So you invested in cryptocurrency in spite of the tax complexities, different tax forms and the tax liability that the IRS is sure to come asking for. Congratulations and welcome to the anti-fiat currency club!
In all seriousness, crypto taxes can be very easy or very complicated; while the industry has seen tremendous growth over the last few years, the regulators and IRS have lagged behind the technology. With Accointing.com you can simplify your crypto taxes, however, even with the best tools there are many questions surrounding cryptocurrency taxation. This guide is meant as a quick answer tool where you will find answers to your most frequently asked questions about cryptocurrency and Bitcoin taxes.
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 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 explained by them, “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.
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.
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. You can find this income 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 this 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.
Mining, Staking and Crypto Yield
I mine Bitcoin, how is this taxed?
The value of the Bitcoin mined is reported as income based on the fair market value of the coin at the time you successfully mined a block. The IRS addressed this in Notice 2014-21,
“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?
While the IRS has not formally commented on taxation of staking income, the conservative approach so far has been to tax staked coins upon receipt. At the end of the day, staking is simply the result of a different consensus mechanism – staking is to proof-of-stake what mining is to proof-of-work, therefore, it is fairly reasonable to expect staking to be treated the same as mining based on the IRS guidance.
However, the Jarret case is challenging this treatment. The Jarrets are still pursuing litigation on the case as they seek an answer from the courts to their challenge: staking rewards should not be taxable upon receipt but upon disposal. There is certainly an economic disparity created when you tax staking rewards that have yet to be converted into fiat, making the taxpayer have to liquidate crypto (which hopefully isn’t down 80%) or other assets to pay for the tax.
While it will be interesting to observe the developments in this case, the lack of formal guidance, combined with the issuance of 1099-MISCs for staking on exchanges is putting a lot of pressure on regulators to provide taxpayers with an answer.
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.
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, the purchase of your crypto or HODLing is not a taxable event, but earning any type of income is taxable based on the fair market value of the crypto at the moment that 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?
A: 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?
In order for your crypto earnings to qualify to be reported on a Schedule C, your activity from which you are earning crypto (staking, mining, nodes) must rise to the level of a trade or 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?
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.
How do I calculate my gain or loss for a trade?
Use the following equation to calculate your gain or loss:
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.
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.
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.
I got rug pulled, can I deduct this loss?
A rug pull generally involves the issuer of the coin (or NFT) disappearing and leaving you with a worthless asset with no liquidity. While you will not find any guidance on rug pulls, you are still holding the asset, therefore you will need to dispose of the coin (or NFT) in order to realize the losses. This can be difficult when there is no liquidity, however, one way to accomplish this is by sending the coins to a burn address, therefore effectively trading them for $0 – your proceeds will be $0 and your cost will be your actual cost, allowing you to deduct your cost on your Form 8949.
My crypto was stolen (lost) can I deduct this loss?
Thefts of property generally fall under the Casualty Losses Framework, however, these are currently limited to losses or theft caused by a federal declared disaster. But cryptocurrency is not a personal asset such as a home or vehicle, it is rather an investment asset. Could a case be made for deducting the loss of an investment asset on Form 8949, considering that your investment is now worth $0 and there is no one who will make you whole (such as an insurance company)? Certainly, but it is recommended to consult a tax advisor prior to deducting a large loss as you will be taking a tax position.
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
Can I just convert to Monero and not pay taxes?
This would be tax evasion which is a crime. Besides, you would never be able to cash out without scrutiny.
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.”
When do I have to pay my crypto taxes?
The deadline to file an individual tax return in the US is April 15. Sometimes due to holidays and/or weekends, it gets extended by a few days, such as this year in which the deadline is April 18, 2022. Keep in mind these are filing dates – you should generally pay quarterly payments for any income (such as crypto) on which there is no tax withholding. For more information, refer to our article on tax estimated taxes.
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, or if they require a separate extension form. Most tax tools will be able to help with this, otherwise, check out this article on state extension requirements.
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.
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 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 such as Schedule C (or Schedule E Part II if you received a K-1).
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 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.
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.
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
DeFi Taxes and NFT Taxes
How are NFTs taxed?
Exactly the same as crypto until further notice by the IRS. While they have not commented on NFT taxation, NFTs are merely a different type of digital asset also on the blockchain. Therefore they are taxed as property, exactly the same as crypto and reported on Form 8949. Accointing.com can help you keep track of all your NFTs and cryptos in one central location and provide you with the most accurate crypto tax report.
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.
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 DeFi transactions taxable?
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?
The taxation of LP tokens is highly controversial as there has yet to be any guidance. Should the taxpayer trading his original coins for the LP tokens be a taxable event? Based on the current guidance, you are trading one type of property for another, so it would seem that this initial trade is a taxable event, where you are realizing the gain (or loss) from the crypto pair you are trading and obtaining a cost basis in the LP token based on the value at the time of the trade. But an argument can be made that this is more of a deposit, as the taxpayer expects to receive his original coins back. But is the taxpayer expecting his original coins back? What about the impermanent loss that happens from the change in the ratio of the tokens in the Liquidity Pool? Does the taxpayer really have control of the coins? This could be argued for both ways, though the conservative and most likely approach by the IRS is that entering the LP is a taxable event. If you think otherwise you should consult your tax advisor.
The rewards are taxable upon control based on the value of the coins, the same as mining, staking or any other type of income.
The information presented in this guide is for educational purposes only and is not financial or investment advice.
The information contained in this guide, including any supplemental materials, is for general information purposes and does not constitute legal or tax advice. In specific individual cases, 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.