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How to calculate taxes on crypto gains
Stay on the good side of the IRS in 2023 by understanding crypto gains and losses.
You may be facing questions about virtual currencies this year, and we’re here with a brief guide to help you start to wrap your head around it. Whether you’re HODLing Dogecoin or day trading Litecoin, understanding your tax situation can help you avoid fees and penalties down the line.
When do you pay cryptocurrency taxes?
The IRS reports only some 800 to 900 Americans filed taxes on property “likely related to bitcoin” in the years 2013, 2014 and 2015. But times have changed, and the government now has official guidelines on cryptocurrency taxes. Understanding what events are taxable will help you understand whether you’re likely to owe crypto taxes or not. Here are some of the many common tax scenarios:
Taxable crypto events
- Selling crypto – Tax is applied when you sell crypto for a profit, and will either be a short- or long-term tax rate.
- Trading and exchanging crypto – Trading one cryptocurrency for another is a taxable event.
- Making a stablecoin trade – Trading a cryptocurrency for a stablecoin is a taxable event.
- Making a purchase with cryptocurrency – When you pay with cryptocurrency you’ll be taxed based on the price of the crypto when you make the purchase.
- Airdrops and hard forks – The IRS considers tokens that you’re airdropped as a results of a hard fork as income that must be reported.
- Bonuses, signup perks and receiving payments – Whether you’re getting bonus Bitcoin when signing up for a new exchange or being paid in Litecoin, these may qualify as income tax.
Non-taxable crypto events
- Buying cryptocurrency – Buying and holding crypto will not require that you pay taxes.
- Coin and token swaps – If a crypto you own changes its underlying technology and coin name, even if the number of coins changes you won’t owe taxes unless the amount they are worth changes as well.
- Gifting crypto to friends and family – The act of gifting is not taxable, but they will have to pay taxes when they sell the crypto themselves.
- Receiving crypto rewards – If you receive crypto rewards or earn a yield on your crypto via mining, lending or yield farming, you don’t get taxed on receiving these rewards. You get taxed when you sell these rewards.
- Donating crypto. Charitable donations of cryptocurrency to a registered charity are tax-exempt.
Estimating your crypto taxes for gains and losses takes just 4 steps
You may have crypto gains and losses from one or more types of transactions. A few examples include:
- Exchanging one crypto for another
- Spending crypto on goods and services
1. Find out how much you made selling crypto
To find your total profits, multiply the sale price of your crypto by how much of the coin you sold:
Next, subtract how much you paid for the crypto plus any fees you paid to sell it. (In tax jargon, this total is called the cost basis.)
Finally, you’ll get what’s known as a realized gain — your profit after you sell.
2. Decide on whether you want to use FIFO, LIFO or HIFO as an accounting method.
FIFO – or first-in-first-out – is an accounting method in which your crypto gains or losses are calculated by subtracting the price at which you sold some crypto from the earliest rates at which you purchased that same amount of crypto. For example, if your earliest purchase of crypto was a purchase of 0.1 BTC for $3,000 and your first sale of crypto was a sale of 0.1 BTC for $5,000, then you would have to account for a $2,000 profit using the FIFO method.
LIFO – or last-in-first-out – is an accounting method in which your crypto gains or losses are calculated by subtracting the price at which you sold some crypto from the most recent rates at which you purchased that same amount of crypto. For example, if your most recent crypto purchase was 0.1 BTC for $6,000 and your first sale of crypto was a sale of 0.1 BTC at $3,000, then you would have to account for a $3,000 loss using the LIFO method.
HIFO – or highest-in-first-out – is an accounting method in which your crypto gains or losses are calculated by subtracting the price at which you sold some crypto from the highest rate you paid for that same amount of crypto. For example, if the highest price you paid for a crypto purchase was $5,000 for 0.1 BTC and you sold 0.1 BTC for $5,500, then you would have account for a $500 gain using the HIFO method.
Please keep in mind that once you select either the FIFO, LIFO or HIFO accounting method, you must use this same method in all subsequent years.
3. Figure out whether you have a short-term or long-term gain
Find the date on which you bought your crypto. Then glance at your calendar and note today’s date.
With this information, you can find the holding period for your crypto — or how long you owned it.
