The Ultimate Crypto Tax Guide (2022)

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Crypto taxes 101

In the US, cryptocurrencies like Bitcoin are treated as property for tax purposes.

Just like other forms of property (such as stocks, bonds, and real-estate) you incur capital gains and capital losses on your cryptocurrency investments when you sell, trade, or otherwise dispose of your crypto.

Depending on what tax bracket you fall under, you will pay a certain percentage of tax on this capital gain. Tax rates fluctuate based on your personal tax bracket and whether the gain was short-term or long-term (more on this later).

Outside of buying, selling, and trading, if you earn cryptocurrencieswhether through a job, mining, staking, airdrops, operating a node, or interest from lending activitiesyou are liable for income taxes on the US Dollar value of your crypto earnings at the time you receive the cryptocurrency.

We will walk through examples for all of these scenarios in more detail below.

When do you owe taxes on your crypto?

Whenever you incur a taxable event from your crypto investing activity, you incur a tax reporting requirement.

A taxable event simply refers to a scenario in which you trigger or realize income or previously unrealized gains. As seen in the IRS virtual currency guidance, the following are all considered taxable events for cryptocurrency:

Below, we run through practical examples to illustrate each of these taxable events further.

1. Do you pay tax when you trade crypto for fiat?

Yes, selling crypto for fiat currency is a taxable event.

In this example, Emma incurs has $200 capital loss (1,000 – 1,200). This loss gets deducted and actually reduces Emmas taxable income or can offset capital gains from other investments.

2. Do you pay tax when you trade cryptocurrency for other cryptocurrencies?

Yes, trading one crypto for another is treated as a disposal.

In this scenario, John incurs a taxable event by trading his Litecoin for Ethereum. Trading one crypto for another is treated as a disposal, and here John incurs a $150 capital gain (400-250) from the trade which he would need to report on his taxes.

3. Do you pay tax when you buy goods and services with crypto?

Yes, buying goods and services with crypto is considered a taxable event.

4. Do you pay taxes when you earn crypto income?

Yes, earning crypto income is considered ordinary income subject to income tax.

Common forms of crypto income include earning crypto staking rewards, crypto interest, crypto referral rewards, and airdrops.

How much is cryptocurrency taxed?

Your personal income tax bracket and the holding period of your crypto assets (short term vs. long term) will determine how much tax (and what % of tax) you pay on your crypto income. This will be different for each investor and can be affected by more traditional sources of income such as stocks, income from your job, and other investments.

Short-term capital gains tax events

Short-term capital gains apply for any crypto that was held for less than 12 months before being sold. Short-term capital gains dont get any special tax treatment under the tax code. They are taxed at the same rate as your normal income (such as income from your job). Thus, you pay taxes on your short-term capital gains according to your personal income tax bracket (outlined further below).

Long-term capital gains tax events

Long-term capital gains apply to any crypto that was held for 12 months or more before being sold.

The government wants to encourage investors to hold onto their investments for the long term, so they offer tax incentives for doing so.

Long-term capital gains tax rates top out at much lower rates than short-term gains.

As depicted in the chart below, holding onto your crypto for more than one year can provide serious tax benefits. If you are in the highest income tax bracket, your taxes on your long-term capital gains will be 20% instead of 37% (the highest tax rate for short-term gains).

You can use CoinLedger to automatically detect which cryptocurrencies in your portfolio qualify for long-term capital gains and to help plan for future trades. This can help save you thousands of dollars in taxes in the long run. Get started for free here.

Crypto income tax events

Crypto transactions that are classified as income are generally taxed based on your personal income tax bracket.

This includes your short-term capital gains (as mentioned above), staking rewards, airdrops, node rewards, and interest earnings.

These income tax brackets are outlined in the chart below.

How is crypto income taxed?

Lets say you made $25,000 in short-term capital gains from your crypto trading, and this was the only income you had for the year. Would you simply pay 12% of tax on that $25,000?

No. Instead of paying a flat tax on your entire income, you’ll pay different tax rates as you ascend through the income tax brackets. In this case, you only pay 10% on the first $9,950 and 12% on the next $15,050.

Tax-free cryptocurrency transactions

In certain circumstances, you will not trigger any taxable events when transacting with crypto, and you will not have to pay or report any cryptocurrency taxes.

You do not trigger a taxable event in the following circumstances:

1. Do you pay taxes for holding cryptocurrency?

No, if you simply buy Bitcoin or another cryptocurrency and hold it in a wallet, you do not have any sort of tax reporting requirement as you havent realized a gain or loss on your investment yet. Once you sell, trade, or trigger a taxable event by disposing of the coin, you realize a capital gain or loss.

