How to calculate taxes on crypto gains

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:

It's important to understand which transactions are reportable and then report them correctly on your return. If in doubt, consult with a tax pro. Moreover, ignorance of the law is not a justifiable excuse for not reporting transactions and the IRS appears to be getting stricter about reporting crypto transactions.

Charlie Corsello
Enrolled agent and founder of TaxCure

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:

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

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

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:

1. Find the sale price of your crypto.
2. Multiply the sale price by how much of the coin you sold.
3. 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.

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.

Bottom line

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