Everything you need to know about US cryptocurrency tax
Updated: 21st September 2022
This article seeks to address some of the main questions that we get asked about US tax on cryptocurrency and demystify how the IRS handles the taxation of cryptocurrency in the U.S.
We are certified and specialist in US and UK tax for tax filers worldwide.
Please note: Recommendations and obligations for crypto investors will vary depending on the circumstance. This article offers a general overview of the topic.
We recommend always consulting a certified UK tax adviser for cryptocurrency to ensure your investments are treated in line with UK tax law and for maximum savings against tax.
This article is updated as new information about US tax on cryptocurrency emerges
Click below to skip to a section that may be more relevant to your circumstance. If you can’t find what you are looking for, feel free to contact us and we may be able to help you and your situation.
How is Cryptocurrency taxed in the U.S.?
Capital Gains tax on Cryptocurrency
How to work out the Capital Gain Owed?
Cryptocurrency and Federal Income Tax
Tax implications on staking crypto assets
Tax considerations when spending cryptocurrency
When is Crypto-Based Activity Non-Taxable?
Does US tax on cryptocurrency vary by state?
Send us your US cryptocurrency tax questions and we will update this article and email you back with answers
What is Cryptocurrency?
Cryptocurrency, often referred to as “crypto”, is a virtual currency that is secured by cryptography. Cryptocurrency is often also referred to as one of its most famous types of cryptocurrency: “Bitcoin”.
Other examples of cryptocurrencies include:
You can view all known cryptocurrencies and their trading value on Coin Market Gap.
The use cases and purpose of crypto is a developing area. One of the most popular uses of crypto currently is holding the currency and s "crypto asset" investment, with the goal to one day sell and join the many "Crypto Millionaires" formed each year.
"Crypto Staking" is another common practice for those holding cryptocurrency. Staking is a reward mechanisim for crypto miners.
Cryptocurrency is a decentralized form of money. Therefore like all money it can be spent. The different ways you can spend cryptocurrency is growing constantly. Cryptocurrencies like bbitcoin can be used to purchase giftcards from services like "eGifter" and "Gyft", which can be used on sites such as Amazon.
eGifter
eGifter is an online service for gifting cryptocurrency. You can find out more at the link below. The link will open in a new tab.
Gyft
Gyft is an online service for gifting cryptocurrency. You can find out more at the link below. The link will open in a new tab.
What is Bitcoin?
Bitcoin is the most widely known form of cryptocurrency. You can view more about bitcoin at the link below.
Crypto Staking
Crypto Staking has grown a popular way to earn money via crypto currencies. You can find out more at the coinbase link below.
Crypto Millionaires
Crypto Millionaires are people who have become millionaires due to their early investment in cryptocurrency.
Coin Market Gap
Coin Market Gap is a site that monitors the fluctuations in cryptocurrency and contains their market information.
What is BNB?
To find out more about BNB, we have included this link to Coin market gap where you can find more information. The link will open in a new tab.
What is USD Coin?
To find out more about USD Coin, we have included this link to Coin market gap where you can find more information. The link will open in a new tab.
What is Tether?
To find out more about Tether, we have included this link to Coin market gap where you can find more information. The link will open in a new tab.
What is Etherum?
To find out more about Ethereum, we have included this link to Coin market gap where you can find more information. The link will open in a new tab.
How is cyptocurrency taxed in the U.S.?
According to the IRS: “virtual currency is treated as a property. General tax principles applicable to property transactions apply to transactions using virtual currency”. This is a key statement when evaluating whether you may owe tax on your crypto.
IRS comments of cryptocurrency
The comments above are taken directly from the IRS, you can view this statement on their website at the link below.
This being said, you could also be subject to income tax, if you should earn crypto currency through your work or through some other income stream.
Capital Gains Tax on Cryptocurrency
Generally you will owe Capital Gains Tax when you dispose of your crypto assets. There are 3 ways to dispose of your cryptocurrency in the U.S. This includes:
- Sell Crypto for Fiat Currency (Paper money, such as USD, GBP, etc.)
- Trading Crypto for other Crypto
- Spending Crypto on goods or services
You will only have to pay a Capital Gains Tax on the profit (if any) you have made as a result of the sale of your Crypto.
Koinly Article on Cryptocurrency
The bullet points are taken from an article made by Koinly. You can view their article at the link below
Working the amount of capital gains tax you owe on the disposal of your crypto is fairly straight forward. You will need the following information to perform the calculation:
The amount your cryptocurrency was worth in USD at the time of purchase, plus the fees you paid to acquire it
The date you bought it and how long you have owned it for
The Amount you received for the cryptocurrency upon disposal or the equivalent amount in USD.