You can also figure out if you have a short-term or long-term gain:
- You have a short-term gain if you held your crypto for one year or less.
- You have a long-term gain if you held your crypto for longer than one year.
Your tax rate ultimately depends on the type of gain you’ve realized.
4. Estimate your taxes
If you have a short-term gain, the IRS taxes your realized gain as ordinary income. Accordingly, your tax bill depends on your federal income tax bracket. Mining coins, airdrops, receiving payments and initial coin offerings are also taxed as income. Please note that mining coins gets taxed specifically as self-employment income, which is subject to both income tax and self-employment tax.
Overall the main thing you’re looking for when estimating your crypto taxes are whether you’ll be paying crypto taxes based on a short-term or long-term gain. Short-term gains will rely on your tax bracket, while long-term gains have their own bracket:
2022 federal income brackets
Federal Income Tax Brackets and Rates for Single Filers, Married Couples and Heads of Households
|Tax rate||Single||Married, filing jointly||Head of household||Married, filing separately|
|10%||$0 to $10,275||$0 to $20,550||$0 to $14,650||$0 to $10,275|
|12%||$10,275 to $41,775||$20,550 to $83,550||$14,650 to $55,900||$10,275 to $41,775|
|22%||$41,775 to $89,075||$83,550 to $178,150||$55,900 to $89,050||$41,775 to $89,075|
|24%||$89,075 to $170,050||$178,150 to $340,100||$89,050 to $170,050||$89,075 to $170,050|
|32%||$170,050 to $215,950||$340,100 to $431,900||$170,050 to $215,950||$170,050 to $215,950|
|35%||$215,950 to $539,900||$431,900 to $647,850||$215,950 to $539,900||$215,950 to $323,925|
|37%||$539,900 or more||$647,850 or more||$539,900 or more||$323,925 or more|
If you have a long-term gain, you’ll pay a capital gains tax rate on your crypto profit.
You’ll likely also see a smaller tax bite. The government wants consumers to hold their investments for longer periods, and it offers lower tax rates as an incentive.
2022 capital gains tax rates
Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly and Heads of Households
|Long-term capital gains tax rate||Single||Married, filing jointly||Head of household||Married, filing separately|
|0%||$0 – $44,625||$0 – $89,250||$0 – $59,750||$0 – $44,625|
|15%||$44,626 – $492,300||$89,251 – $553,850||$59,751 – $523,050||$44,625 – $276,900|
|20%||$492,300 or more||$553,850 or more||$523,050 or more||$276,900+|
Compare crypto tax calculators
A cryptocurrency tax calculator can help you determine the best way to file your crypto taxes. Factors like crypto losses, how long you hold your crypto and your income level all impact your tax bill. The best crypto tax software can help you get all your trades in order to make filing your crypto taxes much easier.
2022 highlights on IRS crypto FAQ updates
The IRS maintains answers to frequently asked cryptocurrency tax questions. We’ll cover some of the most common ones, but a full list is available through the IRS.
- If my crypto hard forks but I don’t receive the new crypto, does this count as gross income?
No. Because you haven’t received units of the new crypto, you do not have an “accession to wealth” — in other words, you have not come into possession of wealth. Thus, you don’t have gross income after the hard fork.
- If my crypto hard forks and I receive the new crypto via airdrop, does this count as gross income?
Yes, because you have an accession to wealth. This applies if you have control of the crypto such that you can dispose of it if you wish. In this case, you’ve received ordinary income. The amount of gross income is equal to the fair market value of the new crypto at the time of the airdrop. For more information, read Ruling 2019-24 from the IRS.
- Calculating income and basis from services provided. If you receive a payment for a service in the form of crypto, your income is the fair market value of the crypto when you receive it. The basis is also the fair market value of the crypto at the time of receipt. This fair-market-value guidance applies to other transactions, such as exchanging your crypto for property.
- Recognizing gain or loss. You’ll recognize a capital gain or loss after activities such as paying someone with crypto, exchanging your crypto for other property ad exchanging your crypto for other virtual currencies.
- Determining fair market value. If you receive crypto after a transaction on an exchange, the value of it is what’s recorded on the exchange in US dollars. If you receive crypto in a peer-to-peer transaction, you can determine fair market value through a blockchain explorer. If you receive crypto that doesn’t have a published value, the fair market value is equal to the fair market value of the services or property exchanged as a result of the crypto transaction.
