What are the most asked crypto tax questions? We are here to clarify all of your crypto tax doubts by collecting the most asked questions out there and providing an answer from a certified crypto CPA in the US.
From how crypto taxes work to what happens if you don’t report crypto, we have the answers to the 10 most common crypto tax questions!
1. How do crypto taxes work?
The IRS treats crypto as property in the US, leading to similar taxation as trading stocks, incurring in capital gains/losses when you sell crypto (for FIAT or other cryptocurrencies).
In the US, if you trade any crypto for another crypto or USD (or another FIAT), you’ll have to calculate the capital gain/loss for that trade and include it on your tax forms.
If you earn income from crypto (e.g., airdrops, salaries, crypto interest vehicles, hard forks, staking rewards), you’ll be taxed at an ordinary income level, and you need to report it on your income tax return.
2. Do you have to report every crypto transaction on taxes?
Yes, you have to report the capital gain or loss from each crypto trade you did during the tax year. You must determine the gain/loss on each trade, including other information like:
- Date of acquisition for your crypto
- Date of disposal
- The cost basis of the trade
- Sales proceeds
- If the gain is short-term (=<12 months) or long-term (>12 months)
3. How much tax do I pay on crypto?
If you have crypto gains from your trading, they will be taxed at a capital gains tax rate, depending on your holding period (long or short term), if you file as a single or married person, etc.
If you have held your crypto before selling it for over 12 months, you can be taxed at a long-term capital gains tax rate, ranging between 0% and 20%, depending on personal factors like the filing status.
If you have held your crypto before selling it for 12 months or less, you would be taxed at a short-term capital gains tax rate, ranging between 10% and 37%.
If you have crypto income, you’ll be taxed according to your income tax bracket, including your total income from non-crypto activities.
4. How to calculate crypto taxes
To calculate your crypto taxes, you need to know the sales proceeds of each of your crypto trades and their cost basis.
You calculate the gain/loss on each trade by subtracting the cost basis from total sales proceeds. Your gains will be taxed at a capital gains level, with a long-term or short-term rate, depending on the holding period.
If you have crypto income, you have to determine the Fair Market Value (in USD) of the income at the time you received it, while that FMV will be taxed according to your total taxable income bracket for the year.
5. How much crypto do you have to report on taxes?
You must report any capital gain/loss from any crypto trade you made during the year on your taxes as a US citizen.
If you have any income from crypto (below or above $600), you also need to report it on your income tax return, and you’ll be taxed according to your taxable income bracket.
6. How does the IRS know if you have cryptocurrency?
The IRS has enforcement powers like summoning crypto providers to get customer information, an increased workforce to oversee crypto activities, and multiple tools to track the activity on the blockchain, making it easy to know if you have cryptocurrency or not.
Beyond those abilities, US citizens have the obligation to report crypto and to answer the crypto question on their income tax return.
7. How do you answer crypto question on tax return?
On Form 1040, you must answer “Yes” to the crypto question if you have sold any of your cryptocurrency during the tax year, while you can answer “No” if you only bought or transferred your crypto between personal wallets.
If you have made any other operations beyond buying, holding, or transferring crypto personally, you’ll have to answer “Yes” to the crypto question on your US Individual Income Tax Return.
8. How to report crypto on taxes?
You have to report your crypto gains/losses on the following tax forms:
- Form 8949 and Schedule D of your 1040 Form;
- Answer “Yes” to the crypto question;
- Include any crypto income on Schedule B (for interest) or Schedule 1 (for miscellaneous income) of your Individual US Income Tax Return.
9. What happens if you don’t report crypto?
If you don’t report or misreport your crypto on taxes, you’ll incur fines and penalties or face worse consequences (e.g., jail).
10. How to avoid crypto taxes
You can legally avoid crypto taxes by:
- Holding your crypto in the long-term (over 12 months), getting a reduced tax rate;
Doing crypto tax loss harvesting;
- Invest in crypto through an IRA;
- Moving to a crypto tax-free state or crypto-tax friendly country.