Cryptocurrency transactions are taxable in most countries, including the U.S., and failing to report them correctly can lead to penalties or audits. Here’s what you need to know before filing your taxes:
1. Cryptocurrency is Taxable Property (U.S. & Many Other Countries)
- The IRS (U.S.) and many tax authorities treat crypto as property, not currency.
- Capital Gains Tax: Selling, trading, or spending crypto triggers a taxable event if the value has increased since acquisition.
- Ordinary Income Tax: Mining, staking rewards, airdrops, and earned crypto are taxed as income at their fair market value when received.
2. Key Taxable Events
- Selling crypto for fiat (USD, EUR, etc.) → Capital gains/loss.
- Trading one crypto for another (e.g., BTC to ETH) → Taxable as a disposal of the original asset.
- Spending crypto on goods/services → Taxable as if you sold it.
- Receiving crypto as payment (income) → Taxable as ordinary income.
- Earning staking rewards, mining income, or airdrops → Taxable as income.
3. How to Calculate Gains & Losses
- Cost Basis: Original purchase price + fees.
- Capital Gain/Loss: Sale price – cost basis.
- Holding Period Matters:
- Short-term: Held ≤1 year → taxed as ordinary income (higher rate).
- Long-term: Held >1 year → lower tax rate (0%, 15%, or 20% in U.S.).
4. Tracking Transactions is Crucial
- Use tools like CoinTracker, Koinly, or CryptoTaxCalculator to import exchange data.
- Keep records of:
- Purchase dates & prices.
- Sale/trade dates & amounts.
- Wallet addresses (if needed for verification).
5. Reporting Requirements (U.S.)
- Form 8949 & Schedule D: Report capital gains/losses.
- Schedule 1 (Form 1040): Report crypto income (mining, rewards, etc.).
- FBAR/FATCA (if applicable): If you hold >$10k in foreign exchanges.
6. Common Mistakes to Avoid
- Not reporting crypto-to-crypto trades (e.g., swapping ETH for SOL is taxable).
- Forgetting hard forks/airdrops (these are income when received).
- Ignoring DeFi transactions (yield farming, liquidity mining are taxable).
- Assuming losses aren’t reportable (they can offset gains).
7. IRS Enforcement is Increasing
- The IRS added a crypto question to Form 1040 (must answer truthfully).
- Exchanges like Coinbase, Binance, and Kraken issue 1099 forms (IRS receives copies).
- Penalties for underreporting can include fines + interest.
8. International Considerations
- UK/EU/Canada/Australia: Similar rules—crypto is taxable as property or income.
- Some countries (e.g., Portugal, Germany): Tax-free if held long-term (check local laws).
Next Steps
- Gather all transaction history (use CSV files from exchanges).
- Use crypto tax software or consult a crypto-savvy CPA.
- File accurately and on time to avoid penalties.
Would you like help with a specific scenario (e.g., DeFi, NFTs, or losses)?
