Pricing

Table of Contents

  1. Buying crypto with USD
  2. Buying and HolLing Crypto
  3. Moving crypto between wallets
  4. Adding or removing liquidity
  5. Soft fork
  6. Gifting crypto
  7. Receiving crypto as a gift
  8. Donating crypto
  1. Swapping crypto for crypto
  2. Buying crypto in exchange for stablecoins
  3. Selling or trading coins from an airdrop
  4. Selling Crypto for USD
  5. Selling Crypto for Crypto
  6. Selling a crypto gift
  1. Receiving an airdrop
  2. Hard fork
  3. Mining crypto
  1. Staking through the PoS consensus mechanism
  2. DeFi staking
  3. IRS guidelines
  1. Earning from DeFi protocols
  2. Selling/trading coins and tokens on DeFi
  1. Form 8949
  2. Schedule D
  3. Schedule 1 - Form 1040
  4. FBAR
  5. FATCA
  1. HODL
  2. Use tax deductions
  3. Factor in the CGT allowance
  4. Offset losses against capital gains
  5. Track and harvest unrealized losses
  6. Gift and donate crypto assets
  7. Invest in IRAs
  8. Invest in opportunity zone funds
  9. Choose the cost basis method wisely

Crypto Capital Gains Tax in US 2023

Last Updated: December 5, 2022

Any U.S. citizen participating in cryptocurrency trading or exchange must file a tax return to the IRS. Cryptocurrencies and non-fungible tokens (NFTs) are treated as “property” for tax purposes in the U.S., as decided by the IRS in 2014.

This is a regularly updated guide in tune with IRS crypto tax rules as they apply in the United States of America. The IRS lays down clear guidelines around how crypto is taxed, crypto capital gains tax, the crypto tax rate, crypto income tax and how it affects various people buying, trading and exchanging cryptocurrencies and NFTs. This guide simplifies tax rules around crypto and makes the guidelines accessible to the reader.

Note: IRS rules on crypto tax are constantly evolving. While we regularly update this guide to keep you tax-compliant, we encourage you to keep a tab on IRS guidelines.

Let’s dive in.

What Kind of Crypto Taxes Do You Pay in the U.S.?

Citizens of the U.S. pay taxes on cryptocurrency profits. You pay up to 37% tax on short-term capital gains and income from cryptocurrencies and up to 20% tax on long-term capital gains. Cryptocurrency in the U.S. is equivalent to a share or a rental property.

Because Bitcoin, Ethereum and other cryptocurrencies are viewed as property, two potential taxes may apply in various situations- Income Tax and Capital Gains Tax. We will look at both after understanding how the IRS keeps a tab on your cryptocurrency activities.

How Does the IRS Track Crypto?

Here’s how IRS knows about your crypto investments-

  1. Your information is collected and made accessible to the IRS by way of KYC (Know Your Customers) checks all major crypto exchanges must complete.
  2. Exchanges keep track of banking information where they provide crypto in exchange for fiat payments.
  3. Many exchanges maintain a record of crypto addresses you withdraw funds to, meaning they can identify custodial wallets.
  4. Many exchanges send 1099 forms to the IRS and users.
  5. The IRS has fought and won cases against Kraken, Poloniex and Coinbase, compelling them to share customer data.

Long story short, the IRS knows, so there is no way around paying crypto tax.

When Do You Pay Capital Gains Tax on Cryptocurrency?

Capital gains tax involving cryptocurrencies includes the following events -

  1. Selling cryptocurrency for fiat money (U.S. Dollar, Japanese Yen, etc.)
  2. Purchasing goods and services in exchange for cryptocurrency, even if you buy a pizza.
  3. Trading or swapping digital assets, including purchasing NFTs with crypto.

Please note that you only owe taxes on any capital gains you make from one or multiple of these events, not on the full amount of disposed-off assets. The taxable capital is the difference between the price paid for the asset and the price it was sold at.

Also worth noting is that the IRS has not issued clear guidelines on whether or not minting tokens, creating wrapped tokens, publicly minting NFTs or minting interest-bearing assets are taxable events.

It’s also unclear whether withdrawing or depositing liquidity in DeFi liquidity pools using LP (liquidity provider) tokens is a crypto-crypto transaction. We advise you to seek professional tax guidance if you’ve engaged in these crypto activities this tax year.

What is the Crypto Capital Gains Tax Rate?

The crypto capital gains tax rate isn’t fixed but is based on how long you’ve held your crypto asset and how much you earn from it. If you’ve owned your crypto asset for less than a year, you pay the short-term capital gains tax rate and the long-term capital gains tax rate for duration above a year.

The short-term capital gains tax rate is the same as that on your taxable income based on the Federal Income Tax rate brackets. The following table demonstrates the short-term capital gains tax rates for 2022.

