Filing taxes with cryptocurrency

How long you owned the cryptocurrency makes a big difference

Derek Silva

Derek Silva

Published February 13, 2020

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KEY TAKEAWAYS

  • U.S. tax law treats cryptocurrency similarly to property and stock investments

  • You have to pay capital gains tax on cryptocurrencies when you sell them, even if you’re exchanging them or using them to buy something else

  • The taxable value of your cryptocurrency is usually the difference between the price you paid for it and what you made when you sold it

  • Cryptocurrency is treated as regular income if you received it as payment for a service

The Internal Revenue Service (IRS) treats cryptocurrency similarly to other investments and property, not as cash. When you sell cryptocurrency, you pay capital gains taxes on it. You have to pay short-term capital gains if you owned it for one year or less, but you pay long-term capital gains tax if you owned it for more than one year. Long-term gains are taxed at much lower rates, so it’s generally better to sell something as a long-term capital asset.

Reporting capital gains on your taxes requires you to fill out Schedule D, and potentially Form 8949. To make filing easier, first gather any 1099-B or similar forms that list the sale price of the cryptocurrency and what you initially paid for it. Your taxable gains are generally equal to the difference between what you paid for the cryptocurrency and what you sold it for.

When you receive cryptocurrency as payment for products or services, it’s treated as regular income. The income you report is based on the fair market value (FMV) of the cryptocurrency on the date you you received it. This value is usually publicly available from the cryptocurrency exchange. If not, the FMV is the value (in U.S. dollars) of the products you sold or services you performed.

This article will also cover other situations you may encounter, like how to report charitable cryptocurrency donations on your taxes. For more help filing the rest of your taxes, read our guide to filing income taxes.

What is cryptocurrency

According to the IRS, a cryptocurrency is any type of digital currency that uses cryptography (a method of securing information) and is on a distributed ledger (a database that is shared and synchronized across multiple sites). The most common ledger for virtual currency transactions is blockchain.

On tax forms and instructions, the IRS will commonly use the term virtual currency instead of cryptocurrency. Popular types of cryptocurrency include bitcoin, ether (Ethereum), XRP (Ripple), Litecoin (LTC), Tether, (USDT), and Libra.

How is cryptocurrency taxed?

Cryptocurrency is property in the eyes of the IRS. Any time you sell, exchange, or trade cryptocurrency, you need to pay capital gains taxes, the same as if you were selling property or other investments. This also applies in situations where you exchange cryptocurrency for cash, services, or other products.

You do not need to pay taxes if you’re only transferring cryptocurrency from one account or digital wallet you own to another one that you own.

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Capital gains tax rates

There are two types of capital gains: short-term and long-term. They have different tax rates and which you have depends on how long you owned your cryptocurrency.

Short-term capital gains are for assets you own for one year or less before selling. They’re taxed at the standard income tax rates, which range from 10% to 37%. Long-term capital gains are on assets you own for more than one year before selling. Long-term gains are taxed at much lower rates that range from 0% up to 20%. You can save significantly on your taxes by paying long-term vs short-term capital gains.

The tax you pay also depends on your basis, also called cost basis. Your basis is the amount you spent — in U.S. dollars — to acquire the cryptocurrency, including all commissions and fees you paid. When you sell a cryptocurrency, your total gains are calculated as the sale price minus your basis.

If you sold cryptocurrency for less than you paid for it, you have capital losses and still need to report it on your taxes. You don’t need to pay taxes on losses, though. Your losses will also offset any gains you made and decrease the amount of tax you owe.

Learn more about capital gains tax.

What if I get paid with cryptocurrency?

When you receive cryptocurrency as payment for services, the value of the currency, on the date you receive it, is treated as income on your federal income taxes for that year. Changes in the value between the date you receive it and the date you actually file your taxes will not affect your taxes. You may receive a W-2 or 1099 form with the currency’s tax value. If you don’t receive these forms, try to find other documentation of the cryptocurrency’s value on the date you received it. If you sell your cryptocurrency in the future and make a profit over your cost basis, then you will pay capital gains taxes.

If you receive a virtual currency payment and you’re a contractor, freelancer, or otherwise self-employed, you may need to pay estimated taxes each quarter.

How to report cryptocurrency on taxes

There are a few tax forms you may need to fill out depending on the type of cryptocurrency transactions you made. The specific type of cryptocurrency you have doesn’t change how you file your taxes. For example, selling bitcoin is reported the same way as ether, Libra, or any new virtual currency protocol.

Gather necessary forms

First, gather any tax forms you have that state the value of your cryptocurrency. Ideally, you maintained records throughout the year for any sales, exchanges, purchases, or changes in value of your cryptocurrency.

The most common tax form is a 1099-B, and the exchange that manages the currency will normally send you one when you sell a virtual currency. However, you may also receive a 1099-MISC, 1099-K, or a similar document that lists the value of the currency. An employer who pays you with cryptocurrency may provide you with a W-2.

