Last Updated: September 28, 2022
Cryptocurrency income and gains are taxable in the United States and should always be reported based on the U.S. dollar value of the transaction. In general, HODLing crypto is not taxable. However, it is the gains and income that the IRS considers taxable. While cryptocurrency tax can be very complicated, we can simplify everything by grouping transactions into the general rules below:
Capital Gains Taxes
If you purchase a coin or token and sell (or trade it) for more value than what you paid for it, this is a taxable gain. The key here is that every trade is taxable – whether selling crypto back into fiat (any government-issued money) or trading one crypto into another. This applies if you purchase a coin, token, NFT or any other type of financial instrument representing a crypto asset such as a futures contract.
Just like gains are taxable, any capital losses from selling or trading a coin for less than what it was acquired for are deductible for tax purposes, subject to certain restrictions.
Even trading stablecoins between each other count as taxable events!!
Proceeds from sale – cost basis = taxable gain or loss
Proceeds from sale: If you are converting into fiat, this is the amount of fiat you get for your crypto (after any fees). If you are converting to another crypto, it is the value of the acquired crypto at the time of the trade.
Cost basis: What you acquired your crypto for – if purchased with fiat, is the amount you bought it for plus any fees on the trade. If purchased with another crypto, it’s the value of the crypto at the time of acquisition plus any fees on the trade.
Any income from crypto is subject to income taxes at the ordinary marginal rate of the taxpayer. The list of taxable crypto events includes (but is not limited to):
- Mining income
- Staking income
- Liquidity pPool iIncome
While crypto income can have many forms, the rule of thumb is that if you open up your wallet (or exchange account) and you have more coins / tokens than you had before, then the new coins / tokens received should be recognized as ordinary income based on the value of the coins at the time that the taxpayer obtains control of the coins.
The IRS addressed mining in Notice 2014-21, while it provided guidance on airdrops and hard forks in Rev. Rul. 2019-24. In both cases, the conclusion is that if the taxpayer receives new units of a cryptocurrency, those new units are taxable.
While the extent of the guidance is limited, we have done the best to provide you with the most comprehensive crypto tax guide available in a Q&A format for your convenience.
General Crypto Tax Questions
Is crypto taxed in the USA?
Buying crypto with fiat is not taxable, however, the moment you make any trades or put your crypto to work, you will have to report and pay taxes on your crypto income and gains.
Do I owe crypto taxes in the USA?
If you are a US resident or otherwise have a tax filing obligation with the United States, then you must report all of your cryptocurrency transactions on the tax return for the taxpayer or entity owning the cryptocurrency.
Why is cryptocurrency taxed?
Cryptocurrency is considered property – a capital asset. As such, as explained by the Internal Revenue Service, “general tax principles applicable to property transactions apply to transactions using virtual currency.”
Further, the Internal Revenue Code section 61(a) defines income to be “all income from whatever source derived, including (but not limited to)…” This definition means that all income (gains, staking, mining, hard forks, etc.) is statutorily taxable unless specifically exempted by the Internal Revenue Code.
Crypto is private so the IRS can’t see it, right?
False. Everything on the blockchain is fully visible to anyone who knows your public address. There are also many on-chain tools that regulators can use to track your crypto. Just report your taxes – tax evasion is a crime.
The IRS refers to crypto as virtual currency, is there a difference?
The guidance put forth by the IRS has not generally used the term “cryptocurrency”; as they explained, “virtual currency” is a digital representation of value. And they do emphasize that “regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.” This means that any asset associated with crypto is included in the definition of the IRS. You must report your NFT taxes, just like you must report your crypto taxes.
I’m worried about the IRS, what should I do?
Report your taxes to the best of your ability, pay any tax due (maybe you have losses) and keep your records. Crypto taxes are complicated, but if you use a tool such as ACCOINTING.com, connect all your wallets and exchanges, go through the review steps and ensure you have the right settings, your tax report should be accurate. While every tool will produce a different result due to data differences, this is the same challenge that the IRS has. Therefore, if you have used ACCOINTING.com, reviewed your data and ensured that there are no gaps in the data, you will be fully compliant with the IRS.
I have not filed crypto taxes in prior years and I should have
If you have missed reporting for prior years it is recommended you consult with a tax professional who can help you report the correct amounts, amend tax returns or take the appropriate action depending on your situation.
Using Accointing.com and Finding a Crypto Tax CPA
Do I have to connect all my wallets or only the exchanges on which I trade?
In order for Accointing.com to provide you with an accurate tax report, it is critical that you connect all your wallets and exchanges, including cold storage wallets. Your crypto taxes are dependent on all of your transactions, so if you don’t connect a wallet, we won’t be able to identify the non-taxable transfer nor will you be able to track the tax basis of the crypto.
My gains don’t seem right, what can I do?
If your gains are not accurate it is likely due to a missing link in the chain – an internal transaction, or multiple that add up to creating big differences in your data. This could also be due to transactions that are classified incorrectly or a missing wallet or data. While there is no answer to troubleshooting every case, the best approach is to review your tax report, identify the coins causing the incorrect gains, and deep dive into the history of the transactions of that coin. Perhaps your ETH that you deposited into Coinbase for staking shows up as a taxable disposal due to an issue with the data – in this case you could either ignore the disposal or create the necessary data points to create an internal transfer; to find this error, a user could identify your ETH gains being overstated, and seen that the transaction triggering the largest gains was in fact a deposit into a staking pool.
What do I have to do to generate an accurate tax report?