Tax RateSingleHead of HouseholdMarried filing jointlyMarried filing separately
10%$0 - $10,275$0 - $14,650$0 - $20,550$0 - $10,275
12%$10,276 - $41,775$14,651 -$55,900$20,551 -$83,550$10,276 - $41,775
22%$41,776 - $89,075$55,901 - $89,050$83,551 - $178,150$41,776 - $89,075
24%$89,076 - $170,050$89,051 - $170,050$178,151 - $340,100$89,076 - $170,050
32%$170,051 - $215,950$170,051 - $215,950$340,101 - $431,900$170,051 - $215,950
35%$215,951 - $539,900$215,951 - $539,900$431,901 - $647,850$215,951 - $323,925
37%$539,901+$539,901+$647,851+$323,926+

On the other hand, the long-term capital gains tax for crypto is lower for most taxpayers in the U.S., with a 0%, 15% or 20% tax rate based on your taxable income. If you earn less than $41,675 in the year 2022, including crypto gains, you pay no long-term capital gains tax.

The following table demonstrates the long-term capital gains tax rates for 2022.

Tax RateSingleHead of HouseholdMarried filing jointlyMarried filing separately
15%$41,676 – $459,750$55,801 – $488,500$83,351 – $517,200$41,676 – $258,600
20%$459,750+$488,500+$517,200+$258,600+

How is Crypto Capital Gain Calculated?

To define how much tax you pay on crypto gains, we quantify crypto capital gain or loss. It’s calculated as the difference between the value of an asset when you acquire it and its value when you dispose of it. This is called a taxable event.

Any time you trade, spend or sell your crypto, you either make a capital gain or a loss. The cost basis includes any transaction fees you paid to purchase the crypto asset besides its cost.

When you subtract the cost from the asset’s value on the day you dispose of it, if you have a gain, you pay a Capital Gains Tax on that gain. If, however, you sold it at a loss, you won’t pay capital gains tax. But, you should keep track of the transactions as you can offset capital losses against gains. We will see how you can do that later in the guide.

Let’s demonstrate how much tax you might pay on cryptocurrency through an example.

Consider you bought 1 BTC in February 2021, valued at $30,000 and paid a 2% transaction fee. Your cost basis is $30,600.

Then, suppose you sell 1 BTC for $60,000 in November 2021, creating a taxable event. Let’s calculate your capital gain/loss from the transaction.

$60,000 - $30,600 = $29,400

You made a capital gain of $29,400, which you will pay capital gains tax on. Since you held on to your crypto asset for less than a year, you’ll pay the short-term capital gains tax based on your regular income tax rate.

If you earned $90,000 a year in taxable income in 2021, you would fall in the 24% tax rate band. Add $29,400 to this, and you remain in the same bracket. So, you pay a 24% tax on your crypto asset gain, which equals $7,056.

How Can You Benefit from Tax-Free Allowances in the U.S.?

Tax-free allowances can help reduce your crypto tax burden. Here’s how you can benefit from them:

  1. Gifting crypto assets under $16,000 in 2022 - Under the annual gift tax exclusion, citizens of the U.S. can gift up to $16,000 in crypto per person tax-free.
  2. Capital gains tax-free allowance - If you earn below $41,675 in 2022 in total income, you don’t need to pay capital gains taxes on long-term gains.
  3. Long-term capital gains tax rate - If you HODL (Hold On for Dear Life) your crypto asset for over a year, you pay a lower long-term capital gains tax rate between 0% to 20% based on your income.

How Do You Handle Capital Losses on Crypto Assets?

You don’t pay capital gains tax on losses in trading or spending crypto. However, if you spend crypto after the value of the token has appreciated, it leads to a capital gains tax. You offset your capital losses against the gains to reduce the total tax bill. Long-term capital losses can offset long-term capital gains, and short-term capital losses offset short-term capital gains. The general rule says that you can only offset losses of the same type. But, there is an exception to this rule.

Let’s look at a few instances that you may find yourself in when facing cryptocurrency capital losses.

  1. Due to a crypto bear market, losses might be all you have. However, if you also invest in the stock market, you can use the capital losses from crypto to reduce your capital gains from the share market.
  2. You only incurred losses on your crypto assets and don’t invest in any other markets, so you have no profits. In this case, citizens of the U.S. can offset their short-term crypto losses against their income, up to $3,000 per year for citizens filing as single or married and filing jointly. You can also carry over these losses to the next tax years and offset them until all of them have been utilized.
  3. You want to be strategic in offsetting your losses. You don’t necessarily have to offset your crypto loss the year you incur it. You can save it for a later tax year when you know you may realize some gains and may want to reduce your tax bill then.

How Does Taxation Work on Lost or Stolen Crypto Assets?

The IRS does not let crypto investors identify lost or stolen crypto assets as capital loss. Before the Tax Cuts and Jobs Act came into effect, crypto investors could claim theft and casualty losses as capital losses. That isn’t the case anymore. So, if you lose your cryptocurrencies or assets due to a hack or a scam or lose your private key and thus can’t access your asset, there’s nothing you can do about it.

Losses incurred before 2017 may be deductible if persons can prove ownership of the assets and provide a declaration or receipt from the exchanges specifying how much they lost in the hack.

The best thing to do if you lose your assets after 2017 is to write them off and disregard them from your calculations altogether.

