0 – $11,600
$0 – $23,200
$0 – $11,600
$0 – $16,550
12%
$11,601 – $47,150
$23,201 – $94,300
$11,601 – $47,150
$16,551 – $63,100
22%
$47,151 – $100,525
$94,301 – $201,050
$47,151 – $100,525
$63,101 – $100,500
24%
$100,526 – $191,950
$201,051 – $383,900
$100,526 – $191,950
$100,501 – $191,950
32%
$191,951 – $243,725
$383,901 – $487,450
$191,951 – $243,725
$191,951 – $243,700
35%
$243,726 – $609,350
$487,451 – $731,200
$243,726 – $365,600
$243,701 – $609,350
37%
Over $609,350
Over $731,200
Over $365,601
Over $609,350
These rates apply to taxable income and will impact your 2024 tax returns, filed in 2025. To calculate how much you’ll owe, income falling within each bracket is taxed at the corresponding rate.
For example, let’s say you’re a single filer making $50,000 in taxable income, the table below gives you a simple breakdown of what you would owe and how to calculate what you should pay.
Taxable Income: $50,000
Tax Rate
Income in Bracket
Tax Amount Owed
First $11,600
10%
$11,600
$1,160
$11,601 to $47,150
12%
$35,550
$4,266
$47,151 to $50,000
22%
$2,850
$627
Total Tax Liability
$6,053
By adding up the amounts owed for each tax bracket, your total tax liability for an income of $50,000 would be $6,053.
Capital Gains: Short-term vs Long-term
The IRS taxes crypto gains as short-term or long-term capital gains depending on how long you’ve held the asset.
Short-term capital gains apply if you’ve held the asset for less than a year, and these gains are taxed as ordinary income based on your tax bracket.
For example, if your annual income is $60,000 and you made $5,000 in short-term crypto gains, your total income would be $65,000, and the crypto gain would be taxed at the same rate as your salary.
Long-term capital gains apply if you’ve held the asset for over a year. Depending on your overall income, these gains are taxed at a lower rate, 0%, 15%, or 20%. Knowing your tax bracket will help you determine the rate you’ll pay on your crypto profits.
Step 2: Calculating Your Crypto Gains and Losses
Now that you know your tax bracket, you need to calculate your gains and losses from crypto transactions. To do this, you must know your cost basis – the price you paid for the crypto.
- For gains: If you sell or trade for more than you paid for it, you made a profit. The profit is the difference between your cost basis and the value of the crypto when you sold or traded it. For example, if you bought Bitcoin for $3,000 and sold it for $5,000 your profit would be $2,000.
- For losses: If you sell or trade for less than you paid, you make a loss. For example, if you bought Ethereum for $4,000 and sold it for $3,000, you’d have a $1,000 loss. These losses can offset your gains and reduce your overall tax bill.
Remember to keep track of every transaction; you’ll need this info when filing your taxes.
Step 3: Reporting Your Crypto on Tax Returns
Now you’ve calculated your gains and losses, and it’s time to file them on your tax return.
It’s also important to make any tax on crypto gains accurate, using specific crypto tax forms, such as Form 8949 for sales and trades and Schedule C if you’re reporting crypto earned as part of a business.
Here’s what you need to know.
- Use Form 8949: This is where you report all your crypto sales, trades, and transactions. You’ll list each transaction separately: the date you acquired the crypto, the date you sold or traded it, the cost basis, and the value of the crypto at the time of sale.
- Transfer to Schedule D: Once you’ve completed Form 8949, you’ll transfer the total gains or losses to Schedule D, where you’ll summarize your capital gains and losses for the year.
- Use Schedule C: If your crypto income is from self-employment, such as mining, staking, or providing services, report it on Schedule C. You can also deduct any business expenses related to earning that crypto, such as equipment costs or electricity used for mining
- Report crypto income: If you earned crypto from mining, staking, or as payment for services, you’ll report this as income on your tax return just like you would for any other job. The value of the crypto when you receive it is the amount you’ll report as income.