2. Do you pay taxes for wallet-to-wallet transfers?

No, sending one cryptocurrency from one wallet you own to another wallet you own is not a disposal of your crypto. You still own the crypto, and thus you do not trigger a taxable event.

3. Do you pay taxes for using your cryptocurrency as collateral for a loan?

No. Like other forms of property, you are allowed to use your cryptocurrency as collateral for a loan without disposing of the collateralized property. As long as the loan is paid back and the collateral returned, the underlying assets will return to the original owner tax-free.

Can the IRS track your cryptocurrency?

Its often assumed that because cryptocurrency is anonymous, evading taxes is fairly easy.

This couldn’t be further from the truth.

Major exchanges like Coinbase send 1099-MISC forms to the IRS which contain customer information and a record of cryptocurrency income.

If the IRS receives a 1099 from your crypto exchange but sees no cryptocurrency income reported on your taxes, your account will be flagged and an automated CP2000 letter will be sent alerting you of your non-reported income and tax liability.

The IRS can use the information that it receives from major exchanges to match anonymous wallets to known individuals. In the past, the agency has worked with contractors like Chainalysis to analyze the blockchain and crack down on tax fraud.

In the future, the IRS will have even more information at its disposal to identify tax cheats. The 2021 infrastructure bill requires all parties that facilitate cryptocurrency transactions to send 1099-B form to users and the IRS, which will contain information about all of your cryptocurrency disposals.

For more information, check out our guide: Can the IRS Track Cryptocurrency?

What happens if you dont report your crypto taxes?

Intentionally not reporting your cryptocurrency gains, losses, and income on your taxes is considered tax fraud by the IRS.

The IRS can enforce a number of penalties for tax fraud, including criminal prosecution, five years in prison, and a fine of up to $250,000.

Over the past several years, the IRS has aggressively cracked down on cryptocurrency tax compliance issues. The agency has sent tens of thousands of warning and action letters to Coinbase users suspected of inaccurate tax reporting. Moreover, it has also updated the main US income tax form (1040) to include a question that every US taxpayer must answer under penalty of perjury:

At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?

As cryptocurrency adoption accelerates, its likely that well see more cryptocurrency tax audits and tax prosecutions.

When do you need to report your crypto taxes?

For the 2022 tax year, the deadline for American taxpayers is April 15, 2023. The deadline for American expatriates is June 15, 2023.

How do you lower your crypto taxes?

As with any other form of income, there are certain steps and actions you can take to proactively minimize your cryptocurrency-related tax obligations. We discuss some of these strategies below.

Long-term capital gains vs. short-term capital gains

Theres one easy and effective way to reduce your taxes liability: lock in long-term capital gains rates by simply holding your crypto-assets for over a year.

As discussed earlier, long-term capital gains offer significantly lower tax rates when compared to short-term gains.

Before you make a sale or a trade, you should review your portfolio to see which assets qualify for long-term gains and which do not. This is a great strategy to help lower your cryptocurrency tax bill and plan ahead for the tax deadline.

Tax-loss harvesting

Remember, your total capital gains are calculated based on the net gain or loss across all of your winning and losing positions for the year. As a result, many traders choose to intentionally sell their assets at a loss to reduce their tax liability. This is called tax-loss harvesting.

Unlike traditional stock investments, cryptocurrency has not been subject to the wash-sale rule. As a result, crypto investors can sell their assets, claim a capital loss, and buy back into the same position soon after. Its expected that this loophole will be closed in the future, but for the time being, investors use crypto wash sales to reap tax benefits from market downturns.

Looking to harvest your crypto losses? You can use the CoinLedger Tax-Loss Harvesting Dashboard to automatically detect which assets in your crypto portfolio are underwater to more efficiently harvest your unrealized losses throughout the year.

Learn more about how you can tax loss harvest with cryptocurrency here.

What if you forgot to report your crypto taxes?

If youre like many other crypto investors, theres a strong chance that you werent always aware of the fact that your crypto-related income needed to be reported on your taxes.

If you are in this situation, don’t worry. You can amend a prior year’s tax return to include your crypto-related income with IRS Form 1040X.

Many cryptocurrency investors go through this amendment process without issue. Its always better to amend your return in good faith rather than waiting for the IRS to find you. While there is never a way to guarantee that someone wont be audited after amending their taxes, paying your taxes before the IRS begins an investigation can go a long way to demonstrate that further inquiry is unlikely to find additional reporting errors.

For a detailed guide, check out our blog post on how to amend your tax return to include your crypto.

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