In the case of rug pulls, you still possess your asset, but it carries no worth. This is good news for U.S. investors as they can realize their loss by disposing of their lost assets and creating a capital loss to offset their crypto gains.

To realize a capital loss, you can sell your tokens on an exchange. If your tokens no longer list on the exchange, you can swap them for another token using a native or non-custodial wallet. Then, you can send your tokens to a burn wallet.

When Are Cryptocurrencies Taxed Under Income Tax in the U.S.?

Now that we’ve covered capital gains taxes and their many rules and exceptions, let’s see when crypto assets are taxed as income. The simple thumb rule is to know that anytime you earn crypto, it will be subject to Income Tax.

The IRS lays down extensive guidance about scenarios when cryptocurrencies are seen as income instead of a capital gain, including:

  1. When you get paid in crypto assets.
  2. When you mine crypto as a hobby.
  3. When you receive an airdrop.
  4. When you receive new coins from a hard fork.
  5. When you earn staking rewards.
  6. When you earn crypto as referral bonuses.

With the advancements and proliferation of Decentralized Finance, there are now many more ways to earn crypto.

  1. You can earn interest through yield farming on lending protocols like Compound and AAVE.
  2. You can earn liquidity pool tokens, governance or reward tokens on Uniswap, for instance.
  3. You can lend your crypto to, let’s say, NEXO to earn interest.
  4. You can earn crypto dividends on platforms like CoinRabbit.

On earn-to-engage platforms that have recently come around, the crypto you receive could be considered income. While there is no clear IRS guidance on the tax these transactions may be subject to, there’s a high chance that earning through these methods may fall under income from a tax perspective.

We advise you to consult a crypto tax accountant for customized advice on these investments. Examples of such transactions include:

  1. Referral rewards as in Binance Referral.
  2. Learn to earn campaigns, such as CoinMarketCap Learning Center and Coinbase Learning Center.
  3. Watch to earn places like Odysee.
  4. Browse to earn platforms such as Permission.io browser extension or the Brave browser.
  5. Play to earn gaming apps like Axie Infinity.
  6. Shop to earn browser extensions such as Lolli.
  7. Share a public address and earn on platforms like Moon Faucet.

What are the Tax-Free Crypto Transactions in the U.S.?

It might feel like music to your ears that not all crypto transactions are taxed in the US. You won’t have to pay taxes on the following:

  1. When you buy crypto assets with fiat currencies.
  2. HODLing crypto doesn’t invite a tax bill.
  3. When you move crypto between your own wallets.
  4. When you haven’t reached the lifetime gift limit, and you gift crypto.
  5. When you donate crypto to charities and causes.
  6. When you create an NFT.

Tax-Free Crypto Transactions in the US

Buying crypto with USD

You pay no taxes or GST when buying cryptocurrencies with USD in the US. However, it is critical to keep records of all crypto transactions to track the cost base and calculate crypto capital gains and losses accurately when disposing of those assets.

Buying and HODLing Crypto

If you’re simply purchasing and HODLing crypto assets, you don’t pay taxes even if your asset’s worth keeps on increasing. Selling, spending or trading that asset creates a taxable event.

Moving crypto between wallets

Moving crypto between your own wallets isn’t identified as disposal and doesn’t need reporting to the IRS. However, little is straightforward in the world of crypto transactions, as adding and removing liquidity may sometimes get confusing from a tax perspective.

Transferring crypto assets between your wallets is a tax-free event, which need not be recorded or reported to the IRS. However, it’s important you track these transactions if you pay a transfer fee, as it would be subject to Capital Gains Tax.

You will likely pay a transfer fee to move crypto from one of your wallets to another. If you pay the fee in a fiat currency, it is tax-free. However, often you may pay the transfer fee in cryptocurrency, which creates a taxable event.

So while crypto transfers between your own wallets are tax-free, the associated transaction fee isn’t. You must calculate your cost basis and capital gain or loss.

The IRS doesn’t have clear guidelines on whether transfer fees can be added to the cost base of an asset. It’s unclear whether the transfer fee would fall into the maintenance cost of a crypto asset- which isn’t included in the cost basis.

Let’s demonstrate this through an example.

Suppose you purchased 1 ETH for $4,000.

You transfer 1 ETH from the MetaMask wallet to your Binance wallet. You pay a flat fee of 0.005 ETH to perform the transfer.

Since you are paying the fee in ETH, you’re disposing of your cryptocurrency. So, you need to calculate the cost basis and fair market value of your crypto at this point. Suppose the price of ETH didn’t change since you bought it.

Then, 0.005 ETH = $20. This is the disposal you will need to report to the IRS, even though you made no capital gain or loss.

Adding or removing liquidity

If you add or remove liquidity from various DeFi protocols, at the outset, these transactions look more like transfers and may not look like taxable events. If you add liquidity to a Defi protocol, you earn commissions on the swap trades that the protocol facilitates and thus have to pay income tax on it.

As the protocol provides a liquidity pool token as a receipt of your deposit which could be used to gain back the ownership of the tokens deposited, one doesn’t lose control of the assets held and so the transaction is not considered disposal. Thus, adding and removing liquidity from DeFi protocols is not considered a taxable event in itself.