- Connect ALL your wallets and exchanges used
- Go through the 4-step review process and ensure there are no issues with your data
- Make sure you have selected the appropriate tax settings
If you have any issues with your tax reports or data, ensure you have completed all steps above.
Why are the review steps necessary?
The review steps ensure that your data is complete and that there are no gaps in your data. Mapping unknown coins, confirming internal transfers, mapping certain unconfirmed withdrawals and deposits and providing you with reconciliation tools are all features built to ensure that your data is complete and that your tax reports are accurate. Without these steps, unreviewed data due to limited data from certain exchanges and blockchains, can lead to inaccurate tax reports.
Can I choose any tax setting?
If you are a US taxpayer, you must choose “USA” in the settings page. If this is your first time filing crypto, you can choose a disposal method (Refer to Should I use FIFO, HIFO or LIFO), if you have filed in prior years, it is recommended to use the same method as changing your settings will recalculate your history as well. While you can change your method of accounting, we would recommend consulting a tax professional to make sure this is done correctly. ACCOINTING.com will support this feature in the future.
Why do I have all this reconcile income?
If you cannot locate the issue with a difference between your transaction history and your actual holdings or with missing cost basis, you can reconcile this data and ACCOINTING.com will add the missing transaction to make your balances correct. Depending on the direction of the issue this could result in income or expense. This is presented as ‘reconcile income’ in your tax report under Taxable Income. Please note that there is no formal guideline for using such a feature, this is simply to help in the case that you cannot locate an issue that is immaterial to your portfolio. If you use this, you should report any reconcile income as taxable income.
Why isn’t my staking (mining, rewards, airdrops, hard forks) on Form 8949?
Form 8949 is used only to report trades and sales of assets. Staking, mining, interest, rewards, LP rewards, airdrops, hard forks, and any other type of crypto income is not reported on Form 8949, but on Schedule 1 line 8z. This income is reported on your Accointing.com tax report under “Tax Relevant Income”.
Do I need crypto tax software to file my crypto taxes?
While you could theoretically keep track with a spreadsheet, this would be extremely time consuming and difficult to do accurately. Accointing.com makes this easy for you by helping you connect all your exchanges and wallets and automatically generating the most accurate tax report for all your crypto transactions.
Any advice on finding a crypto CPA?
Any advice on working with a CPA and using Accointing.com?
Accointing.com is designed to be the most user-friendly crypto tax software out there. You can easily connect all your wallets and exchanges and track your crypto portfolio with our iOS or Android apps. Then you can share access to your account with your CPA who can help you classify your transactions and make sure your data is correct for filing your income tax returns. Use the app and tracking tools all year, and be ready for crypto taxes.
I file my own tax return with TurboTax / H&R Block / etc. Can I still use Accointing.com?
Yes! Accointing.com is designed to be the most user-friendly crypto tax software out there. You can easily connect all your wallets and exchanges and track your crypto portfolio with our iOS or Android apps. When it’s time for taxes, you can simply download your tax reports, including tool-specific import files, to be able to use your favorite tax tool with Accointing.com. Check out our guide on filing your tax return using the most popular tax tools. Use the app and tracking tools all year, and be ready for crypto taxes.
Is HODLing taxable?
No. Simply holding a digital asset is not taxable. If you are earning income (rewards, staking, yield, etc) on an asset, that income is taxable as ordinary income.
So if I HODL my crypto in an undeclared wallet, they will never know.
FALSE! To get your crypto into your wallet, you likely purchased it through an exchange with KYC such as Coinbase, Binance.US, Kraken, Gemini, FTX, Mandala or any reputable exchange. The IRS is able to make the links from the exchange to your wallet. Remember that tax evasion is a crime.
If I only HODL and don’t trade my crypto, do I have to report crypto taxes?
If you only purchased crypto with fiat you don’t have to report anything on your tax return – you don’t even have to check the box according to the IRS FAQs, question #5.
What if I transferred my crypto to a wallet?
The transfer of crypto to your wallet, whether a hot or cold wallet, is not a taxable transaction. Careful – some tax reports assume that transfers out are taxable as they do not know you are transferring crypto to yourself. Be careful and don’t use an exchange tax report (unless it’s a 1099-B or 1099-MISC) without verifying its accuracy by connecting to ACCOINTING.com.
If I transfer crypto and pay a fee, is this deductible?
Technically no, but if the amount is substantial, consult with a tax advisor. This is because the Tax Cuts and Jobs Act temporarily eliminated miscellaneous itemized deductions which is where fees on brokerage accounts used to get deducted through. IRS Publication 529 clarifies that investment fees and expenses are not deductible. However, these are traditional investment fees for brokerage accounts. Should this be the same for crypto assets where often GAS fees can be substantial? If you send 10 ETH to a wallet and only receive 9 due to a 1 ETH fee, didn’t the taxpayer dispose of this unit of ‘property’? While the disposal may be taxable, the fee may remain nondeductible absent further guidance.
Mining, Staking and Crypto Yield
I mine Bitcoin, how is this taxed?
“Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?
A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.”
I stake my Solana / Cardano / Tezos, how is this taxed?
The IRS has not formally commented on taxation of staking income, but the conservative approach is to tax staked coins as ordinary income based on the fair market value of the coins at the moment of receipt.
It is reasonable to tax staking income the same as mining income since they are the results of the two most popular consensus mechanisms – staking provides rewards to network validators in proof-of-stake while mining provides rewards to the miners, who serve to secure and validate the network in proof-of-work.