- Soft forks and income. You’re not considered to receive income after a soft fork, because you haven’t received new crypto.
- Gifts and charitable donations. If you receive crypto as a bona fide gift, this doesn’t count as income until you sell, exchange or dispose of it. Donating crypto to a charity doesn’t count as recognized income, gain or loss.
- Transferring crypto between wallets you own. Transferring crypto between wallets or accounts you own does not count as a taxable event.
- Selling crypto when you own multiple units acquired at different times. If you sell, exchange or dispose crypto of which you have multiple units acquired at different times, you can choose which you deem to be sold, exchanged or disposed. To do this, document the unique digital identifier of each unit — for example, by public key, private key and address. If you can’t produce documentation, the crypto is deemed sold, exchanged or disposed of starting from the earliest unit you acquired.
- Tax reporting rules. Report income, gain or loss for the taxable year each crypto transaction is made. Report capital gains or losses on relevant forms, including Form 8949 and Form 1040. Report ordinary income on Form 1040, Form 1040-SS, Form 1040-NR or Form 1040, Schedule 1. As you make transactions in crypto, maintain accurate records that will help you file tax returns. Document when you receive, sell, exchange or dispose of your crypto, including fair market values.
What if I sold my crypto at a loss?
If you’ve sold your crypto as a loss, you might be able to claim it as a deduction — up to a limit. Here’s how to estimate your deduction:
- Find the sale price of your crypto.
- Multiply the sale price by how much of the coin you sold.
- Subtract the basis — or the price you bought the crypto for plus any fees you paid to see it.
If the result is a capital loss, the law allows you to use this amount to offset your taxable gains. But $3,000 is the maximum you can deduct each year.
Deducting your losses: An example
A month ago, you sold 1 BTC for a $1,000 profit. Today, you sold 1 BTC for a $300 loss.
Though it stinks to sell at a loss, it’s not all bad: Now you can use it to decrease your taxable gains.
Before, the IRS would tax $1,000 of your profit. Now, you’ll likely pay taxes on only $700.
If you hit the $3,000 cap, you may be able to use the excess amount to offset taxable gains in the following year. Talk to a tax professional that specializes in cryptocurrencies to discuss your specific situation and what you can expect to pay.
Taxes are complicated, and mixing in cryptocurrencies doesn’t make them any easier. Using a tool to track your crypto transactions can help you prepare for tax season, even if you’re using it retroactively to figure out your precise gains and losses. Overall, we recommend speaking with a tax expert to get precise answers on your specific tax situation.
Frequently asked questions
If I sell my crypto for another crypto, do I pay taxes on that transaction?
Yes. Most tax experts believe the IRS considers a crypto-to-crypto transaction a taxable event — which means it’s subject to taxation.
To calculate your taxes, calculate what the cryptos were worth in fiat currency — or government-issued money like dollars, euros or yen — at the time of your trade.
Though it requires more work, the extra effort can help you keep diligent records, which may come in handy if the IRS comes knocking.
How does the IRS treat a crypto “fork”?
This is a question that doesn’t have a clear answer. It might make sense that the IRS would treat a “fork” — a crypto term for a split in the currency — as it would your typical stock split.
In that case, you might not pay any taxes on the split itself. Rather, you’d pay on any gain resulting from the split when you eventually sell your shares. However, this information has yet to have a definitive answer and we suggest following the IRS's Virtual Currency Guidance page for if or when they deliver clarification.
Do I pay taxes when I buy crypto with fiat currency?
No. Because you don’t realize gains when you buy crypto with fiat, you don’t have to pay taxes.
Does Coinbase report my activities to the IRS?
Yes, but only if you've earned at least $600 in miscellaneous income from staking, Coinbase Earn or USDC Rewards. Coinbase will issue a 1099-MISC to report this income.
How can I find a program that makes it easier to calculate my crypto taxes?
Look into BitcoinTaxes and CoinTracking. Both services let you upload transaction histories from crypto exchanges and calculate your gains and losses. H&R Block and TurboTax also offer services when it comes to crypto taxes, though you may have to meet in person with an advisor to get assistance from the former.
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