Soft fork

As a consequence of soft fork, you don’t receive any new tokens or coins, so you won’t pay any tax as you have no income to recognize from a taxation perspective. Therefore, this is a tax-free event.

Gifting crypto

American taxpayers get an annual $16,000 gift tax exclusion for the 2022 tax year per person. You can gift crypto assets to many people and multiple assets to the same person, provided the total value in gifted crypto is less than $16,000 per annum.

Gifts valued at over $16,000 invite gift taxes of 40% of the amount gifted over the threshold, but only if you also went over the lifetime exclusion of $12.06 million in 2022. US taxpayers may also need to fill a Form 709 if they gift crypto over the allowance.

Gifting crypto creates a “non-recognition” event for capital gains taxes for the person giving the gift. However, the cost basis is inherited by the receiving party, who will use it to calculate the capital gains when they eventually dispose of the asset.

Receiving crypto as a gift

If you acquired the asset without any cost, such as in case you were gifted an asset, the cost would be the cost basis of the gifter. If the gifter doesn’t have a record of the cost, then the cost would be taken as 0.

Note: Binocs, the crypto tax management app, by default assumes the cost basis as 0. Therefore, users are advised to edit the cost basis to the gifter’s cost basis. In case that information isn’t available, then the cost must be recorded as zero.

Neither you nor the recipient pay tax during the gifting and receiving of the crypto. The recipient inherits the cost basis, so the sender should send this information to the gift recipient. If you don’t have the cost basis information, the cost basis for the gift recipient will be the crypto asset’s fair market value on the day they received it.

Donating crypto

The IRS says that donating crypto to a registered charity doesn’t realize a capital gain or loss, so you don’t pay any capital gains tax.

Moreover, US citizens can claim tax deductions on charitable contributions. The deduction is based on the fair market value of your crypto asset the day you donated it. However, you also must check a charitable organization’s 501(c)3 status with the IRS’ exempt organization database.

Only if a charity has 501(c)3 status can you deduct your donation from your federal taxes. If you donate over $500, you must fill out Form 8283 when filing taxes.

It’s also worth noting that the income tax benefits of non-cash donations differ from those of cash donations. Crypto donations are considered non-cash donations.

Donating cash to a qualified organization can get you a deduction of the donation’s full value up to 60% of your adjusted gross income (AGI), and unused amounts can be carried forward for the following 5 years.

If you donate property, you can deduct 20% to 50% of your AGI, where the specific amount depends on the type of organization. For 2021, an enhanced tax deduction was available of up to 100% of AGI for cash donations to qualifying organizations. This was temporary under the CARES act. The standard deduction rules apply from 2022.

As enhanced deductions are available on donating cash, taxpayers may wish to cash out their crypto assets before donating. The decision may depend on the potential capital gains tax owed on the transaction.

Crypto Transactions Subject to Capital Gains Tax in the US

Swapping crypto for crypto

If you buy a crypto asset with another crypto, such as buying ETH with BTC, it creates a taxable event, and the IRS views the transaction as two separate transactions. First, you sell your BTC cryptocurrencies. Then, you buy ETH at market value.

Even though you didn’t receive any fiat money in exchange, you pay taxes on the sale of the BTC and not on the purchase of ETH. Therefore, to calculate your capital gain, in this case, you will use the cost base of your BTC and subtract that from the market value of BTC on the day you buy ETH. When you sell the ETH, your cost basis will be the value of ETH when you bought it with BTC.

In short, you pay capital gains tax in this scenario.

Buying crypto in exchange for stablecoins

Buying crypto with stablecoins is viewed as swapping crypto for crypto and is subject to Capital Gains Tax in the same way. Even though you may not end up paying any taxes on this specific transaction, you still need to record and report them to the IRS as taxable events.

Understand that through this example.

A stablecoin is a digital currency pegged by a stable reserve asset like USD. So, suppose you wanted to buy 1 BTC with USDT and the price of 1 BTC is $20,000. Since USDT is pegged to the US dollar, it will cost roughly 20,000 USDT plus fees. The cost basis for the USDT would be around $20,000, so there is no capital gain or loss from the transaction.

In short, these transactions also incur a capital gains tax.

Selling or trading coins from an airdrop

You may decide later to sell or trade your airdropped crypto to invest in something else. At this point, you’ve already paid Income Tax on your airdropped coins. When you sell, trade or spend it, you’ll pay Capital Gains Tax on airdropped crypto as it is viewed in the same light as any other cryptocurrency.

Let’s reuse the previous example to demonstrate how.

You sell your 20 airdropped 1INCH tokens a couple of days later. The fair market value on this day is $4 per token, so you get $4 x 20 = $80 for them. Your cost basis was $60. So, you made a capital gain on this transaction of $20. Since you held on to this asset for less than a year, you’ll pay short-term capital gains tax at your regular income rate of 22%, which turns out to be $4.4.

Selling Crypto for USD

Selling crypto in the U.S. incurs tax, but the amount depends on how long you hold the asset and your income. You pay short-term Capital Gains Tax on crypto held for less than a year and long-term Capital Gains Tax if you held on to your crypto asset for over a year.