By following these steps and keeping track of everything, reporting your crypto taxes doesn’t have to be a pain. It’s all about being organized and understanding the basic crypto tax rules.
Strategies to Minimize Crypto Tax Liability
Nobody likes to pay more than they have to, and the same goes for taxes. Fortunately, there are a few ways you can minimize your tax liability when dealing with crypto.
Whether it’s taking advantage of losses, holding assets longer, or using tax-advantaged accounts, these will help you keep more of your gains in your pocket.
Utilizing Tax-Loss Harvesting
One way to reduce your crypto tax bill is through tax loss harvesting. This allows you to use losses from your crypto investments to offset your gains. Here’s how it works:
Realizing Losses
If you sell crypto at a loss, you can use that loss to offset any gains you’ve made elsewhere in your portfolio. For example, if you made $5,000 in gains from Bitcoin but lost $2,000 when you sold Ethereum, your net taxable gain would be $3,000.
Offsetting Ordinary Income
If your losses exceed your gains you can even use the excess losses (up to $3,000 per year) to offset your ordinary income which can lower your overall tax bill. If your losses are more than $3,000 you can carry the remainder forward to future tax years.
You can reduce the taxes owed on your profitable trades by selling off assets that have declined in value.
Holding Cryptocurrencies Long-Term
Another simple way is to hold your crypto for over a year before selling. The good news is that the IRS rewards long-term investors by offering lower tax rates on long-term gains than on short-term gains.
- Short-term vs. long-term capital gains: If you hold a crypto for less than a year, your gains will be taxed at your ordinary income rate, which could be as high as 37%. But if you hold it for more than a year, the gains are taxed at the long-term capital gains rate, which is 0% to 20%, depending on your income.
- The savings can add up. For example, if you made $10,000 in profit on a crypto trade, holding the asset for over a year could mean the difference between 15% long-term capital gains tax or up to 37% short-term gains.
If you’re not rushing to sell, holding your crypto long-term can lead to significant tax savings.
Investing Through Tax-Advantaged Accounts
Not all places offer this, but some tax-advantaged accounts allow you to invest in cryptocurrencies and reduce your tax burden. Here’s how:
- Self-directed IRAs: In the US, a self-directed Individual Retirement Account (IRA) can be used to invest in cryptocurrencies. The benefit here is that gains are tax-deferred (in a traditional IRA) or tax-free (in a Roth IRA) depending on the type of account.
- HSAs: A Health Savings Account (HSA) is another tax-advantaged option for US investors. Some HSAs allow investments in alternative assets like cryptocurrency and the money you invest grows tax free as long as it’s used for qualified medical expenses.
These accounts have rules and restrictions, but investing through tax-advantaged accounts can be a way to build wealth in crypto and defer or avoid taxes altogether.
The Role of Crypto Tax Software
Tracking your crypto transactions and being tax compliant can be a total pain, especially if you’re trading often or earning crypto from multiple sources. This is why crypto tax software can be useful for you.
These tools will automate the process for you by tracking your trades, calculating gains and losses, and even generating the forms you need to file with the IRS. Let’s dive in and see why crypto tax software is a total game changer and which ones to use.
Benefits of Using Crypto Tax Software
Using crypto tax software has several benefits that will make filing your taxes so much easier and more accurate:
- Automatic transaction tracking: Crypto tax software connects to your exchanges and wallets and pulls in all your transactions. You don’t have to manually enter each trade, buy, or sell, which can be time-consuming.
- Accurate gains and losses: One of the hardest parts of crypto taxes is calculating your capital gains and losses, especially if you’ve made multiple trades across different platforms. Crypto tax software does this for you and calculates gains and losses based on current tax rules, including applying short-term and long-term capital gains rates correctly.
- Tax forms: Most crypto tax software will generate tax forms for you, like IRS Form 8949 and Schedule D in the US. This makes it easy to plug the info into your tax return or hand it off to your accountant.
