Taxation of different crypto transactions
Crypto transactions are taxed differently in the US according to their nature, but in general, they are classified as either gains/losses or income.
Let’s cover in detail how different crypto activities, from staking to trading NFTs, are taxed in the US.
Crypto trading in the US is taxed at the capital gains level, depending on the holding period of the cryptocurrency you sold and some other factors.
Your crypto trades can be taxed at a long-term capital gains tax rate, ranging from 0% to 20%, or a short-term capital gains tax rate between 10% and 37%.
Any trade of a cryptocurrency for another cryptocurrency, DeFi token, Web3 token, NFT, or FIAT (e.g., EUR/USD) is taxed at a capital gains level in the US.
Crypto to crypto trades
Crypto-to-crypto trades are taxable events in the US, subject to capital gains taxes, with tax rates depending on the holding period and some other factors.
Crypto-to-crypto trades include any trade of a cryptocurrency for another cryptocurrency/digital asset of any type, from crypto tokens to NFTs.
Here’s how a crypto-to-crypto trade is taxed:
John bought 1 Bitcoin for $20K in October 2020.
In December 2021, 1 Bitcoin is worth $40K, 1 Ethereum is worth $2K, and John sells his 1 BTC for 20 ETH ($40K/$2K tokens).
John’s capital gain ($20K) from this trade (Bitcoin to ETH) is calculated by $40K (sales proceeds/total amount of ETH bought) minus $20K (cost basis of his Bitcoin). The gain is subject to long term capital gain tax rate because John’s holding period for the Bitcoin he sold is more than 12 months.
Staking is a taxable event in the US, with crypto staking rewards being taxed at the income level.
If you earn crypto staking rewards, you’d have to report the Fair Market Value (in USD) of those rewards at the time you receive them. The total FMV of the staking rewards you receive in the same tax year will need to be reported on your US Individual Income Tax Return for that year.
Lending and borrowing
Crypto interest products giving investors crypto rewards in the form of interest will be taxed at the income level in the US. Interest income is reported on Schedule B of Form 1040.
If you put your crypto assets to work in an interest investment vehicle, you’d earn rewards, similarly to staking, and you’d need to determine the Fair Market Value (in USD) of the rewards at the time you receive them.
However, borrowing crypto is usually not a taxable event in the US. If you use the crypto loan to generate investment income and/or trading gains/losses, you may be able to deduct the interest expense you paid for the loan if you are taking an itemized deduction on your tax return.
Crypto mining is a taxable event in the US, leading miners to pay income taxes on their newly created cryptocurrencies.
Miners input resources to create new units of cryptocurrency, and when they are in full control of those new tokens, they have to determine the Fair Market Value (in USD) of those units and then report it as income on Form 1040 (Income Tax Return).
If you are doing mining as a hobby, you need to report your mining income on Schedule 1 of your Form 1040.
If you are doing mining as a business (either sole proprietor or single member LLC), you will need to report your mining income on Schedule C of your Form 1040.
Crypto airdrops or hard forks
Receiving crypto due to airdrops and hard forks is a taxable event in the US.
If you receive a new crypto from an airdrop, you’d need to determine its Fair Market Value (in USD) when you receive it and then report that amount as income on your income tax return.
Hard forks are taxed the same way. If you hold a cryptocurrency that goes through a hard fork and subsequently you receive new coins, you’d have to determine the FMV of those coins when you receive them and report them as income on Form 1040.
If you pay for a product/service with crypto, whether directly or through a crypto card, you’d have a taxable event in the US.
Crypto payments are treated as if you first sell the crypto for FIAT as a trade, which is taxed at the capital gains level, then use the FIAT for your purchase of goods or services.
Crypto gifts and donations
In the US, receiving crypto gifts is usually not a taxable event. But if you give crypto to someone as a gift and the FMV of the crypto exceeds the annual gift tax exclusion amount, $16,000 in 2022 ($17,000 for 2023), you would need to file a gift tax return.
Donating crypto to a charitable organization may qualify you to take a tax deduction and effectively reduce your taxes. You can deduct your donation at FMV if your holding period for the donated crypto is more than 12 months, and you don’t need to report any capital gains for the difference between the FMV and your cost basis.
NFT taxes (non-fungible tokens)
Trading any crypto for NFTs or trading NFTs for NFTs or any other crypto asset is a taxable event in the US.
If you trade any NFT, you’d be taxed at the capital gains level, with the tax rate depending on the holding period of the crypto/NFT. Gains/losses from NFT trading would be reported in Form 8949 and Schedule D of Form 1040.
Some people believe that NFTs are considered collectibles and should be taxed as such. Currently, there is no official guidance about NFT taxation, but the IRS appears to treat NFTs the same way as for cryptocurrencies.
If you’re an NFT creator, your sales proceeds (from your NFT sale) would be considered ordinary income and should be reported on Schedule 1 or Schedule C of your income tax return, depending whether you are doing NFT creation as a hobby or a business.
Using losses to reduce your crypto tax
In the US, you can use your crypto losses to offset your capital gains, effectively reducing your capital gains taxes. In addition, each year you can deduct up to $3,000 of net capital loss and use it to reduce your taxable income.
Let’s cover the tax treatment for other crypto losses.
Tax treatment for lost or stolen crypto
If you lose crypto in an accident or your crypto got stolen, you won’t be able to claim a loss deduction because these losses are considered personal casualty losses, which are not tax deductible in the US under the current tax law.
Crypto exchange bankruptcies
Crypto exchange bankruptcies like recent ones related to FTX or BlockFi cause investors to lose their funds. Legal action may help investors retrieve some of those funds. You may be able to take a capital loss deduction after the bankruptcy is over and the amount of your compensation has been finalized. You cannot deduct any losses while the bankruptcy proceeding is still going on.