I stake my Ethereum but cannot access rewards yet, is this taxable?
You will not find any tax authority with a concrete answer on this question. However, a strong case can be made that ETH 2.0 rewards that cannot be currently redeemed should not be taxable until the taxpayer obtains control of the rewards. In other words, the moment you can trade or withdraw the coins, they should be taxable then.
Is the Ethereum merge a taxable event?
While we do not have a firm answer on this, what we know is that 1) the merge was a change to the protocol that did not result in two new coins from the change. This would technically fall under the definition that the IRS used for soft forks in Question 30 of the FAQs and would therefore seem to be a nontaxable event where tax basis is simply carried over from the original ETH. Any forked coins (such as ETH PoW) that are not part of the main merge would be subject to hard fork taxation rules. Keep in mind that exchanging your ETH for another coin is a taxable event, even if this is exchanged for cbETH (wrapped ETH).
I purchased crypto and have not traded it, but I am earning rewards / staking / generating yield with it. Do I owe crypto taxes on this?
Yes, purchasing your crypto or HODLing is not a taxable event, but earning any type of income is taxable based on the crypto’s fair market value at the moment you obtain control of it. This means that if you are staking a coin and receiving rewards every three days, you will have about 121 different points in time at which you will need to value your rewards.
Accointing.com automates this for you by connecting to your favorite exchanges and blockchains.
How are airdrops and hard forks taxed?
They are both taxed the same as ordinary income based on the value of the coins at the time that the taxpayer obtains control of the coins. The IRS provided their analysis on this in Rev. Rul. 2019-24.
One thing to make clear is that an airdrop does not follow a hard fork – an airdrop is a marketing event in which coins are sent to users who meet certain criteria. A hard fork is a change to the protocol that results in a new coin being given to users who held the forked coin, for example, Bitcoin went through a hard fork in 2017 and created Bitcoin Cash.
Regardless of the name, airdrops or hard forks result in taxpayers receiving new coins. If you have any new coins in your wallet from seemingly thin air, this is taxable as ordinary income based on the fair market value of the coins upon control.
I earn rewards or other yield on my crypto, how is this taxed?
The IRS has not formally commented on taxation of many types of crypto income. However, just like with airdrops and hard forks, the generally accepted principle is that any new coins earned are taxable as ordinary income based on the fair market value of the coins upon control.
What are the tax implications of nodes such as Strong?
There is no guidance on taxation of nodes such as those of Strong. However, there are various taxable events associated with nodes.
- When you create a node, this is a taxable event as your STRONG will have a gain or loss based on its change in value since you purchased it.
- The creation of the node can be seen as an expense – the problem is that you have to have a trade or business in order to deduct business expenses. You can claim this as a capital asset, obtaining a tax basis in your node, the problem is that it doesn’t exactly fit that framework either. The ideal tax treatment would be to capitalize and amortize the node, as it is providing future value (along with your monthly fees), but you also need a trade or business to do this. If your investment in such assets is substantial, it is recommended you find a tax professional to help you navigate the different approaches of reporting.
- When you receive rewards, these are taxable as ordinary income based on the fair market value of the rewards when received.
I mine / stake / earn crypto – can I set up an LLC and deduct my expenses on a Schedule C as a business?
The IRS explains in the instructions to Schedule C that “An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity, not-for-profit activity, or a hobby does not qualify as a business.” In order for an activity to qualify as a business, you must show that you are engaging in that activity continuously with an intent to make profit and income.
Unfortunately there is no bright-line test to determine this as there is no formal definition of “trade or business” in the Internal Revenue Code, which has led to much confusion and litigation over the years. The best advice is that if you say you are in a business, you should actually be in the business – working regularly, in a for-profit activity and treating it like a business – this means an LLC, accounting records and such. If you are paying a fee, not doing anything else and only collecting rewards, this is not likely to be seen by the courts as a business activity, but either a passive activity or an investment activity.
If you have a mining operation set up and you are working to keep the hardware running, expanding, doing activities for the business constantly, and this is the main source of income on which you depend on to live, you certainly have a business activity. Should playing Axie Infinity for a living and earning income be a business activity? Best advice is to use common sense – are you working enough in an activity that you would consider it a business, or is it a passive “chill at the beach while I earn” type of activity?
What counts as a taxable disposal of a crypto asset for U.S. taxpayers?
- The sale of a crypto for fiat (USD, Euro, GBP, etc.)
- The sale of a crypto for a stablecoin (USDT, USDC, DAI)
- The trade of a crypto for another crypto
- The trade of a stablecoin for another stablecoin
- The purchase of an NFT with crypto
- The purchase of any goods or services with crypto
In every case, whenever you have a taxable disposal of a crypto asset, you must calculate and report your gain or loss. Every time you trade one crypto asset for another, this is a taxable event. If it has a different ticker on CoinMarketCap, it’s a taxable event. This is also true of assets not listed on CoinMarketCap such as individual NFTs or other assets such as Liquidity Pool tokens or futures contracts.
How is my gain or loss calculated for crypto taxes?
Taxable gain or loss = Proceeds from sale – cost basis
Proceeds from sale: The amount of fiat received for the crypto asset sold or fair market value or crypto asset acquired in the transaction.
Cost basis: Cost of crypto disposed of; cost in fiat or crypto or fair market value at time of acquisition if traded for another crypto asset.
I traded my BTC for ETH, as long as I don’t cash out, this is not taxable right?
