Calculating taxes on investments can be hard, and it can be even more difficult with cryptocurrencies. It’s highly recommended to consult with a certified tax professional in your area before filing taxes on crypto investments.
This guide is for crypto taxes in the United States only. Other regions have different requirements and tax rates.
Unfortunately in 2014, the IRS issued Notice 2014-21 establishing the taxation of cryptocurrencies. This notice defined virtual currencies, such as Bitcoin, as property for federal tax purposes. Consequently, the same tax rules governing property transactions now apply to cryptocurrency activities.
However, with the re-election of Donald Trump, we may see a shake-up in how crypto taxes work in the United States.
In the United States, cryptocurrencies are treated as property for tax purposes. This means that general tax principles governing property transactions also apply to crypto activities, with taxation falling under either capital gains or income tax depending on the nature of the transaction.
A taxable event occurs when cryptocurrency is sold, traded, or used to purchase goods or services. The resulting gain or loss is subject to capital gains tax, which depends on the holding period: short-term gains (assets held for one year or less) are taxed at ordinary income rates (10% to 37%), while long-term gains (assets held for more than one year) are taxed at preferential rates of 0%, 15%, or 20%, based on taxable income.
Cryptocurrency earned through mining, staking, airdrops, or as payment for goods and services is taxed as ordinary income. The value of the cryptocurrency at the time it is received determines the taxable amount, which is subject to rates between 10% and 37%, depending on the taxpayer's income bracket.
The IRS requires taxpayers to report all crypto transactions, even if they don’t receive a Form 1099 from an exchange. Starting in 2025, cryptocurrency exchanges will be mandated to issue Form 1099-DA for enhanced transparency.
Certain activities, like purchasing cryptocurrency with fiat or donating to a qualified charity, are not considered taxable.
The evolving regulatory landscape signals significant changes in 2025. President-elect Donald Trump has pledged to eliminate capital gains taxes on U.S.-issued cryptocurrencies, though specific details of this proposal remain unclear.
The IRS has recently emphasized that staking rewards are taxable upon receipt, creating immediate tax liabilities. Despite the gray area of the time of receipt when it comes to locked Ethereum, staking rewards are taxable income.
Revenue Procedure 2024-28 introduces substantial changes to how cryptocurrency traders calculate and report their cost basis for tax purposes, replacing the universal cost basis method with an account-by-account approach. Starting January 1, 2025, traders must:
This shift requires detailed record-keeping and may complicate tax reporting. Traders should review holdings, reconcile data, and consult tax professionals to ensure compliance and optimize strategies under the new regulations.
Taxpayers have until December 31, 2024, to utilize a one-time safe harbor transition, enabling them to allocate cost basis on a wallet-by-wallet basis before the new rules take effect. Missing this deadline could lead to audits and penalties if records fail to comply with the updated requirements.
According to the IRS, with cryptocurrencies nearly every swap or sell, is a taxable event.
The last day to file taxes is April 15th, although you can request a six-month extension which is usually auto-approved.
Cryptocurrency tax rates can range from 0% to 37%, depending on factors like holding period and income level. Short-term gains (held ≤1 year) are taxed as ordinary income (10%-37%), while long-term gains (held >1 year) are taxed at 0%, 15%, or 20%. Simply holding cryptocurrency incurs no taxes.
The first step to lowering your taxes from cryptocurrency trading and investing is hiring a certified accountant or utilizing specific software for tax calculations. Here’s a few more good tips:
Holding cryptocurrency for more than a year can significantly lower your tax rate, as long-term capital gains are taxed at rates between 0% and 20%, compared to short-term rates of up to 37%.
Tax-loss harvesting is another effective strategy. By selling cryptocurrencies at a loss, you can offset your gains, reducing your taxable income. You can close these trades at a loss by year-end to apply them to the current tax year. After selling the position you can immediately re-enter the trade as purchases do not incur tax.
If your income falls below certain thresholds, you might qualify for a 0% capital gains rate, offering another way to reduce liability. Additionally, donating appreciated cryptocurrency can avoid capital gains taxes while providing a charitable deduction.
Deductions for mining or business expenses and the careful use of transaction fees to adjust your cost basis can further minimize your taxable gains. Investing through a cryptocurrency IRA allows for tax-deferred or tax-free growth, depending on the account type.