Selling cryptocurrency for USD creates a taxable event, according to the IRS. The short-term Capital Gains Tax for selling crypto for USD is the same rate as your Income Tax rate. Selling crypto assets for fiat money after a year of holding means you’ll pay long-term Capital Gains Tax, between 0% to 20% depending on your regular income.

For instance, you bought 2 ETH in February 2021 at $1,200. You sell 1 ETH in June 2021 for $3,500 and pay short-term capital gains tax on the profit at your regular income tax rate.
Your capital gain is $3,500 - $600 = $2,900 in this case.

Suppose you earned $60,000 in FY 2021, putting you in the 22% tax bracket, with a total of $638 in taxes.

Let’s say you sold 1 ETH in March 2022 for $4,000 and will now pay long-term capital gains tax on your profit.

Your capital gain in this case will be $4,000 - $600 = $3,400. If you earn $50,000, you pay 15% tax on $3,400, meaning $510. Therefore, even though you made a larger capital gain in the second scenario, you paid less tax because of the long-term capital gain tax rate.

Selling Crypto for Crypto

Selling your crypto asset for another crypto asset is deemed as similar to selling crypto for fiat currency. It creates a taxable event, and you pay capital gains tax on the profit generated.

Selling a crypto gift

Even if you received crypto as a gift, when you dispose of it, you pay capital gains tax. The recipient takes on the cost basis of the original asset from the sender and uses it to calculate their capital gains. If the cost basis is unknown to the sender, the recipient can use the market value of the asset on the day they received it.

Crypto Transactions Subject to Income Tax

Receiving an airdrop

Airdrops and hard forks are seen as income in the US, and so investors pay income taxes on these.

The IRS lays down clear guidance that when a citizen of the US receives an airdrop, they pay Income Tax calculated as per your income tax rate on the fair market value of the airdropped crypto on the day you received it.

For instance, if you receive 20 1INCH tokens by airdrop and their market value on that day is $3, their total worth calculates to be 20 x $3 = $60.

You made an additional bonus income of $60. If you fall in the 22% income tax bracket, your tax on this crypto transaction will be $13.2.

Hard fork

The IRS clearly states that when you receive coins or tokens due to a hard fork, you pay both Income Tax and Capital Gains Tax. The day you receive your new tokens, you pay income tax similarly by calculating the cost basis based on the fair market value of the tokens the day you receive them.

Later, when you trade, spend or sell these tokens, you pay a Capital Gains Tax. The cost basis is the fair market value on the day you received them.

Let’s demonstrate how this works.

Suppose you received 1 BCH in 2017 when it split from BTC. Your cost basis for this new coin would be $300- its market value on the day you received it.

Let’s say you fall in the 22% income tax bracket. That means you’ll pay 22% of $300 = $66 in income tax.

Say you sell 1 BCH for $1,000 a month later. Your capital gain from the transaction would be $1,000 - $300 = $700.

Since you held the asset for under a year, you’ll pay short-term capital gains tax at your income tax rate of 22%, which is $154.

Mining crypto

Crypto mining is subject to income tax and capital gains tax when you later dispose of mined tokens. It’s also worth noting that if you’re self-employed and run a crypto mining business, you’ll also pay Self Employment Tax to cover social security contributions and Medicare.

Cryptocurrency you receive from mining crypto will be subject to income tax based on the market value of the asset the day you receive it. And, you’ll pay capital gains tax on it when you decide to sell, trade or spend the crypto later.

How are Taxes Calculated for Staking Cryptocurrency?

The term staking in crypto language can refer to DeFi lending and proof-of-stake cryptocurrencies. Let’s learn more, as both have diverse tax implications.

Staking through the PoS consensus mechanism

Cryptocurrencies such as Solana, Avalanche and Cardano employ a proof-of-stake consensus mechanism where you ‘stake’ your crypto to earn a reward. The process resembles mining crypto as part of a PoW mechanism where a network participant is selected to add the latest batch of transactions over the blockchain and earn crypto in exchange.

An argument states that since this leads to creating new coins, just as someone would manufacture a machine, it shouldn’t entail tax.

DeFi staking

Through DeFi lending, investors can lend their crypto through a given protocol, such as Aave, and receive interest from borrowers on the other side of the transaction in the form of crypto. DeFi lending resembles any typical lending arrangement where people provide capital in exchange for interest, where interest earned is taxable as income.

IRS guidelines

The IRS has no clear guidelines on staking rewards and how they are taxed. It was presumed for a long time that as PoS rewards were similar to mining rewards, they would be taxed similarly. Mined coins are subject to Income Tax at the point of reception.

However, a recent case against the IRS suggests that this may not be the case in the future. A couple staked Tezos, attempted to claim a refund on their staking rewards for 2019 and were denied without clarification by the IRS.

They then filed against the IRS and received a refund, which they denied to set the legal precedent that staking rewards from PoS must be considered a creation of property and only subject to Capital Gains Tax on disposal. The IRS recently moved to dismiss the case. The case is ongoing. We will update this guide as soon as an outcome is reached.