Trading one crypto for another is a taxable event that has to be reported on your tax return on Form 8949. That means that anytime you go from one coin to another, that’s a taxable trade that has to be reported; this is true even if you go between different stablecoins. The trade will have to be valued and reported in USD based at the time of your trade – Accointing.com will fetch the value of the trade directly from CoinMarketCap.
I need to sell my crypto for fiat, do I have to pay taxes?
Trading crypto for fiat is a taxable event that has to be reported on your tax return on Form 8949.
I’m a high volume trader, how do I pay taxes?
By connecting your wallets and exchanges with Accointing.com, we will generate a tax report and Form 8949 taking into account each and every trade.
I want to sell my DOGE but my gains are short-term, should I sell?
While DOGE has certainly proven to endure the test of time, if you are holding a coin that you don’t want to have for the long-term, you must always consider the economics of a trade first, then the tax implications. It is recommended to only trade assets after the gains are long-term as it will optimize your tax rate, however, you don’t want to hold a coin that might decrease in value 80% just because you are waiting for the gains to be long-term. Always consider the economics first and taxes second, but always do consider the tax implications and set aside some funds for your tax bill.
I only traded a small amount, do I have to report this?
Every trade of crypto to crypto or crypto to fiat is a taxable event. Any income event such as staking, mining, interest, airdrops or rewards are taxable events. There is no de minimis for reporting.
What is the difference between futures and margin and how is this taxed?
Easy to confuse as both allow you to use leverage to generate a greater return on your capital, there are basic differences between the two products, which should lead to different tax outcomes, but due to a lack of guidance and complexities with data, most should be treated as capital gains similar to other trades.
When an investor trades with margin on a crypto platform, they are borrowing funds to have greater amounts of capital for their positions. Margin trades are placed in the spot market.
When an investor trades a futures contract, they are obtaining contracts to buy or sell an asset at a given price in the future. These contracts also let investors amplify their gains by using leverage in a similar manner as margin trading, where the broker would only require a fraction of the borrowed capital as collateral, the result being that while gains are amplified, liquidations can occur much faster if the market goes the wrong way. Future trades are placed in the derivatives markets and generally have access to higher leverage than margin traders.
From a tax perspective, unless a contract qualifies under Section 1256, then the gain or loss must be reported as capital gain absent further guidance.
I am a crypto trader, can I use the mark to market election?
The Internal Revenue Code section 475(f) gives trades in securities or commodities the option to elect to mark to market their assets and treat losses as ordinary losses. This election is not available to crypto traders or crypto investors as cryptocurrency is not considered a security or commodity.
Does the wash sale rule apply to crypto?
The Internal Revenue Code section 1091(a) disallows the deduction of losses that have been realized where within a period of 30 days before the sale and 30 days after the sale the taxpayer has acquired or entered into an option to acquire substantially the same units of stock or securities. The keyword here is stock or securities. Cryptocurrency is neither of those and as such, the wash sale rule does not currently apply to crypto. This is expected to change in the very near future, so proceed with caution.
My crypto was stolen / lost / rug-pulled, can I deduct this loss?
While there is no official guidance for many common type of crypto losses such as rug pulls, there are a few ways to claim crypto losses from scams or thefts:
- The loss from a sold or traded crypto asset is reported on Form 8949.
- The loss from an abandoned business or investment asset is reported on Form 4797, line 10.
- A loss of theft of business or income producing property, is reported on Form 4684 Section B.
- A loss on a Ponzi-type investment, using the safe-harbor under Rev. Proc. 2009-20 is reported on Form 4684 Section C, but you must make sure to qualify which generally requires an indictment or complaint being filed against a lead figure in the Ponzi-scheme.
If a loss fits in one of the buckets above, you can deduct the loss which is generally based on the cost of your assets lost or stolen. If you have a coin with no liquidity, it is recommended to send the coins to a burn address in order to formally abandon the coins and deduct your tax loss.
Thefts of personal property generally fall under the Casualty Losses Framework which are currently limited to losses or theft caused by a federal declared disaster. But whether cryptocurrency is a personal asset or an investment asset is the key question here. If it is an investment asset, then these losses would then generally not be personal but rather investment or income-producing.
If you are unsure of how to deduct a particular loss and it is large enough, you should consult a tax professional.
If I donate crypto to a charity, is this deductible?
Yes, but it must adhere to the IRS requirements for a donation of property. If you have held the crypto for more than one year before gifting it to a charity, your donation is the fair market value of the donated crypto at the time of the donation and you would not recognize any gain or loss and donation. Yes, you would get the tax benefit at the appreciated value while not having to recognize the loss – a great tax strategy if you are sitting on a lot of appreciated crypto and want to help the world. Please be aware of the requirements by the IRS on donations of property.
Federal Tax and Rates
What is the difference between a short-term gain and a long-term gain?
Your short-term capital gains will be taxed at your ordinary tax rate which depending on your income will range from 10% to 37%. Your long-term capital gains will be taxed at 0%, 15% or 20%, depending on your income. The tax brackets for 2021 are as follows:
Ordinary Income Tax Rates
Long-term Capital Gain Rates
Are there other taxes I need to consider?
You will have to pay a tax of 3.8% of any investment income in addition to the capital gains and ordinary income tax rates. You should also consider the state that you live in and how they tax capital gains, whether they have better rates for long-term gains over short-terms, or any exclusions.
What is the advantage of holding crypto for over one year?
