How is crypto taxed?
The IRS treats crypto as property, which means you owe taxes when you earn or dispose of it. There are two primary ways crypto is taxed in the US.
Capital gains tax: Crypto capital gains taxes apply when you sell or otherwise dispose of your crypto, resulting in a capital gain or loss based on the price difference from when you received it.
Ordinary income tax: If you earn cryptocurrency, you owe ordinary income tax, calculated based on the fair market value at the time of receipt. You will also owe capital gains taxes on future sales of crypto received as income.
Examples of cryptocurrency earnings and disposition
Crypto taxation is not limited to sales of your holdings. Various scenarios can trigger tax obligations for US taxpayers, including when you earn and dispose of your crypto.
Taxable earning events
Earning cryptocurrency through staking.
Receiving cryptocurrency referral rewards.
Earning cryptocurrency through mining.
Receiving cryptocurrency interest.
Taxable disposal events
Selling your crypto.
Trading one cryptocurrency for another.
Using crypto for purchases.
Crypto tax-free events
While there are numerous taxable events in crypto, some situations typically won't incur taxes:
Holding cryptocurrency.
Transferring crypto between wallets.
Receiving cryptocurrency as a gift.
Donating crypto.
Still unsure about crypto taxes? Learn more in our crypto tax guide for 2024
What happens if you don’t sell your crypto?
When you decide to invest in cryptocurrency, it's important to understand the associated crypto tax implications. Crypto is generally not subject to immediate taxation, assuming you purchased the crypto as an investment and didn’t acquire it as a form of income or by other means.
This means that when you US taxpayers purchase crypto, there is no immediate reporting requirement until you sell. However, if you've acquired cryptocurrency through means such as staking, a hard fork, an airdrop, or any method other than a direct purchase, you will likely need to report it as income.
As long as you hold digital assets you purchased with fiat currency without converting them into cash or other crypto, you are not required to report or pay taxes on any potential gains to the IRS.
However, when you sell your cryptocurrency, there are tax consequences. Whether you exchange your crypto for fiat or another form of crypto, you trigger a taxable event. This means that you are obliged to report the transaction to the tax authorities and potentially pay capital gains tax on your profit.
Realized gains in crypto
The key concept here is "realized gains." Until you sell your crypto and receive cash or an equivalent asset, your investment gains remain unrealized and thus untaxed. The timing and frequency of your crypto sales will influence your overall tax liability, so keeping complete records of your transactions is crucial.
How do I avoid capital gains tax on crypto?
While completely avoiding capital gains tax on your cryptocurrency profits is not possible, there are legitimate strategies that can help you minimize your tax obligations while staying firmly within the bounds of the law.
One such approach is tax-loss harvesting, which involves strategically selling losing investments to offset the gains realized from your cryptocurrency transactions. You can effectively reduce your overall taxable income by matching your gains with corresponding losses.
Crypto tax-loss harvesting is a legal way to help crypto investors optimize their tax situations. It's particularly useful in volatile markets where prices fluctuate significantly. By leveraging this strategy, you can potentially reduce the amount you owe in capital gains tax and keep more of your crypto gains.
Other methods to avoid capital gains taxes and reduce your crypto taxes include:
Accounting strategies.
Donating or gifting crypto.
Aiming for long-term capital gains.
Simply not selling.
Whatever approach you take, it’s essential to consult with a crypto tax professional or use specialized crypto tax software to ensure that you remain compliant with the tax regulations in your jurisdiction.
Why you should report your crypto tax
Fulfilling your cryptocurrency tax obligations isn't just about being financially responsible – it's a legal requirement. Ignoring it can have serious consequences. Even if you've dealt with cryptocurrency without converting it to regular currency, following tax rules and honestly reporting your income is crucial.
If you don't report your cryptocurrency holdings on your tax return, regardless of the amount, it could be seen as tax evasion. Tax evasion is a severe offense that can result in legal consequences like imprisonment and hefty fines. Tax authorities, including the IRS, are increasingly monitoring crypto transactions, with the ability to trace and verify digital financial activities.
By properly reporting your cryptocurrency income and sticking to tax laws, you're not just meeting legal requirements – you're also safeguarding yourself from penalties associated with tax evasion. Honest and accurate tax reporting is vital for maintaining your financial integrity and staying on the right side of the law.
How TokenTax can help navigate your crypto tax
Navigating the complex world of crypto taxes can be daunting, but TokenTax is here to streamline the process for you. As the ultimate crypto tax calculator and a full-service accounting firm, TokenTax equips you with the tools and expertise needed to ensure accurate and hassle-free tax filings, regardless of your trading history or location.
Data import and integration: Say goodbye to manual data entry. TokenTax seamlessly synchronizes with all your wallets and accounts, providing you with a comprehensive overview of your crypto data. Whether you're involved in DeFi, NFTs, margin trading, or futures trading, TokenTax supports it all. Easily spot and resolve errors or missing data, ensuring your records are complete and accurate.
Real-time tax previews: Stay ahead of the game by tracking and previewing your tax liability in real time. TokenTax's tax reports include various calculation methods such as FIFO, LIFO, Minimization, and average cost, as well as tax loss harvesting dashboards, mining and staking income reports, and even Ethereum gas fee reports. With custom enterprise reports, you'll have all the insights you need at your fingertips.
Comprehensive tax forms: TokenTax automates the generation of practically every tax form required for your filing and even integrates with popular providers like TurboTax.
Advanced reconciliation services: For those with more intricate accounting needs, our crypto-savvy tax professionals are here to assist. Whether you're dealing with a messy data situation, high transaction volumes, cross-chain transactions, or seeking enterprise solutions, we have you covered.
Take the stress out of crypto tax reporting, and let TokenTax simplify the process for you. Explore our plans and pricing to discover the solution that best fits your needs and get started on your journey to hassle-free crypto tax compliance.
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Crypto taxes when you don't sell FAQs
Here are answers to frequently asked questions, including do you pay taxes on crypto if you don't sell, and do I need to report crypto if I didn't sell?
How to take profits from crypto without selling?
If you want to access gains without selling, options like crypto lending, borrowing, or staking may help you earn income without triggering a taxable event.
Do you have to pay taxes on crypto if you spend it?
Yes, using crypto for purchases can lead to tax obligations, as it's considered a disposal event. For more information and assistance, check out our comprehensive guide to cryptocurrency taxation.
Do you have to pay taxes on crypto if you reinvest?
If you purchase cryptocurrency with fiat and hold it without further activities such as selling or trading, you might not need to file crypto taxes until you sell, per the IRS. However, income from sources such as airdrops, hard forks, staking rewards, or crypto salaries must be reported, even if you choose not to sell the received coins.
These sources of cryptocurrency income fall under ordinary income tax, necessitating the declaration of Fair Market Value at the time of receipt. Leveraging crypto tax software like ours at TokenTax can streamline this process, ensuring accurate tracking of various crypto-related income sources.
Do I pay taxes on crypto if I lost money?
If you realize a loss on your crypto investments, it can impact your overall tax liability. Losses can be used strategically to offset gains and potentially reduce your taxable income through a practice known as tax-loss harvesting. While losses are not directly taxed, you may be able to use them to minimize your tax obligations.
Tax-loss harvesting, accounting strategies, donating or gifting crypto, aiming for long-term capital gains, or simply holding crypto without selling can help you navigate crypto taxes more efficiently. We strongly recommend consulting a crypto tax professional and using specialized crypto tax software to ensure compliance with tax regulations.
