Is crypto taxable? Do you pay taxes on Bitcoin? Is there a Bitcoin tax? Many wonder if you have to pay taxes on transactions involving Bitcoin and crypto in the US.
Tax treatments for buying, selling, holding, making a profit or loss, gaining interest, swapping one cryptocurrency for another are some of the many doubts US taxpayers face each tax season.
Today, we clarify all the bitcoin taxable events for individuals in the US.
In this article:
Is there a Bitcoin Tax?
There’s no such thing as a crypto tax or bitcoin tax in the US. When someone refers to this, they mean the capital gains taxes they paid when profiting from selling bitcoin or another cryptocurrency. It’s the same tax for trading stocks or mutual funds. Capital gains tax is not unique to cryptocurrency.
As a result, there’s no particular bitcoin tax rate, but the usual capital gains tax rate you also pay when selling stocks.
The Bitcoin capital gains can be taxed at a short-term or long-term tax rate according to your holding period after you bought a cryptocurrency. If you held crypto for no more than one year (365 days) before selling it, your gain or loss is short-term.
Otherwise, it’s long-term. Long-term capital gains are subject to a lower capital gains tax rate in the US when compared to short-term capital gains, while many other countries offer tax benefits or tax-free treatment for long-term “hodlers.”
Is buying Bitcoin taxable?
Buying any amount of Bitcoin or any other cryptocurrency with FIAT is not a taxable event. You do not have to pay taxes on any crypto purchase with FIAT currency.
Bitcoin is considered property by the IRS, and in the same way as other property (e.g., stocks), you are not subject to taxes when you buy them with FIAT.
Example:
In January 2021, John bought $10,000 worth of Bitcoin (BTC) at a price of $30K. John acquired 0.33 BTC.
What are John’s tax implications when buying?
John does not have to pay any tax on that Bitcoin purchase. However, there are a new set of requirements/procedures he has to follow from then on. Find out how to report your Bitcoin to the IRS later on in this article.
Is holding Bitcoin taxable?
Holding Bitcoin without doing any transactions is not a taxable event.
If you believe in the long-term price gain that Bitcoin can reach in the next year, you may want to become what’s called a “Hodler.”
If you hold Bitcoin or any other cryptocurrency for more than 12 months after you bought it, you’re eligible for a lower capital gains tax rate when you sell your holdings.
Being a long-term crypto holder has many advantages as it is one of the simplest investment strategies you can have, and at the same time, get tax benefits.
Is transferring crypto from one wallet to another wallet taxable?
No, transferring crypto from one place to another is not a taxable event. Check our article about other tax considerations when transferring crypto between wallets.
Are the fees from transferring crypto between wallets tax deductible?
No, gas fees/network fees you need to pay when transferring crypto from one place to another are not deductible unless you are a professional trader running a trading business.
For security reasons, you should spread your long-term crypto investment across different storage options to avoid losing them in a possible hack. To do so, you’ll incur some fees to transfer between wallets. You should keep track of those fees as they will impact your remaining basis, even though they are not tax-deductible.
Is selling Bitcoin taxable?
In short, yes!
Every time you sell Bitcoin or another cryptocurrency for a FIAT currency or another crypto, you have a taxable event. Find out all the tax implications on crypto trades.
Are bitcoin earnings taxable?
Bitcoin earnings/profits are taxable at a certain capital gains tax rate in the US. There’s no particular tax for Bitcoin or a differentiated tax rate for crypto.
Bitcoin is considered property by the US. As a result, the rules for paying taxes on profits and the tax rates are similar to what you would have with other investments (e.g., stocks).
The tax implications of selling Bitcoin are also dependent on the holding period after you bought such crypto and your accounting method of choice (e.g., FIFO, specific identification).
If you hold for more than 12 months, you’ll be able to get a long-term capital gains tax treatment (0-20%) when selling at a profit. If you sell before holding for more than 12 months, you’re subject to a short-term capital gains tax (10%-37%) in the US. However, these rates are merely indicative as the real ones will depend on your income level bracket and family status (married/single) as a US taxpayer.
If John held Bitcoin for more than 12 months and only sold it after that threshold, he would still have to pay taxes but at a lower tax rate (long-term capital gains tax).
With CoinTracking, you automatically find which coins are eligible for a long-term tax rate with our Privileged Coins Report!
Can I claim Bitcoin losses on taxes?
If you sell Bitcoin at a loss, meaning if the price you sold at is lower than your purchase price, you’re entitled to a tax loss deduction, lowering your overall tax bill.