If you hold your crypto for more than one year your gains will be taxed at the long-term capital gains tax rates as opposed to ordinary tax rates for short-term gains which depending on your tax bracket, could save you about 20% in your tax bill.
Can my long-term losses offset my short-term gains?
Yes, all your gains and losses will be able to offset each other. You will report your trades separately on Form 8949 depending whether they are long-term or short-term. Then on Schedule D, your net long-term gain or loss will be combined with your net short-term gain or loss. If you have a net gain, it will be taxed depending on what makes up that gain (short-term or long-term). If you have a net loss, you will be able to deduct up to $3,000 of the loss against your ordinary income, and the excess will be carried forward to future years indefinitely.
If I have a net capital loss, I can only deduct $3,000 of it?
Yes, if you have a net capital loss on your Schedule D, you can only deduct $3,000 of it against any ordinary income such as wages or business income.
Should I use FIFO, LIFO or HIFO?
Regarding the method of accounting to use when disposing of crypto when you have acquired at different times at different value, the Internal Revenue Service has answered this on their FAQs Questions #39 and #41.
In Question 39 they state that “You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.”
In Question #41 they state that “If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.”
Based on the two answers above, the recommended method absent to further guidance is FIFO. However, question #40 says that to identify the specific unit sold “You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address. This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”
Based on the above requirements, applying HIFO or LIFO with Accointing.com and maintaining your full tax report and full data set would satisfy the requirements for specific identification, as there is no requirement based on the guidance for this to be done prior to the trade.
Federal Tax Compliance
What is the tax year in the USA?
If you are an individual you will file on a calendar year basis. If another entity such as a trade or business, estate or trust holds your crypto, you must follow the tax year of such entity.
When do I have to pay my crypto taxes?
Generally, any balances due will be due at the unextended due date of the tax return. There are also other payments that may be due throughout the year. Refer to the next two questions for filing due dates and payment dates.
When are tax returns due in the USA?
The deadline to file a tax return in the USA depends on the taxpayer. The deadline to file an individual tax return is April 15. Sometimes due to holidays and/or weekends, it gets extended by a few days, such as 2022 in which the deadline was April 18, 2022. Taxpayers are generally allowed to extend their time to file by 6 months by filing an automatic extension, Form 4868 for individuals or Form 7004 for businesses. Below are the general due dates for those with a calendar tax year:
Form 1040 due April 15, 6 month extension available to October 15
Form 1065 due March 15, 6 month extension available to September 15
Form 1120 due April 15, 6 month extension available to October 15
Form 1120-S due March 15, 6 month extension available to September 15
Form 1041 due April 15, 5 ½ month extension available to September 30
*The due date will be different for any fiscal year taxpayers. Certain filers have different extension times, refer to the IRS instructions.
When are tax payments due in the USA?
You should generally pay quarterly payments for any income (such as crypto) on which there is no tax withholding. When income comes from self-employment, business earnings, or investment income (such as crypto income), since there is no withholding on this income, taxpayers are required to make quarterly estimated tax payments to cover for any tax due, with any balance being due at the unextended time of filing your tax return. If you extend your tax return, you must also estimate the payment due and pay with Form 4868, along with any first quarter estimated tax payments for the new tax year.
Estimating the extension payment (or quarterly payments) can be difficult,
Due dates for estimated tax payments for individual taxpayers (filing Form 1040) are:
- April 15
- June 15
- September 15 and
- January 15
What are the penalties for late filing or payment?
You must make sure to file your extension (and / or tax return) on time. The failure to file penalty is 5% of the unpaid taxes for each month, while failure to pay penalty is 0.5% of the unpaid taxes for each month. Interest is charged on penalties – refer to the IRS guidance on penalties for more information.
To avoid filing penalties, make sure to file your tax return, or extension by the unextended deadline.
To avoid underpayment penalties, you must make sure that your total quarterly payments meet one of the two criteria below (with the balance being paid by the unextended due date – April 18 in 2022):
- 90% of taxpayer’s total expected tax for the current year, or
- 100% of the total tax shown on the taxpayer’s prior-year return
Please refer to the IRS guidance as if your adjusted gross income is over $150,000 ($75,000 in for married filing separately taxpayers), you may have to use 110% for the second criteria. Guidance on estimated tax payments for corporations is available through the instructions for Form 1120-W.
Estimated tax payments for sole proprietors, single-member LLC’s, S-Corporations and Partnerships are due on the individual taxpayer’s tax return to which the income flows-through.
Can I extend my tax return to October 17, 2022?
Yes! You can always extend your tax return by filing Form 4868 by the unextended due date (April 18, 2022) which gives you a six month extension of time to file until October 15 (this year October 17, 2022). This is an extension of time to file, not to pay, so if you expect to owe, you should be making an extension payment to avoid underpayment penalties and interest. While figuring out the balance you owe can be difficult if your tax return isn’t complete, the recommended approach (if cash-flow is not an issue) is to intentionally overpay your extension – you can always get the excess refunded or apply it to 2022 estimated tax payments. If you do underpay your extension, provided you pay by the extended deadline, the penalties and interest will be relatively low to the total amount owed.
Even if you cannot pay the balance due, you want to file your extension (and / or tax return) on time. The failure to file penalty is 5% of the unpaid taxes for each month, while failure to pay penalty is 0.5% of the unpaid taxes for each month. Interest is charged on penalties – refer to the IRS guidance on penalties for more information.
