Most cryptocurrencies are convertible virtual currencies. This means that they act as a medium of exchange, a store of value, a unit of account, and can be substituted for real money.
This also means any profits or income from your cryptocurrency is taxable. However, there is much to unpack regarding how cryptocurrency is taxed because you may or may not owe taxes in given situations. If you own or use cryptocurrency, it’s important to know when you’ll be taxed so you’re not surprised when the IRS comes to collect.
Key Takeaways
- If you hold a cryptocurrency, sell it, and profit, you owe capital gains on that profit, just as you would on a share of stock. Losses must also be reported.
- If you use cryptocurrency to buy goods or services, you owe taxes on the increased value between the price you paid for the crypto and its value at the time you spent it, plus any other taxes you might trigger.
- If you accept cryptocurrency as payment for goods or services, you must report it as business income.
- If you are a cryptocurrency miner, the value of your crypto at the time it was mined counts as income.
When Is Cryptocurrency Taxed?
The IRS treats cryptocurrencies as property for tax purposes, which means:
- You pay taxes on cryptocurrency if you sell or use your crypto in a transaction, and it is worth more than it was when you purchased it. This is because selling or using an asset is a taxable event.
- If you receive crypto as payment for business purposes, it is taxed as business income.
- If you successfully mine a cryptocurrency or are awarded it for work done on a blockchain, it is taxed as ordinary income.
How Do Cryptocurrency Taxes Work?
Because cryptocurrencies are viewed as assets by the IRS, they trigger tax events when used as payment or cashed in. When you realize a gain—that is, sell, exchange, or use crypto that has increased in value—you owe taxes on that gain.
For example, if you bought 1 BTC at $6,000 and sold it at $8,000 three months later, you’d owe taxes on the $2,000 gain at the short-term capital gains tax rate. Profits on the sale of assets held for less than one year are taxable at your usual tax rate. For the 2024 tax year, that’s between 0% and 37%, depending on your income.
If the same trade occurred a year or more after the crypto purchase, you’d owe long-term capital gains taxes. Depending on your overall taxable income, that would be 0%, 15%, or 20%.
In this way, crypto taxes work similarly to taxes on other assets or property. They create taxable events for the owners when they are used, and gains are realized. That makes the events that trigger the taxes the most crucial factor in understanding crypto taxes.
Types of Cryptocurrency Tax Events
Taxable events related to cryptocurrency include:
- Sale of a digital asset for fiat
- Exchange of a digital asset for property, goods, or services
- Exchange or trade of one digital asset for another digital asset
- Receipt of a digital asset as payment for goods or services
- Receipt of a new digital asset as a result of a hard fork
- Receipt of a new digital asset as a result of mining or staking activities
- Receipt of a digital asset as a result of an airdrop
- Any other disposition of a financial interest in a digital asset
The following are not taxable events according to the IRS:
- Buying cryptocurrency with fiat money
- Donating cryptocurrency to a tax-exempt non-profit or charity
- Making a gift of cryptocurrency to a third party (subject to gifting exclusions)
- Transferring cryptocurrency between wallets
Examples of Cryptocurrency Tax Events
Make a Purchase With Mined Crypto
Making a purchase with your mined crypto is easier than ever. However, this convenience comes with a price; you first pay income tax on the mined crypto. When you make the purchase, you’ll pay sales tax on the item and create a taxable event at the time of the sale. Here’s how it would work if you bought a candy bar with crypto you mined:
- You must report the crypto earned through mining as income using its market value on the day you received it.
- You transfer the crypto to the merchant through your wallet to theirs, including the sales tax.
- If your crypto’s value is higher than when you purchased it, you have created a taxable event with a realized capital gain. If it’s less, you have a capital loss. Each needs to be reported at tax time.
- If you held that specific amount of cryptocurrency for less than one year and it appreciated, the gain is taxed at your income tax level. If you held it longer than one year, it would be taxed at your capital gains rate.
So, you’re getting taxed three times when you use a mined cryptocurrency if its value has increased—income tax, sales tax, and capital gains tax.
Buying Cryptocurrency and a Car
Imagine you bought one Bitcoin (BTC) for about $3,700 in early 2019. In late February 2022, 1 BTC was worth $38,500, which you could have used to buy a car.
There are tax implications for both you and the auto seller in this transaction:
- You must report the transaction as a capital gain (or loss) because you’ve cashed out an investment to buy something and must pay taxes on it or report a loss.
- You pay sales tax and other state and local taxes on the purchase.
- The seller must report the transaction as gross income based on Bitcoin’s fair market value at the time of the transaction.
- The seller must also realize a capital gain or loss when they exchange the Bitcoin for fiat currency or use it as payment.
Cashing Out Cryptocurrency
When exchanging cryptocurrency for fiat money, you’ll need to know the cost basis of the virtual coin you’re selling. The cost basis for cryptocurrency is the total price in fees and money you paid. When you exchange your crypto for cash, you subtract the cost basis from the crypto’s fair market value at the time of the transaction to get the capital gains or losses.
The amount left over is the taxable amount if you have a gain or the reportable amount if you have a loss.
