Key takeaways
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The taxation of crypto assets and cryptocurrency is complex and constantly evolving, creating a challenging landscape for investors, founders, and employees of crypto-focused companies. Knowing how much tax you will owe on crypto capital gains or other digital asset income can be complex to calculate without the right guidance. In this guide, we’ll cover everything you need to know about crypto taxes in the United States for 2024 and how to best minimize your tax liability, including:
- Crypto-to-Crypto Transactions
- Crypto Staking
- NFTs
- Airdrop and Forks
- DeFi
- Crypto Lending
- Crypto Mining
- Gifts and Donations
- Summary of Crypto Income and Capital Gains Taxes in 2024
- How Do You Calculate Crypto Cost Basis?
- How Do You Complete IRS Form 1040 For Digital Assets?
- IRS Tax Forms for Crypto
- Estimated Quarterly Taxes on Crypto
- Best Practices for Minimizing Crypto Tax Liabilities
The Many Types of Crypto Asset Transactions
In the United States, crypto assets and cryptocurrency are categorized as property by the Internal Revenue Service (IRS) for federal income tax purposes. As such, crypto investments are subject to capital gains taxes, just like publicly-traded stocks and other capital assets. Capital gains taxes are triggered by taxable events, such as buying and selling crypto assets, receiving staking and mining rewards, and more, all of which we’ll discuss in this guide.
Before diving into the specifics of each taxable event, remember that capital gains are taxed in one of two ways, and rates are adjusted based on your income:
- Long-term capital gains tax: 0% to 20% when held for more than one year
- Short-term capital gains tax: 10% to 37% when held for less than one year
As you navigate through the various sections of this guide, you’ll gain a better understanding of the tax implications associated with each of these types of transactions, helping you maintain compliance with IRS regulations and minimize your tax liability.
Crypto-to-Crypto Transactions
When you exchange one crypto asset or cryptocurrency for another (e.g., selling Bitcoin to purchase Ethereum), the IRS considers this a taxable event, and you will be subject to capital gains taxes. The concept is similar to buying and selling stocks in a taxable brokerage account. Additionally, selling a crypto asset for fiat currency, such as US Dollars, also incurs capital gains taxes.
To calculate capital gains or losses from a crypto-to-crypto transaction, establish the cost basis of the original asset, which includes the amount you initially paid and any platform fees. Subtract the cost basis from the fair market value of the new asset at the time of the exchange. The resulting amount represents your capital gain or capital loss on the transaction.
Crypto Staking
Staking involves locking up a certain amount of crypto assets in a wallet to support the operations of a blockchain network, such as validating transactions or securing the network. Staking rewards, typically paid in the form of additional crypto assets, are considered taxable income and subject to ordinary income taxes at the time of receipt. Later, when the crypto asset earned from staking is sold or exchanged, the gains are subject to capital gains tax similar to other capital assets.
NFTs
Non-fungible tokens (NFTs) are unique digital assets that can be bought, sold, or traded on various platforms. When you sell or trade NFTs, the gains are subject to capital gains tax, just like other crypto assets. If you create and sell NFTs as part of a business, the income may be subject to self-employment tax.
To learn more, explore our guide to NFT taxes.
Airdrops and Forks
Airdrops occur when a crypto platform or project distributes free crypto assets to users, often as a marketing strategy. The fair market value of the newly acquired crypto at the time of receipt is considered taxable income and must be reported to the IRS.
Forks involve changes to a blockchain and come in two forms: hard forks and soft forks. Hard forks create a new, separate crypto asset and result in the distribution of new crypto to existing holders of the original asset. Like airdrops, the fair market value of the new tokens received in a hard fork is considered taxable income. Soft forks represent updates or changes to the existing blockchain protocol. Soft forks do not result in the acquisition of new crypto assets and therefore do not have direct tax implications.
DeFi
Decentralized finance (DeFi) platforms offer various financial services, such as lending, borrowing, and trading, without intermediaries like banks. Transactions involving DeFi platforms may be subject to capital gains taxes or ordinary income taxes, depending on the transaction’s nature. It’s crucial to maintain detailed records of your DeFi activities for accurate tax reporting.
To learn more, read our in-depth guide to DeFi taxes.
Crypto Lending
Crypto lending allows investors to lend their cryptocurrencies to borrowers through centralized and decentralized finance (DeFi) platforms, which facilitate transactions and often provide higher interest rates than traditional lending options. Interest earned from lending is subject to ordinary income tax. As with traditional loans, borrowers do not owe taxes on the loaned amount.
Crypto Mining
Crypto mining is the process of validating and adding new cryptocurrency transactions made on a blockchain network. Miners are often compensated with newly minted crypto assets and, in the United States, this revenue is considered taxable income. The tax rate applied to mining income depends on the individual miner’s overall taxable income and filing status. Mining rewards, as they are crypto assets themselves, will also be subject to capital gains taxes if and when they are sold or exchanged.
Gifts and Donations
Crypto gifts are subject to different tax rules depending on the situation. If you receive a crypto asset or cryptocurrency as a gift, you generally do not need to pay taxes on it until you sell, exchange, or otherwise dispose of it. For the person giving the gift, there may be gift tax implications if the value of the gift exceeds the annual gift tax exclusion.