You can claim losses on taxes from unprofitable crypto-to-crypto or crypto-to-FIAT trades. This is called tax-loss harvesting. Usually, at the end of each year, you should determine if it is worth realizing a big loss to offset high realized gains from other trades.
Is selling Bitcoin for another cryptocurrency taxable?
Yes. If you convert Bitcoin to another cryptocurrency, you have to track those transactions and then pay the appropriate taxes if you sell at a profit.
Each crypto-to-crypto trade is treated as a 2-step transaction:
The sale of the first crypto (e.g., BTC) at its fair market value in FIAT at the time of your exchange. A gain/loss will be recognized for the difference between the fair market value/sales proceeds and your basis in the coin.
Purchase of the second crypto (e.g., ETH) for the amount of deemed sales proceeds from the sale of the first crypto.
Even though there is no fiat involved, you still need to recognize a gain or loss for the deemed sale of the first crypto.
Example: John sell 0.1 BTC for 4 ETH
When John bought his Bitcoin, the price was $30K. At the time of this sale, 1 BTC is $40K.
John’s profit from selling 0.1 BTC is $1K ($4,000-$3,000).
He needs to recognize this gain ($1,000) and pay capital gains tax at the long-term or short-term rate depending on the amount of time he held the coin (more/less than 12 months).
Then, he purchases 4 ETH (each ETH worth $1,000) with the $4,000 (sales proceeds) from selling 0.1 BTC at $40K. The purchase is not a taxable event, but it will be when he sells ETH for FIAT or another crypto.
Are Bitcoin Debit Cards purchases taxable?
The wave of new crypto debit cards opened a new avenue for crypto adoption and spending. The easiness of using crypto debit cards linked to your wallet or exchange makes it a strong value proposition.
However, please know that each purchase you make with a crypto debit card is a taxable event. Moreover, purchasing any goods or services with crypto is a taxable event. For example, be aware of the tax implications if you plan to buy a Tesla with Bitcoin.
You have to pay capital gain tax when you purchase if the coin price at the time of your purchase is higher than the price when you bought the coin. Your cost basis is the price at which you acquired the cryptocurrency used to make the purchase. The price of the crypto at the time of the purchase is used to calculate the profit.
Your tax rate will be dependent on the period you held your crypto: a long-term rate if you hold it for more than 12 months; a short-term rate if you hold it for less than 12 months.
Do I need to pay taxes from crypto airdrops?
Yes.
Receiving crypto airdrops results in income taxes “in the taxable year you receive that cryptocurrency,” according to the IRS guide for crypto.
As a result, the nature of income is ordinary, and the tax rate applied will be based on the updated tax brackets for that year in the US.
Moreover, the ordinary income is “equal to the fair market value of the new cryptocurrency when it is received.”
Example:
John received 100 units of Token X in an airdrop. Each token X is worth $1. John’s income is $100 (fair market value) when receiving the airdrop. This income is added to his total income bracket and tax appropriately.
Are Crypto hard forks subject to taxes?
Yes.
Crypto Taxes from hard forks are similar to receiving a free airdrop.
You need to claim the new coins and gain their full control and access to be taxable.
In that case, you’ll have taxable income based on the fair market value of the coins at the time you received them.
A soft fork doesn’t have any impact on your taxes.
Example:
John received 200 units of Token Y following a hard fork of Token X. Each token Y is worth $1.
John’s income is $200 (fair market value) when receiving the new cryptocurrency. This income is added to his total income bracket and taxed appropriately.
Is earning interest in Bitcoin taxable?
Yes.
When receiving interest in BTC, you have to recognize that amount in USD, based on the price of BTC at that time, as interest income, which is subject to the ordinary income tax rate.
If the BTC you earned from interest increases in price, and you sell it for USD or another crypto, you’ll be liable to pay capital gains tax, as we explained before.
John does not need to convert his BTC into USD for the interest to be recognized as taxable income. The transaction is automatically taxable when he receives the interest in BTC.
Bitcoin Mining and Taxes
You guessed it. Bitcoin mining leads to income tax. If you earn income from any crypto mining activities, you have to report it as taxable income.
But, there’s good news: you can get tax deductions if you are doing mining as a business. Some of these deductions include the necessary equipment to set up a profitable mining operation.
On top of the initial high investment, the recurring electricity costs take a toll on your predicted profit. Fortunately, you can also deduct all those monthly costs from your taxable mining income.
Let’s look at an example:
John spent $30K to set up his mining operation at the beginning of 2021. On top of that, he has $800/month mining-related expenses and brings in $1500/month as mining revenue.