What About Taxes on Crypto Margin Trading, Futures and Other CFDs

Let’s break down these slightly complicated taxes.

If you’re trading as an individual investor, you pay Capital Gains Tax on profits from futures, margin trades and other CFDs (Contract for Difference). When you open a position, you don’t pay any tax. When you close your position, you will realize a capital gain or loss and pay Capital Gains tax accordingly. Long-term and short-term capital gains tax rates apply in this situation.

Crypto futures, especially regulated crypto futures have a more favorable tax treatment because of the IRS 60/40 rule. The rule states that when trading regulated crypto futures, 60% of capital gains are taxed as long-term and 40% as short-term capital gains, regardless of how the position is kept open.

Currently, only Bitcoin Futures are considered Regulated Futures contracts (RFC) as they are traded on Chicago Mercantile Exchange (CME). The regulated futures have to be marked to market on the last day of the financial year, that is 31st December in order to compute the capital gains or loss on the open position. The capital gain or loss so arrived at enjoys the 60/40 favorable treatment of regulated futures contracts.

Since most other crypto futures are unregulated, this rule doesn’t apply but is worth exploring for those trading at scale.

When your collateral is sold, it’s treated as disposal from a tax perspective and needs reporting to the IRS.

DeFi Crypto Taxes in the US

DeFi is still evolving and offering investors new opportunities to make money. Even though the IRS hasn’t yet issued clear guidance on specific DeFi transactions, investors must look at the current crypto guidance available and infer the tax they likely need to pay on DeFi transactions.

Basically, investors still pay either Income tax or Capital Gains tax or none on their DeFi transactions. As a thumb rule, any time investors earn crypto, they pay Income Tax, and anytime they dispose of crypto, they pay Capital Gains Tax.

We can summarize DeFi crypto taxes as follows:

  1. When you earn interest from DeFi protocols, you pay income tax.
  2. When you borrow from DeFi protocols, you don’t pay any tax.
  3. When you pay interest in DeFi protocols in cash or fiat money, you don’t pay any tax. When you pay interest in crypto, you potentially pay capital gains tax, although it could be an investment expense and tax deductible based on your purpose behind borrowing crypto.
  4. When you sell or trade NFTs, you pay capital gains tax.
  5. When you buy NFTs with fiat currency, you don’t pay any taxes. When you buy NFTs through crypto, it’s seen and potentially taxed as crypto-to-crypto trade.
  6. Minting and creating your own NFT elicits no tax. Although, minting costs may add to your cost basis.
  7. When you sell an NFT you created, you incur income tax.
  8. When you stake on DeFi protocols, you pay income tax.
  9. Yield farming DeFi protocols requires you to pay income tax.
  10. When you earn liquidity tokens from DeFi protocols, if you earn new coins, you pay income tax and if you increase the value of your asset, you pay capital gains tax.
  11. When you add liquidity to liquidity pools, you pay no taxes.
  12. When you remove liquidity from liquidity pools, you pay no taxes.
  13. When you earn on DeFi protocols through play or engage features, you pay income tax on what you earn.
  14. Profits you earn from DeFi margin trading and options protocols are subject to capital gains tax.

We advise you to speak with an experienced crypto tax accountant to get clear guidance on staying tax compliant.

Earning from DeFi protocols

Anytime you earn through DeFi protocols in new coins or tokens, it is considered additional income, and you pay income tax on it based on the fair market value of the asset in USD on the day you obtained it.

Selling/trading coins and tokens on DeFi

Anytime you sell or trade a crypto coin or token on a DeFi protocol, you are disposing of a crypto asset, making the transaction subject to capital gains tax.

What About DAO Taxes in the US?

Decentralized Autonomous Organizations or DAOs have recently proliferated. These are member-owned communities that function without centralized leadership. The organizational structure allows stakeholders to make governing decisions independent of a centralized authority. Instead of a Board of Directors where power is centralized in traditional institutions, DAOs distribute power to token holders or members to vote on decisions that build the future of the organization.

Uniswap is an example of a DAO, where holders of UNI tokens vote on issues relating to the protocol, such as how transaction fees are utilized, what new features can be added, etc.

Members of a DAO benefit from it in several ways. They may receive a share of the profits resulting from activities of the DAO or they may sell their DAO tokens to investors, for instance.

The IRS has laid down no clear guidelines on the taxation of DAOs. They can not pay taxes as they are not a registered entity in any jurisdiction and have no central authority. A DAO can be seen most familiar with a flow-through entity, which is a business entity that passes all of its income directly to owners, investors and shareholders.

By that interpretation, any income passed on to the members of a DAO may be subject to income tax. Similarly, the sale of DAO tokens whose value may have increased since acquiring them would be subject to capital gains taxes.

Do you Pay Taxes When Spending Crypto Assets?

Spending crypto on goods and services is subject to capital gains taxes in the US as it is a disposal of the asset. The IRS views it as similar to selling your crypto asset for market value. Therefore, crypto holders need to calculate their cost basis and the capital gain or loss for such transactions.

How to Record Crypto Transactions for Tax Purposes?