Cryptocurrency Mining
The rules are different for those who mine cryptocurrency. Cryptocurrency miners verify transactions in cryptocurrency and add them to the blockchain. They’re compensated for the work done with rewards in cryptocurrency.
Their compensation is taxable as ordinary income unless the mining is part of a business enterprise. If the crypto was earned as part of a business, the miners report it as business income and can deduct the expenses that went into their mining operations, such as mining hardware and electricity.
Cryptocurrency Staking
If you own cryptocurrency that belongs to a blockchain that uses staking, you’ll be required to pay income tax on any rewards you receive. Staking is when you lock your cryptocurrency on the blockchain as collateral for becoming a transaction validator and being paid for it. Transactors pay fees to the validators on these blockchains, and any fees you receive are taxed as income in the year you receive them.
Because you’re paid in cryptocurrency, you must report any capital gains or losses if you use or convert the cryptocurrency.
Exchanging Cryptocurrencies
Exchanging one cryptocurrency for another also exposes you to taxes. For example, if you buy one crypto with another, you’re essentially converting one to fiat and then purchasing another. You’ll need to report any gains or losses on the crypto you converted.
Many exchanges help crypto traders keep all this information organized by offering free exports of all trading data. The trader, or the trader’s tax professional, can use this to determine the trader’s taxes due.
Cryptocurrency Tax Records
To be accurate when you’re reporting your taxes, you’ll need to be somewhat more organized throughout the year than someone who doesn’t have cryptocurrency. For example, you’ll need to ensure that with each cryptocurrency transaction, you log the amount you spent and its market value at the time you used it so you can refer to it at tax time.
Important
Cryptocurrency brokers and exchanges are required to issue 1099 forms to their clients for the current tax year.
You can do this manually or choose a blockchain solution platform that can help you track and organize this data. For example, platforms like CoinTracker provide transaction and portfolio tracking that enables you to manage your digital assets and ensure that you have access to your cryptocurrency tax information.
Cryptocurrency capital gains and losses are reported along with other capital gains and losses on IRS form 8949, Sales and Dispositions of Capital Assets. If you’re unsure about cryptocurrency taxes, it’s best to talk to a certified accountant when attempting to file them, at least for the first time.
New Crypto Tax Rules for 2025
The way cryptocurrency is taxed will generally remain the same for taxpayers. However, in June 2024, the IRS released updated tax guidance for taxpayers. As of January 2025, the new rules remove the concept of universally applying basis using a first-in, first-out (FIFO) approach for all digital asset units that could not be identified and replace it with one that accounts for cost basis on a wallet or account approach. This transition is supposed to make it easier to track cost basis as cryptocurrencies move from wallet to wallet.
Taxpayers have until Jan. 1, 2025, to account for the unused basis units of any remaining digital assets by transferring the units to the assets in a wallet or account with an equal amount of remaining digital assets using a global or specific unit allocation method. The IRS defines remaining digital assets as assets acquired before Jan. 1, 2025.
Important
The easiest way for taxpayers to account for unused basis units is to transfer all assets to one wallet, but this goes against most cryptocurrency security practice guidelines. Another option is to sell all assets held by a custodian, removing all unused basis, but you risk triggering a tax event and would need to consider the amount you’d need to pay in capital gains. Tax software that allows users to generate inventory reports and account for cryptocurrency transactions can also help taxpayers understand their basis and reporting requirements.
In plain language, this means that taxpayers must allocate all basis from assets acquired before Jan. 1, 2025, to all assets held in a single account or to specific assets in one account. Alternatively, basis can be transferred to specific assets using a rule such as FIFO. All users and investors will need to record every transaction’s date, time, and amount. They will also need to ensure they report these transactions at tax time to the IRS or face significant fines or jail time if they are caught not reporting.
The method must be selected before Jan. 1, 2025, and cannot be changed. After Jan. 1, 2025, taxpayers must begin tracking basis per wallet.
Brokerages and exchanges will be required to record and report transactions conducted on the exchanges to the IRS and taxpayers via the new Form 1099-DA after Jan. 1, 2025.
Do You Pay Taxes on Cryptocurrency?
Yes. The type of taxes you pay and how much depends on the circumstances in which you acquired and used or sold your cryptocurrency, your income, and your tax status.
Do You Have to Report Crypto Under $600?
If your gross income, including cryptocurrency, for a year was under the minimum filing requirements for your status, you’re not required to file or report it. However, you may want to file, as you might be eligible for a refund. If your income exceeds the minimum filing requirements, you must report the crypto and any capital gains and losses.
How Do I Avoid Crypto Taxes?
It is illegal to avoid paying taxes, so it’s best to ensure you record all of your transaction dates, times, and amounts for accuracy. Otherwise, you risk an audit and being charged with tax evasion.
The Bottom Line
Cryptocurrency taxes are complicated because they involve both income and capital gains taxes. In most cases, you’re taxed multiple times for using cryptocurrency. Additionally, tax laws change, especially considering cryptocurrency. With that in mind, it’s best to consult a tax accountant familiar with cryptocurrency and current tax laws to ensure you’re reporting correctly.