At the end of 2021, John generated $18,000 in revenue and he incurred $9,600 of annual expenses. John can deduct those costs and end the year with a taxable income of $8,400 ($18,000 – $9,600).
Is staking crypto taxable?
Yes. Cryptocurrency received from staking is treated the same as receiving interest income in crypto. You have to recognize a taxable income based on the fair market value of the coins received through staking at the time of your receipt.
Tax Implications of Getting Paid in Crypto
You’ll have ordinary income if you receive Bitcoin or another crypto as your salary. The amount reported is the fair market value at the time you received your salary.
If you have a fixed monthly salary in USD (e.g., $5K each month), you’ll have the same income basis each month even if the amount of BTC is different due to price changes.
Check all the tax details of getting paid in Bitcoin as an employee or an independent contractor.
Do I have to pay taxes on Bitcoin gift cards or when I gift Bitcoin?
It depends on the amount you’re gifting.
In 2020, if you have gifted less than $15K to someone (individual recipient), you won’t need to file a gift tax return. In 2021, the same threshold applies for each recipient.
However, if the person who received the Bitcoin later sells it, he/she will be subject to capital gains tax on the profit. In that case, the cost basis can be:
1) The same as your cost basis; or
2) Equal to the fair market value of the coin at the time of the gifting.
Determination of basis cost depends on whether the fair market value is higher or lower than your basis. We encourage you to check IRS Publication 551, Basis of Assets, for more details.
Do I pay taxes if I receive Bitcoin in an inheritance?
Maybe.
The IRS considers digital assets like Bitcoin and other cryptocurrencies in your total “gross estate” in their fair market value at the time of death.
As a descendant, you may be liable for inheritance tax on your inherited Bitcoin if your total inheritance surpasses the IRS threshold ($11.7M in 2021).
How to not pay taxes on bitcoin?
Most people have to pay taxes. But if you meet certain requirements, you may be able to avoid paying bitcoin taxes. For example, if your total income is less than the filing threshold, you don’t need to pay any taxes. If all capital gains from your crypto trades are long-term and you qualify for a 0% long-term capital gains tax rate, you don’t have to pay crypto taxes.
There are also some ways you can use to reduce your crypto taxes. For example, trading fees and similar trading expenses can be deductible from your sales proceeds, which will lower your capital gains.
If you have altcoins that have depreciated a lot in value and you have high unrealized gains with Bitcoin, you can also realize those altcoins losses to lower your tax bill on the Bitcoin profits.
If you run a mining operation as a business, all the expenses related to your activity (e.g., electricity expenses, equipment) can be deductible.
Finally, If you donate crypto to a qualified charity (a charitable organization), you may also be able to use that amount to reduce your tax bill. Check how our article on how our partner, The Giving Block, makes it easy to donate your crypto while learning to classify those donations in your CoinTracking account.
Can you pay taxes with Bitcoin?
Recently the Mayor of Miami, Francis Suarez, made waves when hinting at the possibility of investing the city reserves into Bitcoin and allowing residents to pay their taxes with Bitcoin.
Miami seems to be on a roll trying to attract companies and high net worth individuals from other states with attractive tax benefits and quality of life.
Paying taxes with Bitcoin seems like a novel idea, but the Swiss Canton of Zug allowed, in September 2020, for individuals and companies to pay taxes with Bitcoin.
It is still a divisive subject in the community as holders do not see it as advantageous to pay with Bitcoin instead of USD to not miss out on the potential gains.
How to report bitcoin on taxes?
In the US, there are several reporting procedures when trading crypto. Bitcoin tax reporting is divided into 2 steps:
Declaring that you have acquired crypto if you make additional trades: you need to answer “Yes” to the question regarding cryptocurrency on page 1 of 2020 Form 1040.
Reporting your transactions and gains/losses: You need to report all your trades on Form 8949 and Schedule D of your Form 1040. If you have crypto income (e.g., from hard forks, airdrops, staking, mining), you also need to report that income on your tax return.
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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights. Follow our weekly AMAs for US taxpayers on Twitter where she clarifies all your crypto tax doubts.
Check our comprehensive crypto guides with the best tools out there:
2021’s NFT guide (with taxes).
The best 65 Crypto Twitter accounts to follow.
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Crypto debit cards: The best 5 providers in 2021.
Find Crypto tax accountants near me.
Bitcoin analysis: Here’s the best 7 tools to find it.
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Exchange imports: The 2021 guide by CoinTracking.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.