- Complex activities: If you’re involved in more complex crypto activities like staking, mining, airdrops, or DeFi transactions, crypto tax software can track and categorize them so they’re reported correctly.
- Audit support: Some even offer audit support, so if the IRS has questions about your crypto filings they can help you. Nice to have if you get audited.
Additionally, the IRS has tools to help you estimate your taxes and withholding, which can be super helpful for managing your crypto tax liability. Try using the IRS tax withholding estimator to stay on track and avoid surprises.
Top Crypto Tax Software Recommendations
There are many crypto tax software platforms out there. Below are some of the easiest-to-use options.
1. Koinly
Koinly is one of the top choices for international crypto traders, supporting over 30 countries and connecting to over 400 exchanges and 100 wallets. Whether you’re trading, staking, or lending, Koinly easily handles even the most complex transactions. Once you sync your crypto data, Koinly will provide a detailed portfolio overview and automatically calculate your tax obligations.
While Koinly’s free plan allows you to track your portfolio, generating tax reports requires a paid plan. Koinly stands out for its user-friendly interface and ability to handle complicated DeFi activities. If you’re outside the U.S., Koinly is an excellent option, supporting countries like Australia, Canada, and the UK. Pricing starts at $49 for 100 transactions, with higher tiers for larger portfolios.
Visit Koinly2. CoinLedger
CoinLedger is a popular crypto tax software trusted by over 400,000 clients. It simplifies the tax reporting process into three easy steps. First, you connect your exchanges and wallets. CoinLedger then analyzes your transactions and prepares a draft report. Once you confirm everything looks correct, it generates the final tax report, highlighting your crypto tax obligations for the year.
CoinLedger integrates with over 100 platforms, including major exchanges like Kraken, Binance, and Gemini. However, it only supports nine wallets, such as MetaMask and Ledger. While this can be limiting, you can manually upload data if your wallet isn’t supported.
The software also offers crypto tax-loss harvesting, helping reduce or eliminate your tax liabilities by making strategic crypto disposals. CoinLedger serves 16 countries, including the U.S., Japan, and the UK. Free plans are available for portfolio tracking, but tax reporting starts at $49 for 100 transactions, with higher tiers available.
Visit CoinLedger3. TokenTax
TokenTax is a full crypto tax platform known for its robust features, especially for DeFi, NFTs, and margin trading. One of TokenTax’s best features is its tax-loss harvesting dashboard, which helps you offset capital gains by selling assets at a loss. It supports over 120 exchanges and has many tax forms, including Form 8949. It also integrates with TurboTax, so you can file your taxes easily.
TokenTax offers three main pricing tiers: The Basic plan starts at $65 and is limited to Coinbase and Coinbase Pro users. For those using other exchanges or dealing with more transactions, the Premium plan at $199 handles up to 5,000 transactions and includes support for DeFi and NFTs.
The VIP plan goes up to $3,499 for power users and offers full tax filing services, in-depth help from crypto tax experts, and extensive audit support. TokenTax is available in 30+ countries, making it a solid option for both U.S. and international traders
Visit TokenTax4. ZenLedger
ZenLedger is a robust crypto tax platform for advanced traders and those involved in complex transactions, such as NFTs or DeFi. It supports over 400 platforms and can integrate data from multiple exchanges and wallets into a single, organized report. ZenLedger’s tax-loss harvesting feature helps you reduce your taxable income by optimally selling assets.
In addition to generating essential forms like Form 8949, ZenLedger integrates with TurboTax to streamline the tax filing process. The platform also includes audit support, providing backup in case of IRS audits. While ZenLedger is powerful, it doesn’t offer a mobile app, and its pricing can be high for users with large portfolios. Plans start at $49 for 100 transactions, with higher pricing for advanced features.
Visit ZenLedgerIf you’re looking for more help with tax prep, tools like Credit Karma offer free access to tax calculators and other helpful resources. These platforms all have different features, so check which one suits you best according to your crypto activities and number of exchanges.