As is evident from the discussion above, it’s imperative that taxpayers in the US keep detailed records of their crypto transactions. As a minimum, taxpayers are advised to maintain records of the following:

  1. The date of each transaction.
  2. The fair market value of crypto assets in USD the day you acquire them.
  3. The fair market value of your crypto assets in USD the day you dispose of them.
  4. The capital gain or loss made on each cryptocurrency transaction.
  5. The nature of each transaction and the parties involved in it.
  6. The receipts of purchase and sale of crypto assets.
  7. All the records of crypto transfer transactions from all your crypto wallets and exchanges.

The IRS can choose to audit tax returns going back to six years. So, the best practice would be to hold on to all records for at least six years, so you have the information required should you undergo an audit.

How to Do Crypto Accounting for Taxes in the US?

Now that you know how crypto assets are taxed in the US, you may think you can handle accounting easily. It is actually a bit more complicated than it looks. So let’s get into the trenches to figure out how you can do accounting for crypto taxation.

First, let’s talk about calculating your cost basis. On the face of it, it sounds like something straightforward to calculate. However, when you have multiple assets and transactions, calculating the cost basis can get real messy real quick.

Let’s see this with an example.

Suppose you bought 1 BTC in 2019 for $2,000. In the year 2020, you bought another BTC for $20,000. Then, in 2021, you sold 1 BTC for $30,000. If you use your first cost base, you just made a whopping capital gain of $28,000. On the other hand, if you use your second cost base, you have a more reasonable gain of $10,000.

So, which of those do you use? You could go through each transaction and identify each private key and cross-reference it with the transaction. However, crypto investors hold hundreds of assets and make thousands of such transactions in a year. When the feasibility of accounting through the private key referencing method is low, accounting methods come in.

The IRS allows for multiple cost basis calculation methods as below, and these can impact your crypto tax bill significantly.

  1. First In First Out (FIFO) - The first asset you purchased will be the first you sell.
  2. Last In First Out (LIFO) - The last asset you bought will be the first you sell.
  3. Highest In First Out (HIFO) - The most expensive asset you buy is the one you sell first.
  4. Specific Identification (Spec ID) - You can pick the specific asset you sold, provided you can identify it with the records.

If FIFO was the only method allowed, you would pay a hefty capital gains tax on the transaction we used as an example. However, IRS gives investors options to choose a method that allows them to strategically pay tax on their crypto assets.

However, please note that a taxpayer can only use one accounting method in a given financial year. The most common methods used in the US are FIFO and Spec ID.

When Should you Report your Crypto Taxes?

In the US, the financial year starts on the 1st of January and ends on the 31st of December each year. The current financial year is 2023. Taxpayers in the US need to report crypto taxes for the financial year by 15th of April the following year as the annual tax return, so the deadline to file taxes is April 15, 2023. As the date falls on a weekend, the official tax deadline for 2022 is April 17, 2023. For US expats, the deadline is June 15, 2023.

How Do I Calculate Crypto Taxes?

If you trade at volume, calculating your crypto taxes can seem like a humongous task. To manually calculate crypto taxes-

  1. Identify all crypto transactions you made in the financial year.
  2. Identify transactions that will be subject to Income Tax and those subject to Capital Gains Tax.
  3. Determine the cost base for each transaction using your preferred accounting method.
  4. Calculate your capital gains or losses, income and expenses.

Then, report all taxable crypto disposals, the proceeds gained from them and the subsequent capital gain or loss to the IRS, besides any income you made on crypto investments.

Binocs simplifies crypto tax and reporting for you

How to File Crypto Taxes in the US?

Crypto taxes need to be filed along with the annual tax returns in the US, albeit need a few extra forms to be filled.

To report crypto disposals, capital gains and losses, taxpayers need to fill Form 1040 Schedule D and Form 8949.

To report crypto income, taxpayers need to fill Form 1040 (Schedule 1) or Form 1040 (Schedule C). You can complete the process with paper forms or through an automated app like Binocs. Let’s walk you through both processes.

How to Use Binocs Crypto Tax Management App to File Taxes?

An effective and automated way to file your crypto taxes is to use a crypto tax management app like Binocs.

  1. Once you integrate all your accounts (exchanges and wallets) with Binocs, it harmonizes and identifies all income tax and capital gains/losses transactions automatically.
  2. Then, Binocs computes the cost basis and the profits and losses realized for these transactions. Based on the holding period, capital gains will be appropriately treated as short-term or long-term.
  3. You can then review these transactions and add missing transactions if any. You may also edit or label the transactions or assign a cost basis to each transaction based on your preference.
  4. Finally, you can download your tax forms based on the taxable income and short-term and long-term capital gains calculated from the above transactions.

Binocs saves you a lot of time and hassle of filing crypto taxes in the US.

How to File Crypto Taxes with Paper Forms?

If you’d like to stick with pen and paper tax filing, here’s what to do.