If you didn’t receive any of these forms, you still need to report the cryptocurrency on your taxes. To make things easier, look up the value of the cryptocurrency through its exchange. If there are no publicly available values, the value of your cryptocurrency is likely equal to the value of what you purchased with it.

If you forgot to report any virtual currency sales during a previous year, you should file an amended tax return.

Reporting your cryptocurrency payments

Any time you get paid in cryptocurrency, you need to report the fair market value of the payments on Schedule 1. This includes cryptocurrency you received in exchange for products or services and through an airdrop or similar promotion. At the top of Schedule 1, make sure to check the box asking if you sold or exchanged and virtual currency during the year.

If you didn’t receive a W-2 from an employer, you were an independent contractor, or you otherwise earned the cryptocurrency as a self-employed worker, you need to pay self-employment income. In that case, you also need to pay self-employment tax by completing Schedule SE.

If there is a hard fork in the currency’s blockchain, you have to report income on your taxes if you receive new (or just more) cryptocurrency out of it. A hard fork occurs when there’s a divergence in a blockchain, creating a new version of the cryptocurrency such that all transactions after the fork point are part of the new cryptocurrency. One example of a hard fork is when bitcoin forked to become Bitcoin Cash. The bitcoin that people already owned remained as bitcoin, but any purchases after the fork point were Bitcoin Cash. With a soft fork, which doesn’t result in a new cryptocurrency, you won’t need to report any income on your taxes.

Importantly, a hard fork probably creates a new cost basis because the value of the forked crytpo is usually less than that of the original. A soft fork does not result in income for you.

Reporting cryptocurrency sales

Any time you sell or exchange cryptocurrency, you need to report it on Schedule D, Capital Gains and Losses.

If you had short-term capital gains — because you owned the cryptocurrency for a year or less — write the value of your gains in Part I of Schedule D. You need to write the sale price, your basis, and your net capital gains. Your basis is usually the amount you spent for the cryptocurrency, but it should also be reported on 1099 forms you received. Make sure to include the sum from all individual sales you made.

If you have long-term capital gains, you need to report it in Part II of Schedule D. Again, you need to know your basis, the sale price, and your net gain or loss. Before you can do this, you need to complete Form 8949.

Form 8949, for long-term capital gains

Fill out Form 8949, Sales and other Dispositions of Capital Assets, any time you have long-term capital assets (you owned them for more than one year). Form 8949 asks you to list out all of your long-term capital assets. You don’t calculate any tax on this form, though. That happens on Schedule D. Use as many copies of the form as you need in order to list everything.

On this form, you can also identify individual units of a virtual currency. For example, you may have purchased amounts of bitcoin at different times and at different prices. Your basis will be different for each of those transactions because you paid different prices, which is true for any asset in your portfolio. Form 8949 allows you to identify the individual units you own and your basis for each. You can identify a unit of cryptocurrency by writing down your public key or the address to the unit’s block. (The IRS also says you can use your private keys, but anyone with access to your private keys may be able to steal your crypto. As much as we trust the IRS, we don’t recommend giving out your private keys.)

Charitable contributions

All charitable contributions you make with a cryptocurrency are treated as noncash contributions. You should receive a written acknowledgement from the charity for your donation if it was worth more than $250. If you plan to claim a deduction of more than $5,000, you should likely ask the organization to sign a copy of Form 8283, Noncash Charitable Contributions.

As always, if you’re claiming the charitable contributions deduction, you need to itemize your deductions and complete Schedule A.

What if I earn dividends?

If you have a cryptocurrency that pays dividends, you need to report them just as you would with any other investments. You will most likely receive a copy of Form 1099-DIV or 1099-MISC, but you may not if you made less than $10 from dividends for the year.

To report dividends, use line 3 of Form 1040. If you earned more than $1,500 of total dividends, you also need to complete Schedule B, Interest and Ordinary Dividends.

I got cryptocurrency as a gift

If you receive cryptocurrency as a bona fide gift — not in exchange for any services or products — then you do not have to include its value in your annual income. (The person giving the gift may pay gift tax, though, if it’s worth more than $15,000.)

Determining the basis of cryptocurrency you got as a gift depends on whether you sell it for a gain or a loss. If you sell it for a gain, your basis is equal to the basis of the person who gave it to you (likely their original purchase price) plus any gift tax they paid on it. If you sell gifted cryptocurrency for a loss, your basis is either the basis of the person who gave it to you or the fair market value of the cryptocurrency at the time you received it, whichever is less. If you don’t have the documentation to prove the donor’s basis, your basis is equal to zero. Learn more about the basis of gifted assets in IRS Publication 551.

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Personal Finance Expert

Derek Silva

Personal Finance Expert

Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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