Don’t forget to verify with your state’s department of revenue whether they follow the federal extension and payment dates, or if they require a separate extension form or have different estimated payment dates. Many states automatically accept the federal extension and have the same estimated payment due dates as the IRS, but some may differ. Most tax tools will be able to help with this, otherwise, check out this article on state extension requirements.
Where are crypto taxes reported?
You should report any trades or sales on Form 8949, Part 1 or 2 depending on whether short or long-term, and check box A, B or C (D, E or F if long-term) depending on whether you receive a 1099-B or not. You should report any taxable income on Schedule 1 line 8z.
If your income is from a trade or business (such as a mining business), report on the appropriate schedule or form as discussed in the Entity Choice section above.
I got a Form 1099-MISC, should I report this?
You want to report your Forms 1099-MISC exactly as reported to you in the form. This income will be included in your Accointing.com tax report, so be sure to back out the amount already reported on the 1099-MISC from the total you report with Accointing.com. Refer to our article on filing a 1099-MISC.
I got a Form 1099-B, should I report this?
You want to report your Form 1099-B as issued to you. For more information on reconciling your 1099-Bs to your Accointing.com tax report, refer to our article on filing a 1099-B.
I got a Form 1099-K, should I report this?
A Form 1099-K does not have to be reported as provided to you – this form will not reflect your proceeds, cost basis or gain or loss. This form does tell you that the IRS knows that you have transacted in the exchange, so you must make sure to report this exchange in your Form 8949. For more information refer to our article on Form 1099-K.
What tax forms should I know for crypto tax purposes?
For purposes of your own individual income tax return, you will need to keep in mind the following tax forms:
Form 8949 is used to report all trades, sales and exchanges of property, such as cryptocurrency and digital assets. All your gains and losses, whether reported on a form 1099 or not, should be reported in the appropriate section. While the form provides detail of every trade, taxpayers are allowed to summarize information and provide an attachment with the same information.
Schedule D takes all forms 8949 in the return, as well as other gains
Form 8960 calculates the net investment income tax (3.8%) on your net investment income – this is only applicable to taxpayers with modified adjusted gross income of $250,000 for married filing jointly or qualifying widow(er) taxpayers, $125,000 married filing separately or $200,000 single or head of household filers.
Form 6781 is applicable to any section 1256 regulated contracts as explained in the Leverage section of this guide.
Form 4868 is used to report casualty losses and theft.
Schedule A is used for itemized deductions, such as charitable contributions. However, if your noncash donations exceed $500, then you will need to file…
Form 8283 is for noncash donations of over $500, including donations of crypto.
Schedule 1 is used to report other income without a specific spot elsewhere such as staking, hard forks or other crypto income.
Schedule C is used to report the profit or loss from a trade or business whether a sole proprietorship or a single-member LLC.
Schedule E is used to report any rental or royalty income, as well as any income from a pass-through business tax return.
Form 4797 is used to report the sales or abandonment of business or investment property.
Schedule SE is used to report self-employment taxes on income from self-employment. This is a tax of 15.3% which consists of 12.4% for social security and 2.9% for Medicare. Self-employed individuals pay this on their income to compensate for the lack of social security and Medicare taxes of also 15.3% which are split by the employee and employer in an employment relationship.
Form 1040 puts it all together and is the individual tax return on which all of the above forms come to complete the main tax return, showing all your personal information, adjusted gross income, taxable income, tax due, taxes withheld or paid and last but not least, your refund or amount due.
What records should I keep for my crypto taxes?
Keep your Accointing.com tax report and all other reports since these are the files that contain your full crypto tax picture for the year. Beyond this keep all other records; the IRS answers this in the Crypto FAQs question #46:
“The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns. You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.”
I got a letter from the IRS, what should I do?
If you received a CP2000 notice from the IRS, you are given 30 days to respond to the letter with the information requested. You can read more about it on the IRS’s website. These letters are computer generated when the IRS has a data mismatch from Forms W-2, 1099 and K-1. In order to avoid such letters, always report your Form exactly as received.
I have crypto in a foreign exchange, do I need to file an FBAR?
Currently, there is no requirement to file an FBAR for digital assets held in a foreign exchange, however, this will likely change in the near future. The Financial Crimes Enforcement Network (FinCEN), tasked with safeguarding the financial system from money laundering and enforcing FBAR reporting, clarified in FinCEN Notice 2020-2 that “the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR.” They do state that “FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.”
Due to the severity of penalties for not filing an FBAR, some practitioners have advised their clients to file an FBAR for digital assets. You can read more about the filing requirements here.
If you do need to file an FBAR, you can use Accointing.com’s daily balance report to identify the day with the highest balance at each exchange and wallet.
I have never reported my crypto taxes, what should I do?
Depending on the number of unreported years and income, you might want to consult with a tax professional. If you only missed one year or made a mistake, you could amend your tax return. If you have not reported any crypto income for several years you should find a tax advisor to help you file your missed tax returns.
Legally Minimize your Crypto Taxes
Are there states that won’t tax my crypto?
Yes! Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income tax. New Hampshire does not tax earned income (such as from your job), but they do tax interest and dividends. If you are considering relocating to one of these states, you must make sure to establish your new legal domicile as the new state and not just use someone’s address in the state. For more information check out our article on Top States for Crypto Enthusiasts.
If I move to Puerto Rico, do I have to pay any crypto taxes?
While relocating to Puerto Rico and minimizing taxes on your crypto is possible through careful tax planning, you will generally not be able to avoid tax on unrealized gains for crypto you have held in the USA. The requirements to relocate must be carefully met so it is recommended to find a tax advisor that specializes in this.
