With all of the changes in cryptocurrency, one constant you can always count on is the IRS wanting its cut every year. We gathered a few frequently asked tax questions that we hear from our customers, and some tips that we can share with you here. Please consult your tax advisor for any tax considerations for your business as well as for financial advice.
- Cryptocurrency is considered a property by the IRS and is taxed the same as stocks, real estate or any other property
- Taxes should be paid for every taxable event, such as selling, trading, converting crypto to cash in any many, or relinquishing crypto
- Tax rates depend on the length of time an asset is held and the value of the gains
- Tax forms can be prepared manually but using an automated crypto tax software like ZenLedger can save you time and money by importing transactions from across wallets and exchanges
- You can reduce your crypto tax responsibility in the future through various methods like tax harvesting
How is cryptocurrency taxed in the U.S.?
Right away, the bottom line is that you are required to pay taxes on crypto in the USA. Currently in 2023, the IRS considers cryptocurrency a property, so cryptocurrency is taxed the same as stocks, real estate or any other property.
Taxes should be paid for every taxable event – this is, whenever you sell, trade or relinquish crypto, convert one crypto to another and earn any sort of gain. You do not pay taxes on the entire transaction amount, only the profit (known as capital gains tax).
Your tax rate will depend on a combination of how long you’ve held your crypto assets and the value of your gains. Assets held for less than one year are taxed at a short-term gains rate. Assets held for longer than one year are taxed at a long-term gains rate. Read more about crypto tax rates to dive deeper.
What are taxable crypto events?
The IRS considers any event in which you profited from a cryptocurrency transaction to be taxable. Buying crypto in itself is not a taxable event. Neither is holding crypto, even if your portfolio is significantly more valuable than previous periods (lucky you). It is the act of selling or converting to fiat or any other crypto currency and earning a profit from that disposal that signals the taxable event.
Suppose you acquired 1 Bitcoin for $10,000 and now wish to use it when the fair value is $50,000. Here’s how that cryptocurrency event would be taxed:
- Selling your one Bitcoin for $50,000 for fiat; you’re liable for $40,000 in taxable gains
- Converting / trading / swapping 1 Bitcoin worth $10,000 for Ethereum worth $50,000 (in other words, disposing of Bitcoin and buying Ethereum), you triggered a taxable event upon the disposal of Bitcoin with realized gain of $40,000, and new cost basis of Etherum of $50,000. Since January 1, 2018, an exchange of “like-kind” property (i.e., not limited to real property) could qualify for non-recognition for tax purposes, and since crypto is not real property, conversion of one crypto to another is considered a taxable event upon the conversion.
- Using a crypto debit card like BitPay’s prepaid debit card to load your Bitcoin with $10,000 basis for $50,000 of fiat currency; you’re liable for $40,000 in taxable gains at the time of the load. This is one of the simplest ways to track realized gains and losses on crypto as the taxable event is triggered only once at the time of the load, and not when the debit card balance is spent on purchases
- Buying a $60,000 car with one Bitcoin; you’re liable for $50,000 in capital gains
Read ZenLegder’s guide to crypto taxes for more advanced scenarios and details around taxable events. Things can get a bit more complicated when advanced crypto activities like margin trading, mining, hacks, lending, staking, airdrops and collecting rewards are involved.
How to calculate and prepare your crypto taxes (two ways)
The number one rule for properly reporting and filing your crypto taxes is to keep track of your transactions! This can be done manually, but it may open you up to human error and, let’s be real, is a pain to deal with. A much more efficient way of preparing your taxes is with specialized crypto tax software like ZenLedger.
Method 1: Manually preparing your crypto taxes
The IRS instructs crypto users to report your gains and losses on Form 8949. Use this form to list details about your crypto transactions and calculate your liability, including:
- Name of asset
- Date acquired
- Date sold or disposed of
- Sale price
- Cost basis (purchase price)
- Gains or losses
Once you’ve calculated your gains/losses on Form 8949, include this information on form 1040 Schedule D. Both Form 8949 and Form 1040 Schedule D should be filed with your annual income tax forms.
Depending on which crypto services you use, including centralized exchanges like Coinbase or Kraken, you may receive additional forms including: 1099-B, 1099-MISC and 1099-K.
Method 2: Automating your crypto taxes
You could manually keep track of your transactions in a spreadsheet and then fill in each form, but this can be a tedious task. Instead, BitPay and ZenLedger make this an easy and automated process. BitPay users can sync wallet transactions directly from within the app to ZenLedger’s intuitive tax software. With just a few taps from the BitPay app, ZenLedger can automatically calculate fair market value, gains/loss, apply cost basis to the tranche of the crypto sold, and tax-loss harvesting from your transaction history. It can also calculate cost basis using various methods such as FIFO, LIFO, specific identification etc.
For realized gains and losses to be calculated accurately, it is important to have the underlying data from all the wallets and exchanges where you have crypto aggregated accurately. Any inter-wallet or interexchange transfers between your own accounts will be eliminated upon consolidation as such transfers do not trigger taxable events.
How to use BitPay + ZenLedger to prepare your crypto taxes
Importing your transactions and crypto info to the ZenLedger platform is easy and secure. This integration is applicable only to BitPay users based in the United States and Canada.
- For current BitPay users, make sure you have the latest version of the BitPay Wallet. For new users, download the app here.
- Tap the ZenLedger button under the “Do More” section of the BitPay app home screen.
- You will be prompted to connect your wallet to ZenLedger.
- Log in or create your free ZenLedger account.
- Choose the wallets holding the transactions you wish to import into ZenLedger.
Once you’ve created a ZenLedger account and connected your wallet, your transactions will appear within your ZenLedger dashboard. Now you are ready to use ZenLedger to prepare and file your crypto taxes.
Your keys, your crypto
Minimizing your crypto tax liability
As outlined by ZenLedger, there are multiple ways to reduce your crypto tax liability. Some of the most common ways include:
- Use crypto tax software like ZenLedger to save yourself from human error
- Leverage tax-loss harvesting to realize losses before paying taxes
- Consolidate transactions across wallets and exchanges, and properly exclude non-taxable transactions
- Sell your assets depending on the timing of when you anticipate moving into a higher tax brackets
- Benefit from long-term capital gains if assets are held for more than 1 year to lower your tax rate
- Hire a crypto-friendly accountant for a more streamlined tax process (when needed in advanced scenarios), and consult your CPA for tax advice on a timely basis
- Diversification of assets with a crypto IRA have certain tax benefits that you can consider as well