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Published: Mar 25, 2022 13 min read
Illustration of a hand playing a catch-ball cup game, where the ball is a bitcoin, and the cup is an Uncle Sam hat
Kiersten Essenpreis for Money

Cryptocurrency's popularity has skyrocketed in recent years, and Uncle Sam is ready to collect.

Around 16% of adult Americans — approximately 40 million people — have invested in, traded or used cryptocurrencies, according to the White House. Cryptocurrency exchanges like Coinbase have garnered millions of users, and trading apps like Robinhood make it as easy to buy and sell bitcoin, ethereum and other digital coins as it is to trade stocks and bonds.

But if you're one of the many people who's invested in cryptocurrency, don't forget: Crypto profits are taxed. TurboTax saw the number of people with cryptocurrency transactions more than triple between tax year 2019 and tax year 2020, with no signs of slowing in tax year 2021.

"The IRS has indicated it believes there is a great deal of underreporting when it comes to cryptocurrency, and that they’re ramping up enforcement efforts to combat it," says Andrew King, vice president of tax policy and research at Goldman Sachs Ayco Personal Financial Management. "While the principles around the taxation of cryptocurrency is continuing to evolve, cryptocurrency investors who overlook taxes are more likely than ever to hear from the IRS."

Here's what you need to know about how crypto is taxed.

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Crypto taxes guide

When do you have to pay taxes on crypto?

There are different ways crypto is used, from buying and holding to getting paid in crypto to making purchases. Not all of those uses are taxable events, says Lisa Greene-Lewis, a certified public accountant (CPA) and tax expert with TurboTax.

Here's when there are tax implications for cryptocurrency:

Sell for profit or loss

Like with stocks, investors need to pay federal taxes on cryptocurrency profits. The IRS considers virtual currencies property, which means that investors need to pay taxes on capital gains.

The amount of tax you owe depends on how much you earned in profit and how long you owned the crypto before selling it. If you owned the crypto for less than a year, you'll owe short-term capital gains taxes, and if you owned it for more than a year, you'll owe long-term capital gains taxes. (Short-term capital gains are usually taxed at a higher rate — see below.)

If you sold crypto at a loss you can, like with stocks, offset other gains with those capital losses — thereby lowering how much you owe in taxes.

Earn income from mining

Buying crypto isn't the only way to get the digital asset: Some people earn cryptocurrency by mining. Cryptocurrency mining is how new coins are created, by way of complex algorithms miners use computers to solve. Miners are then awarded with crypto.

Miners are taxed much like freelancers, Greene-Lewis says. If you earn cryptocurrency via mining, it should be reported on a 1099 tax form at the fair market value of the cryptocurrency on the day you received it.

Earning staking rewards

Staking is a way to generate passive income on your cryptocurrency. Staking is similar to mining in that it is part of the transaction validation process for certain cryptos, but staking — unlike mining — happens via a mechanism called proof-of-stake. If you stake your crypto, you're participating in this process and can earn rewards, but those rewards are taxed.

Crypto airdrop

Crypto users may at some point receive an airdrop from crypto projects and developers. An airdrop is free crypto sent out to users as part of a marketing campaign, and it's taxable income you'll have to recognize when filing taxes.

Buying goods and services with crypto

More and more retailers allow you to spend your bitcoin, ether and other cryptocurrencies on goods and services. But because the IRS sees cryptocurrency as property, you need to pay taxes on its appreciation when you exchange it for a product.

"The next time you think about using cryptocurrency to pay for something, remember that you are also going to have to report a gain or loss from disposing of that cryptocurrency on your tax return," King says.

Exchanging crypto for another

Before you can exchange one crypto for another, you technically need to sell that first cryptocurrency. If you sell with a gain, you need to pay taxes on that exchange.

Take the fair market value of the cryptocurrency you're receiving, minus the one you're giving up to recognize either a gain or loss, Greene-Lewis says.

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When do you not have to pay taxes on crypto?

Remember, not everyone who owns crypto will owe taxes this year.

Here's when you don't have to pay taxes on cryptocurrency:

Buying and holding

Just buying and holding cryptocurrency isn't a taxable event. Similar to other capital assets, like stocks, even if the value of the crypto increases, it's not a taxable event until you sell.

If you transfer your holdings from one crypto wallet to another, you're not selling anything and it is not a taxable event.

Donating crypto to charity

The IRS says that if you donate cryptocurrency to charity, you won't recognize an income gain or loss from the donation, which is the same tax treatment as donating stocks to charity.

Charitable contributions are tax deductible. The deduction is generally equal to the fair market value of the crypto at the time you donate it if you held it for more than one year. If you held the cryptocurrency for a year or less when you donate it, your deduction is the lesser of your basis in the crypto or the crypto's fair market value at the time of your contribution.

How much tax do you pay on crypto gains?

When you sell cryptocurrency, you must recognize any capital gains or losses on the sale and your tax liability. That means if you sell your cryptocurrency when its price is higher than the price you bought it for, you owe taxes.

Whether you owe short- or long-term capital gains taxes depends on how long you held the crypto before selling or exchanging.

Short-term capital gains

If you held the cryptocurrency for one year or less before selling, then you'll have a short-term capital gain or loss. Short-term capital gains are generally taxed by the IRS at the same tax rate as ordinary income.