If I move to Portugal, do I have to pay any crypto taxes?
Unfortunately you would still have to pay US taxes as an American citizen.
How can I legally minimize my crypto taxes?
There are many strategies that crypto investors can use to minimize their taxes and maximize their after-tax gains:
- HODL your crypto for over a year to so your short-term gains turn into long-term gains
- Sell any cryptos with unrealized losses in order to claim those losses
- Contribute into a Crypto IRA
- Donate your crypto to a Charitable Organization
- Find a tax professional to help you plan a move to Puerto Rico
- Sell coins during a year with low income to minimize your tax rates
What is tax loss harvesting?
Given the volatility of the markets and how easy it is to trigger a taxable event such as pressing a button from a mobile app, you can see how easy it can be to plan and sell your cryptos at a loss in order to claim the tax loss. This is known as tax loss harvesting.
Tax loss harvesting means selling cryptos (assets) with unrealized losses in order to realize those losses and take them on your tax return, and since we know that losses can offset capital gains, tax loss harvesting can actually save you tax money.
What’s the catch? You will take a lower tax basis in any new asset purchased, therefore any future gains will be greater. In general, it is better to lower today’s taxes than tomorrow’s.
DeFi Taxes and NFT Taxes
What is DeFi?
The term DeFi (Decentralized Finance) is used to describe the ecosystem of blockchains, coins, tokens and decentralized apps (dApps) that operate to provide services to users in a peer-to-peer manner by utilizing smart contracts.
Are DeFi transactions taxable?
There is no difference between taxation of DeFi transactions and CeFi (centralized finance) transactions.
DeFi transactions, just like CeFi transactions, can be subject to:
Short-term and / or long-term capital gains tax on gains
Ordinary income tax on any income obtained through a DeFi protocol
Transactions on a decentralized exchange such as Uniswap or PancakeSwap are taxable just like transactions on any centralized exchange. Accointing.com can help you connect all your DeFi wallets and produce the most accurate DeFi tax report in the market.
Can I deduct my Ethereum gas fees?
Gas fees related to the acquisition of an asset are part of your cost basis of the crypto asset you acquired. Gas fees that cannot be directly associated with the acquisition of a crypto asset are not technically deductible under the current guidance, though a case can be made that they are in fact a deductible cost to acquire your assets. If you have incurred significant gas fees, it is recommended to find a tax advisor to help you navigate this.
If you have a trade of business, all fees are deductible business expenses.
I earn rewards or other yield on my crypto, how is this taxed?
The IRS has not formally commented on taxation of many types of crypto income. However, just like with airdrops and hard forks, the generally accepted principle is that any new coins earned are taxable as ordinary income based on the fair market value of the coins upon control.
How are Liquidity Pool Tokens taxed?
While the IRS has yet to issue any guidance specifically on liquidity pool transactions, we can infer the answer by looking at each transaction.
- When you exchange a coin, token or pair for a liquidity pool token (LP token) this is a taxable event. Your gain or loss is based on the gain or loss in the coins or tokens given up for the LP token. Your tax basis is the original cost of those coins and the proceeds are based on the fair market value of the LP tokens acquired.
- The rewards are taxable upon control based on the value of the coins, the same as mining, staking or any other type of income.
- When you trade the LP tokens back for the original tokens, this is also another taxable event similar to the first transaction. You must report your gain or loss based on the tax basis of the LP tokens relative to the fair market value of the coins or tokens received back when you make the trade.
An argument can be made that this is more of a deposit, as the taxpayer expects to receive his original coins back. But sustaining impermanent losses, the opportunity cost of investing in a liquidity pool due to changes in asset prices, is nearly 100% certain. While impermanent losses are not tax deductible, they do demonstrate that the taxpayer does not retain control of his original coins, which could make a further case for these transactions being taxable.
What is an NFT?
NFT stands for non-fungible token, which means that each one of these tokens is unique and no two of them are exactly alike. This is in contrast to what most of us think of as cryptocurrencies, such as BTC or ETH, which are fungible tokens, meaning each BTC and each ETH is exactly like the other. An NFT is essentially a one of a kind token on the blockchain, to which you can embed any type of digital media file such as a picture, song or movie.
NFTs are tokens that run on top of a smart contract layer 1 blockchain, such as Ethereum, Solana or Cardano. Think of the layer 1 blockchain as an operating system such as iOS or Android, while the NFTs are tokens launched on each particular operating system. In order to purchase these NFTs, users must generally use the coin of that blockchain – this means that if you want to buy an NFT on Ethereum you will need some ETH to purchase the NFT. Transaction fees for NFTs also generally use the coin of the blockchain that the NFT collection is on.
While the majority of the NFTs that we have seen so far traded on Open Sea or Magic Eden are collections of digital pictures, there are many other use cases and we are very early in discovering the potential of NFTs. Some of the use cases that have many in the industry excited are:
- Musicians, writers and other content creators can reach their consumers directly cutting out record labels and other middlemen.
- Marketers and companies will have direct access to their consumers wallets and will be able to understand their behaviors better.
- Real world assets can be linked to an NFT in order to efficiently prove ownership and add liquidity to markets.
- Sports moments and other collectibles – the new trading cards with platforms such as NBA Top Shot.
- Purchasers are always able to resell the NFT, in which case a royalty of the sales will go to the original creator.
- Authenticity of NFT can always be verified with 100% certainty via the blockchain. When you purchase the original drawing of an artist, you will know the NFT is not counterfeit.