Dealing with Crypto Tax Audits
Crypto tax audits are becoming more common as tax authorities step up their focus on cryptocurrency transactions. The IRS and other agencies are cracking down on crypto users and platforms to ensure all crypto income, gains, and losses are reported correctly.
While the thought of a tax audit can be stressful, being prepared and staying organized will make the process much easier. CoinDesk has a video guide on how crypto users can handle a crypto audit by the IRS.
How to Prepare for a Crypto Tax Audit
Let’s look at how you can prepare for an audit and what to do if you are selected for one.
Crypto Tax Audits
Just the thought of being audited by the IRS is enough to make you nervous, but with the increased attention on crypto, you should know how to handle an audit. Crypto tax audits are becoming more frequent as the IRS is cracking down to ensure all crypto transactions are reported accurately. Auditing doesn’t mean you did anything wrong, but you should be prepared if the IRS asks for more info on your crypto activity.
How to Prepare for a Crypto Tax Audit
Preparation is key to making an audit smooth. Here’s what you can do to be organized and stress-free if the IRS comes knocking:
Keep Detailed Records
The most important thing is to keep records of all your crypto transactions. This includes:
- Dates of purchase, sale, and trade of each crypto asset
- Amount of crypto bought or sold
- Fair market value of each crypto at the time of the transaction
- Your cost basis (what you paid for the asset)
- Transaction history from exchanges and wallets
Crypto tax software can help you pull all your transaction data into one place, but you still need to double-check everything is correct.
Document Income Sources
If you’ve earned crypto from staking, mining, or airdrops, make sure to document the value of the crypto when you received it. This includes:
- Date the crypto was received
- Fair market value at the time of receipt
- How you received the crypto (e.g., mining, staking, payment for services)
Keep Tax Forms
The IRS may ask for copies of any tax forms you used to report your crypto transactions, such as:
- IRS Form 8949 (Sales and Dispositions of Capital Assets)
- Schedule D (Capital Gains and Losses)
- Income forms for crypto received as compensation (e.g., Schedule 1 for other income)
Review Your Return
Before you file, always review your return for accuracy. Ensure all crypto income, capital gains, and losses are correctly reported. If you use a CPA or tax preparer, ensure they know about crypto tax rules.
Use Crypto Tax Software with Audit Support
Some crypto tax platforms, like TaxBit and CoinTracker, offer audit support as part of their services. This is a big help if you get audited, as the software providers will help you respond to the IRS.
By being organized and using tools to track your crypto transactions, you’ll be much more prepared in the event of a tax audit.
What to Do If You’re Audited for Your Crypto Taxes
Don’t freak out if you get audited for crypto taxes. Follow these steps:
Respond Immediately
If you get a letter from the IRS, you gotta respond within the timeframe they give you. Ignoring the notice will only make it worse, so open any mail from the IRS right away and follow their instructions.
Get Your Records
The IRS will ask for documentation to prove your crypto transactions. This could be:
- Transaction history from exchanges and wallets
- Bank statements showing deposits or withdrawals related to crypto trades
- Form 8949 and Schedule D
Make sure your records are tidy and complete. Crypto tax software can generate reports that will help you get everything you need fast.
Work with a Tax Professional
If you’re unsure how to respond to the audit or need help with your crypto tax reporting, consider hiring a tax pro who knows crypto. They can help you through the process and communicate with the IRS so everything gets done right.
Be Honest and Transparent
Honesty is the best policy with the IRS. If you made a mistake in your crypto reporting, explain the error and provide any extra information they requested. The IRS will be more lenient if you’re transparent throughout the audit process.
Pay Any Additional Taxes or Penalties
If the IRS finds you underreported your crypto gains or didn’t report income, they may hit you with additional taxes and penalties. If that happens, pay the amount owed as soon as possible to avoid more penalties or interest.
Just because you got audited doesn’t mean you did anything wrong—it means the IRS just wants to check your numbers. Stay organized and you’ll be golden.