Federal Income Tax Brackets for 2021
Rate Single filers Couples filing jointly Heads of household
10% Up to $9,950 Up to $19,900 Up to $14,200
12% $9,951 to $40,525 $19,901 to $81,050 $14,201 to $54,200
22% $40,526 to $86,375 $81,051 to $172,750 $54,201 to $86,350
24% $86,376 to $164,925 $172,751 to $329,850 $86,351 to $164,900
32% $164,926 to $209,425 $329,851 to $418,850 $164,901 to $209,400
35% $209,426 to $523,600 $418,851 to $628,300 $209,401 to $523,600
37% $523,601 and up $628,301 and up $523,601 and up
Source: IRS
Federal Income Tax Brackets for 2022
Rate Single filers Couples filing jointly Heads of household
10% Up to $10,275 Up to $20,550 Up to $14,650
12% $10,276 to $41,775 $20,551 to $83,550 $14,651 to $55,900
22% $41,775 to $89,075 $83,551 to $178,150 $55,901 to $89,050
24% $89,076 to $170,050 $178,151 to $340,100 $89,051 to $170,050
32% $170,051 to $215,950 $340,101 to $431,900 $170,051 to $215,950
35% $215,951 to $539,900 $431,901 to $647,850 $215,951 to $539,900
37% $539,901 and up $647,851 and up $539,901 and up
Source: IRS

Long-term capital gains

If you held the cryptocurrency for more than a year before selling, then you'll have a long-term capital gain or loss.

Long-Term Capital Gains Tax Brackets for 2021
Rate Single filers Couples filing jointly Heads of household
0% Up to $40,400 Up to $80,800 Up to $54,100
15% $40,401 to $445,850 $80,801 to $501,600 $54,101 to $473,750
20% $445,851 and up $501,601 and up $473,751 and up
Source: IRS
Long-Term Capital Gains Tax Brackets for 2022
Rate Single filers Couples filing jointly Heads of household
0% Up to $41,675 Up to $83,350 Up to $55,800
15% $41,676 to $459,750 $83,351 to $517,200 $55,801 to $488,500
20% $459,751 and up $517,201 and up $488,500 and up
Source: IRS

How to file crypto taxes

Address the crypto question on Form 1040. Taxpayers will have to deal with the question of whether or not they owe taxes on cryptocurrency pretty immediately when filing a return this year, says Eric Bronnenkant, head of tax at Betterment. That's because the IRS has added the following question to Form 1040 (the general tax form for individual taxpayers): "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"

Note that if someone only bought cryptocurrency last year and hasn’t sold any of it, they will NOT be required to check the “yes” box, Bronnenkant says.

Report your capital gains and losses. Any capital gains and losses need to be reported on Schedule D of Form 1040. You may also need to report capital gains and losses on Form 8949.

Report all your crypto income. If you were paid in cryptocurrency or mined cryptocurrency, you'll also need to report that income on Form 1040.

How to keep track of crypto for taxes

When you trade stocks and bonds, brokerages are required to provide you with a 1099 or similar tax forms with all the information you need to report gains and losses on your tax return. But you shouldn't expect a 1099 tax form from cryptocurrency exchanges for tax purposes.

"This means that you, as the taxpayer, will have to compile all of the necessary transaction data on your own in order to report the necessary income, gains, and losses on your return," King says.

The more organized and up-to-date you keep records of where you trade cryptocurrency, the easier it will be when the time comes to file your tax return, he adds. Your records should include as much relevant information as possible, including the date of each transaction, the type of transaction, the cryptocurrencies involved in the transaction, and the U.S. dollar value of the cryptocurrency at the time of the transaction, King says.

If you're using a tax software preparer like TurboTax, it may be a little easier. TurboTax has partnered with cryptocurrency trading platforms, including Coinbase and Robinhood, to let users automatically import thousands of crypto transactions at once.

How to pay taxes on NFTs

Non-fungible token (NFT)s are digital assets, like art, exchanged via blockchain technology. The tax rules around NFTs aren't clear, since there is no clear guidance from the IRS on if NFTs should be taxed as "collectibles" — which are taxed differently from cryptocurrency and stocks — as some tax experts say they should be.

The general consensus seems to be that investors who buy these digital assets using cryptocurrency need to pay capital-gains tax when they sell, and that NFT creators who make money selling the assets should report that money as ordinary income.

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Crypto taxes latest news

While crypto exchanges may not be required to issue 1099s now, that's changing soon.

Starting in tax year 2023, cryptocurrency exchanges will have to report crypto transactions to the IRS via 1099s, thanks to the Infrastructure Investment and Jobs Act signed into law last November.

And if you want to get your tax refund in crypto, you can. This year, TurboTax teamed up with Coinbase to allow its customers to have their tax refunds automatically deposited into a Coinbase account and immediately converted to cryptocurrency.

Crypto taxes FAQ

How to avoid capital gains tax on cryptocurrency

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If you sell your cryptocurrency with a gain, you need to pay taxes on it. But you can use tools like TurboTax's cryptocurrency tax calculator to determine how much less tax you'll have to pay if you hold your cryptocurrency for more than a year versus selling it less than a year after buying it.

And remember: If you had crypto losses when you sold you can, like with stocks, offset gains with those losses.

What happens if you don't report cryptocurrency on taxes?

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You need to pay taxes on your cryptocurrency gains. If the IRS gets wind that you did sell cryptocurrency for a profit and didn't pay taxes, they would probably adjust your return based on what they think you owe, Greene-Lewis says.

"It would definitely be better for you to report that," she adds.

Failure to report all your income and gains to the IRS can lead to penalties, interest and, in extreme cases, criminal charges.

How much tax do you pay on crypto gains?

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Whether you owe short- or long-term capital gains taxes depends on how long you held the crypto for before selling or exchanging.

If you held the cryptocurrency for one year or less, then you'll have a short-term capital gain or loss. Short-term capital gains are generally taxed at the same tax rate as ordinary income. If you held the cryptocurrency for more than a year and sell it for a profit, then you'll have a long-term capital gain, which will likely be taxed at a lower rate than a short-term gain.

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