- Documents can be turned into NFTs to store on blockchain and prove authenticity.
- NFTs can disrupt the supply chains of the world by enhancing the information flow between parties in the supply chain and providing a record of authenticity traceable by all parties as needed. This could help fight counterfeit markets by being able to easily verify products’ authenticity via the blockchain.
How are NFTs taxed?
Taxation of NFTs works exactly the same as other crypto taxation until further notice by the IRS or a change to the US Tax Code. While tax authorities and regulators have not commented on NFT taxation, since NFTs are simply a different type of token running on top of a blockchain, it makes sense to apply the same principles as taxation of other cryptocurrencies.
NFTs are taxed as property, and gains or losses from the disposition of NFTs are reported on Form 8949. Each NFT is considered a different asset for tax purposes.
The purchase of an NFT is generally a nontaxable event as you are acquiring an asset. If you purchase the NFT with a cryptocurrency such as ETH or SOL (as it is commonly done on Open Sea and Magic Eden), you will have a taxable gain or loss from the disposition of the cryptocurrency used to purchase the NFT > this works exactly the same as if you are trading one crypto asset for another.
When you sell or trade an NFT, you will have a taxable gain or loss from the disposition of that NFT.
How do I calculate my gain or loss from NFTs?
Taxable gain or loss = Proceeds from sale – cost basis
Proceeds from sale: The amount of fiat or crypto (in USD) received for the NFT sold
Cost basis of NFT = amount paid for NFT in USD (whether fiat was paid, or the USD equivalent of the crypto paid for the NFT) + fees to acquire
If I only buy an NFT and don’t trade it, is this taxable?
If you buy an NFT with crypto, it will be a taxable event due to the sale of the crypto you are using to purchase. If you buy an NFT with fiat, then it is not a taxable event, similar to buying crypto with fiat.
Do I have income to report from my NFTs?
Some NFTs provide holders with different types of income. For example, you could get an airdrop of an NFT or token for holding a certain NFT. You may also be able to stake your NFT to receive a specific token in return.
If you receive an airdrop of an NFT or token, you must recognize this as income based on the fair market value of the NFT or token received. If you earn tokens from staking, this is taxed the same as staking any other coins – you recognize as income based on the fair market value of the tokens at the time of receipt.
What can I do with scam airdrops and NFTs?
- If an airdrop of an NFT has no value or is a scam, you can report for $0 or a nominal amount and send it to a burn address, then dispose of it for $0 proceeds and $0 basis (or nominal amount reported as income), for no impact to your tax return. Some wallets such as Phantom wallet have a burn function in exchange for a nominal amount of SOL (your proceeds).
- If an airdrop of an NFT or token has more than a nominal value, then it is unlikely that a taxpayer would refuse this, and would generally choose to trade and keep the funds, in which case the transaction should be taxable.
Shouldn’t NFTs be collectibles taxed at 28%?
You certainly have a point there, but we have no guidance on this. Proceed with caution or consult your tax advisor.
Are there other tax issues for NFT creators?
The main difference is that a NFT creator is likely in a trade or business. A creator could create an NFT as a hobby, by using copy & paste tools, create a derivative, and put little to no effort into the project other than creating and launching, which would not constitute a trade or business. However, most successful NFT projects are run as trades or businesses, an activity for profit engaged in continuously and regularly. Most NFT projects have teams composed of a CEO, designer, devs, community manager, and clearly hire employees in a for- profit business. They are in the business of creating and selling NFTs and related products (such as merchandise).
Being a trade or business allows an NFT project to deduct all ordinary and necessary business expenses such as (but not limited to): wages, equipment subject to capitalization requirements, rents, leases, bad debts, interest, donations, employee benefit programs, supplies, utilities, advertising, legal, accounting, licenses, certain taxes and even some meals.
The taxation of the income of an NFT creator is based on their gross revenue. If their NFTs are sold for fiat, this is the amount in USD they are sold for. If the NFTs are sold for another crypto, this would be the value in USD of the crypto asset received in exchange.
While all ordinary and necessary expenses for an NFT business are deductible, the question arises whether the costs of creating the NFTs should be capitalized as inventory, and deducted based on when each NFT is sold, or whether all costs can be expensed as incurred (on a cash-basis). The Internal Revenue Code Section 471(c) states that any business whose aggregate gross receipts for the last three taxable years are under the IRC Section 448(c) gross receipt threshold (currently $26 million, to increase to $27 million for tax years beginning in 2022), can treat inventory as non-incidental materials and supplies, or use a method of accounting reflected in an applicable financial statement. What this means is that if your NFT business does not exceed $26 million (or $27 million in 2022) for the last three years in sales, you don’t have to report inventory.
There are other benefits of meeting this gross receipt threshold for any business in the USA, not just an NFT business, such as being able to use the cash method of accounting instead of the accrual method of accounting. If your business is in this position, we recommend that you contact a tax professional.
Whether the NFT business is reported on a Schedule C (in the owner’s Form 1040) or in a 1065, 1120S or 1120 will depend on the form of organization of the entity.
It is generally advised to work with a tax professional if you have any type of trade or business, as the complexities of business taxes and forms can be a pitfall for co-founders. If you have an NFT business, we recommend that you work with a tax professional who understands the cryptocurrency and NFT industries. Check out our partners page for our recommendations in the USA.
The information contained in this guide, including any supplemental materials, is for general information purposes and does not constitute financial, investment, legal or tax advice. The present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.