Crypto Tax Regulation Updates for 2024-2025
Crypto tax regulations are changing as governments try to increase tax compliance and transparency in the digital asset space. In the 2024/2025 tax year, several big changes will be made for crypto investors. Let’s break them down and what they mean for you.
Recent Changes in Crypto Tax Laws
- New Broker Reporting: Starting in 2025, digital asset brokers (exchanges and custodial wallet providers) will be required to report on Form 1099-DA. This form will disclose sales, exchanges, and even some transfer activity of digital assets. The goal is to have more accurate tax filings by providing detailed information about each transaction to the IRS and taxpayers.
- $10,000 Reporting for Large Transactions: Individuals and businesses that make transactions over $10,000 in crypto must report them to the IRS just like they would with large cash transactions. This rule prevents tax evasion on large-scale crypto transactions and will apply to purchases of goods and services.
- Wash Sale Rule: The wash sale rule has not been applied to cryptocurrencies yet but is expected to be soon. This rule would prevent investors from taking a tax deduction on losses if they buy the same or substantially identical crypto asset within 30 days of selling it. This is part of a broader effort to close loopholes and align crypto regulations with traditional securities.
If you want to stay updated on federal regulations impacting cryptocurrency, it’s a good idea to check out the Federal Register. That’s where new rules about virtual currencies and taxes are posted, so keeping an eye on it can help you stay informed about any changes that could affect your crypto activities.
How These Changes Affect Crypto Investors
You’ll need to keep better records, as users and brokers will now report more detailed transaction data to the IRS on Form 1099-DA, including receiving large payments.
If the wash sale rule is applied to crypto, you’ll need to rethink your tax loss harvesting strategies. You won’t be able to sell at a loss and buy back the same asset for tax purposes. You’ll need to find alternatives, like buying correlated assets, to stay in the market.
International Crypto Tax Considerations
As crypto goes global, investors will have international tax obligations. Whether you’re a US citizen with foreign crypto or an international investor, you must understand the tax implications across different jurisdictions. This section will cover US reporting requirements for foreign crypto and how tax treaties impact your crypto tax.
Understanding US Reporting Requirements for Foreign Assets
If you’re a US citizen or resident with crypto in foreign accounts or on international exchanges, you may need to file:
FBAR (Foreign Bank Account Report)
The FBAR requires US taxpayers to report foreign financial accounts, including crypto on foreign exchanges, if the aggregate value of those accounts is over $10,000 at any time during the calendar year. Not reporting these accounts can result in big penalties.
FATCA (Foreign Account Tax Compliance Act)
FATCA requires foreign financial institutions to report assets held by US taxpayers and it may apply to crypto held overseas. If your foreign crypto is over certain thresholds, you may need to report it on Form 8938 with your annual tax return.
US citizens holding foreign crypto accounts over $10,000 must file a Foreign Bank Account Report (FBAR) through FinCEN’s BSA E-Filing System.
These reporting requirements are to help the IRS track foreign assets and ensure tax compliance. If you’re not sure if your foreign crypto is subject to these rules, consult a tax professional with international tax experience.
Tax Treaties and Their Impact on Crypto Taxes
If you’re investing or trading crypto across borders, tax treaties between the US and other countries can impact how much tax you owe. Here’s what to consider:
- Double Taxation: Many countries have tax treaties with the US to avoid double taxation. These treaties can determine which country has primary taxing rights over your crypto income and make sure you’re not taxed twice on the same income. For example, income from crypto in a foreign country may be eligible for tax credits or exemptions under a treaty.
- Residence and Source of Income: Tax treaties typically address where the taxpayer is a resident and where the income is sourced. If you’re a US resident earning income from crypto abroad, tax treaties can reduce your tax liability in one or both countries.
- Country-Specific Provisions: Some tax treaties have specific provisions for capital gains, dividends, or even crypto activities, but this area is still developing as governments adapt to digital assets.