If you subtract the cost of purchase from the amount you sold it for you will either be at a gain or a loss. If you are at a capital gain then you will be eligible to pay Capital Gains Tax on the profit from the disposal of the crypto.
There is not a specific Capital Gains Tax rate for cryptocurrency. Rather it is based on the regular Capital Gains Tax Brackets.
The type of Capital Gains Tax you will pay, either long term or short term, is entirely dependent on how long you have owned the crypto for.
For example, if you have held the Crypto in question for less than a year, you will pay the short-term capital gains rate. If you have held the crypto for longer, you will pay the long-term capital gains rate, which is generally less.
Cryptocurrency and Income Tax
There are circumstances where crypto could be regarded as income rather than a capital gain. If you have received crypto as a form of payment, then this will be regarded as income and may be subject to income tax depending on your tax situation.
The IRS has a fair amount of guidance to determine if your cryptocurrency could be seen as income. Some circumstances include:
Getting Paid in crypto
Mining Crypto
Receiving an Airdrop
Receiving new coins from a Hard Fork
Staking Rewards
Referral Bonuses
Alongside the above, there are other areas which the IRS guidlines are less clear on but could still be considered as an income stream. These include:
Referral Rewards like Binance Referral
Learn to earn campaigns, like Coinbase Learning Center
Watch to Earn platforms like Odysee
Browse to Earn platforms like Premission.io browser extension
Play to Earn games like Axie Infinity
Shop to Earn through browser extensions like Lolli
Share Public addresses to earn on platforms like Moon Faucet
However, it can be inferred that earning tokens and coins in this manner can be classed in the same bracket as Mining crypto and Staking Rewards which leaves them eligible for taxation.
For tax purposes the value of your cryptocurrency is determined in the same manner as it was as a capital gain. That is the equivalent value in USD that the crypto was worth on the day you received it, but this time in the form of payment.
This can make accounting for crypto payments fairly time consuming, and tricky. As feasibly each payment you receive for goods, could be worth a different amount for every payment received. At the very least the value is likely to fluctuate across the year.
After compiling the relative value of your cryptocurrency in USD this would then be added to your taxable income for the tax year in question. Click here to view the U.S. income tax thresholds.
For a clear understanding on whether your cryptocurrency could be considered as taxable income we recommend speaking to a tax professional for peace of mind.
Tax Implications on Staking Crypto Assets
US tax on crypto staking rewards is a developing area in the US tax system and is yet to be clearly defined. The nearest thing to guidance surrounding US tax on crypto staking offered by the IRS is the Notice 2014-21.
Generally staking rewards are subject to income tax based on their fair market value at the point the reward is received.
Just like other crypto income, the point where you dispose of your stakes coins by selling/trading/spending is when the amount becomes liable to capital gains tax.
IRS Notice 2014-21
This Notice by the IRS contains information about the taxation of your crypto asset when staking rewards.
Tax Considerations When Spending Cryptocurrency
When you spend cryptocurrency you are generally required to capital gains tax on the amount.
Currently there is one single tax rate for all of the different types of cryptocurrencies which is not influenced by how the crypto-asset is spent.
When Is Crypto-Based Actiity Non-Taxable
Although there are many circumstances in which your crypto activity will be taxable, there are a few circumstances that are considered non-taxable. These are as follows:
Buying Crypto with Fiat: You are not taxed when buying crypto with cash, instead you may face a Capital Gains Tax upon the selling of the currency when the value is “realised”.
Donating crypto to a Charity of Non-Profit Organization
Receiving a gift: You can gift up to $15,000 per recipient per year without paying taxes (and higher amounts to spouses). 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.
Even in the list above, it is worth working closely with a tax professional when performing crypto-based transactions to confirm whether you will or will not owe tax on your crypto asset.
Does U.S. Tax On Cryptocurrency Vary By State?
There is currently no defined US tax rules specifically for cryptocurrency in any state. However there are some states that are more friendly for crypto taxpayers.
Need More Information?
Recommendations and obligations for crypto investors will vary depending on circumstance. This article offers a general overview of the topic.
We recommend always consulting a certified US tax adviser for cryptocurrency to ensure your investments comply with the IRS’s tax regulations, and for maximum savings against tax.
To speak to one of our certified UK tax advisors drop us a message or book an appointment
