Taxes You Pay on Crypto

Cryptocurrency has risen in popularity as a digital asset class, but many people don’t know how it’s taxed. This makes understanding the IRS’s treatment of cryptocurrency all the more important.

The IRS treats cryptocurrency like property for tax purposes, which means that any time you use crypto to pay for something it triggers a taxable event and you realize capital gains or losses. So, do you pay tax on crypto? Answer in follow sentences.

 

Taxes on gains

When you trade crypto, you pay tax on gains based on the difference between your cost basis and the sale price. The IRS considers cryptocurrency to be property, not currency, so it's treated a lot like stocks and other investment assets.

The cost basis of a crypto asset is the original purchase price. It also takes into account transaction fees and any commissions you paid in the transaction.

You traded one cryptocurrency for another, such as bitcoin (BTC) for Solana (SOL) at a profit. Your taxable gain would be the dollar amount you received in SOL minus your cost basis of BTC.

Selling goods or services with crypto at a loss may allow you to offset your gain from the sale, and deduct up to $3,000 from your taxable income for the year. This can be a significant benefit for crypto traders.

Taxes on losses

When you trade crypto, you pay tax on losses as well as gains. These losses can offset other capital gains you realize from stocks, bonds and mutual funds.

Short-term capital gains and losses are taxable as ordinary income at a rate between 10% and 37% depending on your income level. Long-term gains are taxed as capital gains at a rate between 0-20%.

To determine your capital gain or loss, subtract the cost basis — or the price you paid for the cryptocurrency — from the proceeds received. This can include transaction and gas fees.

If you sold crypto for a loss, you can deduct up to $3,000 in losses from your taxable income each year, according to Lisa Greene-Lewis, a certified public accountant and tax expert with TurboTax. This strategy, known as tax-loss harvesting, can reduce your taxes in the long run.

However, there are a few crypto-specific rules to consider before filing your return. For example, theft losses are generally ineligible for tax deductions.

Taxes on fees

The taxes you pay on crypto can vary depending on how you trade it. For example, mining or staking coins on a network may be taxed differently than paying gas fees using cryptocurrency.

The IRS generally taxes cryptocurrencies as capital gains, which are taxed on the realized change in value of your crypto assets over time. Gains on crypto are subject to a variety of different tax rates, and they can range from 10-37%.

However, it's important to remember that you don't owe any taxes on a capital gain if you exchange your crypto for other assets and use them in an ordinary manner.

Most top crypto exchanges provide Forms 1099-MISC for payments you receive from mining, staking, yield generation, airdrops, hard forks, and other forms of crypto income earned on their platforms. These forms are issued when you earn $600 or more in a year in these types of transactions, and will be taxable under your personal income tax bracket.

Taxes on exchanges

When you trade crypto, you must pay the appropriate taxes on each transaction. These are typically based on the nature of the cryptocurrency, its value and your income.

Taxes on cryptocurrencies work like taxes on other property, such as stocks or real estate. In most cases, the gains you make from trading your cryptocurrency will be taxed if they are a capital gain.

Short-term capital gains are taxed at the ordinary income rate, which is between 10% and 37% depending on your taxable income. Long-term capital gains are taxed at a different rate, which can be as low as 0% for the 2022 tax year.

Using tax accounting software to track your crypto transactions can help you keep track of taxable events and report them correctly. These programs will automatically pull in your cost basis, sales proceeds, and holding period to calculate your tax liability.