To get the full benefit of tax treaty relief, you’ll need to file forms like Form 8833 (Treaty-Based Return Position Disclosure) with your tax return. Consult a tax professional who knows US and international tax law to ensure compliance and minimize your tax.
Avoiding Common Crypto Tax Mistakes
Cryptocurrency tax laws are complicated, and experienced investors can make mistakes when filing their taxes. These errors can lead to audits, penalties, or a bigger tax bill. Let’s look at two of the most common crypto tax mistakes—misreporting income and not reporting all transactions—and how to avoid them.
Misreporting Crypto Income
One of the biggest mistakes is not reporting all crypto-related income. Crypto earned through mining, staking, and airdrops is considered taxable income. Here are some common mistakes:
- Underreporting mining or staking income: Crypto earned through mining or staking is income and must be reported at fair market value on the day you receive it. For example, if you mined 0.5 Bitcoin when the market value was $20,000, you need to report $10,000 as income. Many taxpayers miss this step and underreport.
- Forgetting airdrops and rewards: Airdropped tokens or rewards from platforms are also income. Even if you didn’t sell the tokens, the value at the time of receipt should be reported as income on your tax return.
To avoid misreporting, keep track of all crypto you receive and use crypto tax software to automatically track the value of assets on the day you acquire them.
Failing to Report All Transactions
Another big mistake is not reporting all your crypto transactions, especially small trades or transfers between wallets. The IRS requires you to report every sale, trade, or use of crypto as a payment, regardless of the size or nature of the transaction:
- Ignoring crypto-to-crypto trades: Many investors think that exchanging one crypto for another (e.g., trading Bitcoin for Ethereum) isn’t taxable, but the IRS considers these trades as sales. Even if you didn’t convert to fiat, the difference in value between the crypto when you acquired it and when you traded it is taxable as capital gains.
- Not reporting small transactions: Even small transactions like using crypto to buy goods or services are taxable. For example, if you bought a coffee with Bitcoin, you need to calculate the gain or loss based on the difference between what you paid for the Bitcoin and its value when you spent it.
To avoid this mistake, keep a log of all your transactions—no matter how small—and make sure every trade or sale is accounted for on your tax return. Using crypto tax software can make this process easier by automatically tracking and categorizing your transactions.
So don’t make these mistakes and stay tax compliant. Consult a tax pro if you’re not sure.
Crypto Tax Guide: Conclusion
Crypto taxes can seem like a pain at first, but with the right knowledge and tools, they don’t have to be. Stay organized and up to date with the latest laws as they evolve.
Whether you’re trading, mining, or holding, having a solid tax strategy will save you from future headaches. And don’t forget—keep detailed records and use good crypto tax software, and tax season will be a breeze.
The bottom line? Don’t let crypto taxes get you in over your head. A little effort now will save you from big problems later, and if you get lost, always consult a tax pro.
See Also
- Next 1000x Crypto – 14 Coins That Could 1000x in 2024
- 13 Cryptos With the Most Potential in 2024
- 12+ New and Upcoming Binance Listings in 2024
Frequently Asked Questions
Do I need to report crypto if I haven’t sold or exchanged it?
How do I calculate taxes on crypto mining?
Can I deduct losses on my cryptocurrency investments?
Are there any tax-free crypto transactions?
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What’s the best way to track my crypto transactions for tax reporting?
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United States, Department of the Treasury, Internal Revenue Service. “About Schedule D (Form 1040), Capital Gains and Losses.” IRS, 8 Feb. 2023, www.irs.gov/forms-pubs/about-schedule-d-form-1040.
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CoinDesk. “Crypto Tax Toolkit: Surviving an IRS Exam.” Consensus 2024, www.consensus2024.coindesk.com/agenda/event/-crypto-tax-toolkit-surviving-an-irs-exam-57.
United States, Department of the Treasury, Internal Revenue Service. “IRS Warns Taxpayers about New Email Scam.” GovDelivery, www.content.govdelivery.com/accounts/USIRS/bulletins/395be7f.