  1. Fill out Form 8949 with your taxable crypto disposal transactions.
  2. Report net capital gains and losses on Form Schedule D. This includes both short and long-term capital gains and losses.
  3. In case you’ve got crypto income from forks, airdrops, bonuses, liquidity pools, etc., complete Schedule 1. If you’re self-employed or operate a crypto business and earn crypto income, use Schedule C instead.
  4. Fill out your Individual Tax Return Form 1040 and attach all other required forms. File this with the IRS and consider your job done.

Here’s more information about each of these forms and a few others you must be familiar with

Form 8949

Anyone who has capital losses or gains from crypto during the tax year files this form.

It requires you to enter information about all crypto disposals separated by long-term and short-term.

Schedule D

Anyone who has capital losses or gains from crypto during the tax year files this form.

This form summarizes Form 8949 and contains the total short-term and long-term capital gains/losses.

Schedule 1 - Form 1040

Anyone who obtained income from cryptocurrencies in any format during the tax year is required to fill out this form.

You enter your total additional income from crypto assets on line 8 of this form.

FBAR

Anyone with fiat currency or specified foreign financial assets with over $10,000 in combined value in a non-US exchange at any point during the tax year needs to fill out this form. If you only transact with crypto and stablecoins, you don’t need to fill this form.

You must include details about your foreign exchange accounts with the maximum fiat value you had on them during the year in this form.

FATCA

Anyone with fiat currency or specified foreign financial assets worth more than $50,000 on the tax year’s last day or over $75,000 at any point during the financial year in a non-US exchange must fill this one out.

Similar to the FBAR, this form is only required if you held fiat money and includes information about your foreign exchange accounts, the maximum fiat value during the year and the ending balance during the year.

How To Reduce Your Crypto Taxes in the US?

Here are a few tips to reduce your tax burden from crypto investments if you are a US citizen.

HODL

If you hold on to your crypto taxes for over a year, you will benefit from the lower long-term capital gains tax rates.

Use tax deductions

Opting for the standard tax deduction isn’t always the smartest move to reduce your tax bill. Common tax deductions like child tax credit, medical expenses deduction and 401k contributions deduction are commonly used to save on crypto taxes.

You might be able to claim your Binocs expenses as a tax preparation fee deduction if you are self-employed and not a W2 employee.

Factor in the CGT allowance

If you earned less than $41,675 in 2022 as a single taxpayer, you don’t have to pay capital gains tax. For married people and those filing jointly, the allowance is $83,351. For the head of the household, the allowance is $55,801.

Offset losses against capital gains

You can offset capital losses against gains in the US with no limit whatsoever. You can offset up to $3,000 in capital losses against your regular income. The IRS also allows you to carry over losses you didn’t offset over to future gains.

Track and harvest unrealized losses

Harvest unrealized losses so you can offset them against net capital gains. The wash-sale rule only applies to securities as of today in the US- which doesn’t include crypto, so investors can sell crypto at a loss and buy it back right after. This allows investors to create losses to bring down their overall tax payable amount.

Gift and donate crypto assets

Gifting crypto under $16,000 is tax-free in the US for 2022, courtesy of the annual gift tax exemption. Use this to leverage most of the lower incomes in your household and obtain a lower total tax bill for every individual taxpayer in your household.

Donating crypto is a tax deductible as long as a charitable organization has 501(c)3 status. Find a cause you would like to contribute to. It’s important to note that if you gift over $500, you must fill out Form 8283 with your annual tax return.

Invest in IRAs

Investing in your retirement can help you save on crypto taxes. HODL your assets for the long-term, tax-free.

Invest in opportunity zone funds

Investing in opportunity zone funds helps you save taxes while doing good for your community. If you leave your investment for over 5 years, your tax bill will reduce by up to 10%.

Choose the cost basis method wisely

Cost basis calculation matters. Be sure to pick the right method from FIFO, LIFO, HIFO and Spec ID to minimize your tax bill.

Make Sure you Don’t Have IRS Warning Letters

The IRS stated that they’ve been sending out warning letters to crypto investors they believe are underreporting, owing or evading tax. This letter may come in one of three possible forms- 6173, 6174 or 6174-A.

The 6174 and 6174-A are ‘no action’ warnings considered ‘educational’ to remind the taxpayer of their obligations to report and file their taxes w.r.t. all crypto transactions.

However, letter 6173 does require action. If you fail to respond to this letter, it may lead to an audit of your tax account by the IRS.

Crypto investors who intentionally underreport investments risk facing fines starting from $25,000 and may face criminal charges, unfortunately, with up to 5 years in prison.

We advise you to consult with a tax accountant to assist you in managing and filing your taxes. This piece of information is only for educational purposes. It should not be construed as professional advice from Binocs. Binocs and any associated parties are not responsible

for any loss caused, whether due to negligence or otherwise, arising from the use of, or reliance on, the information provided here directly or indirectly.

Disclaimer:

Binocs Labs Pvt. Ltd. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide tax, legal or accounting advice. As tax laws in the US with regards to digital assets are in the developmental stages there is ambiguity in the interpretation of law including judicial and administrative interpretation. Tax law is subject to continual change, at times on a retroactive basis and may result in incremental taxes, interest or penalties. Binocs Labs Pvt. Ltd. and its affiliates are not responsible for any liability arising from the use of this informational guide.