Donations of crypto assets to qualified charitable organizations are typically tax-deductible. However, specific rules and limits on tax deductions may vary based on the value of the donation and the recipient organization.
Summary of Crypto Income and Capital Gains Taxes in 2024
The IRS’s tax guidance for digital assets is continuously evolving. Generally, if you invest or transact in crypto, expect to pay either ordinary income tax or owe capital gains tax on crypto transactions. There are specific scenarios where digital asset transactions do not trigger a taxable event.
| Non-Taxable Crypto Transactions | Crypto Income Tax Transactions | Crypto Capital Gains Tax Transactions |
Generally, the following crypto transactions are not taxable:
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Expect to pay ordinary income tax if you’re earning crypto through a job or another professional activity. Crypto income tax examples include:
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Expect to pay capital gains tax if you’re trading or using crypto for transactions. Crypto capital gains tax examples include:
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Crypto Record Keeping and IRS Tax Reporting
Proper recordkeeping of your crypto transactions will ensure you can accurately complete mandatory IRS forms when filing taxes, especially as the tax code changes. It can be helpful to work with a crypto tax advisor to help calculate cost basis, complete IRS forms, and determine if you need to file quarterly estimated crypto taxes.
How Do You Calculate Crypto Cost Basis?
Cost basis is the original value of the crypto asset at the time it was acquired. If you bought the cryptocurrency directly, the cost basis is simply the amount you paid for the crypto, including any fees or commissions. If you bought the same cryptocurrency at different times and prices, you can choose a method for calculating the cost basis, including FIFO (first in, first out), LIFO (last in, first out), and HIFO (highest in, first out).
Cost basis may have different calculations in scenarios where you did not purchase the crypto asset directly:
- Mined or earned crypto: The cost basis is the fair market value of the cryptocurrency at the time it was mined or earned.
- Crypto received as payment: If you received crypto as payment for goods or services, the cost basis is its fair market value at the time of receipt.
- Crypto received as a gift: If you received it as a gift, the cost basis depends on the giver’s cost basis, the fair market value at the time of the gift, and the fair market value of the crypto asset when you sell it. Generally, if the fair market value is more than the giver’s cost basis at the time of the gift, you use the giver’s cost basis. For digital asset gifts, it may be beneficial to consult a crypto tax advisor.
How Do You Complete IRS Form 1040 for Digital Assets?
For federal income tax purposes, the IRS requires all taxpayers to answer the following question by selecting “Yes” or “No” on Form 1040 regarding their involvement in digital assets:
“At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Starting in the tax year 2022, the IRS began using the term “digital assets” in place of “virtual currencies” on Form 1040 and other tax forms. These terms are important to understand as you navigate tax forms.
Examples of Form 1040 Digital Asset Activities |
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| Examples of crypto activities that require taxpayers to check “Yes” on Form 1040. | Examples of crypto activities that generally allow taxpayers to check “No” on Form 1040. |
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The above table is only a sample of digital asset activities from the IRS’s guidance. For complex situations, a crypto tax advisor can help navigate tax code and accurately complete IRS tax forms.
IRS Tax Forms for Crypto
In addition to Form 1040, there are other tax forms required for reporting crypto transactions to the IRS. Here are some of the tax forms you will see in 2024:
- Form 1099-B: Your crypto brokerage firm will issue Form 1099-B, which summarizes your transactions when submitting your tax return. Make sure to review these forms for accuracy and include the relevant information on your tax return. Some crypto exchanges may also issue Form 1099-K if you have a high volume of transactions within one year.
- Schedule 1 (Form 1040): Taxpayers must report all crypto-related income on their tax return, including capital gains and losses, on their Form 1040 and accompanying Schedule 1. This includes reporting proceeds from crypto sales, mining and staking rewards, airdrops, and any other taxable crypto transactions.
- Form 8949 and Schedule D: To report capital gains and losses from crypto transactions, you must complete Form 8949 and transfer the totals to Schedule D. This includes providing detailed information about each transaction, such as the date acquired, date sold, cost basis, and proceeds.
- Schedule C: If you operate a crypto-related business, such as mining or trading, you must report your income and expenses on Schedule C. This includes calculating your net profit or loss, which is then reported on Form 1040 and Schedule 1. Be sure to include all relevant income, deductions, and expenses related to your crypto business activities to ensure accurate reporting.
In addition to the forms above, the following two IRS forms will most likely be required for crypto investors pending final IRS guidance:
- Changes to Section 6050I and Form 8300: According to the IRS, if you’re in a trade or business and receive more than $10,000 in cash in a single transaction or in related transactions, you must file Form 8300. The Infrastructure Investments and Jobs Act of 2021 amended Internal Revenue Code 6050I by holding certain digital asset transactions to the same reporting requirements as cash. The Treasury and IRS announced in January 2024 that businesses do not have to report certain transactions involving digital assets until regulations are issued.
- Form 1099-Digital Assets (1099-DA): Form 1099-DA, yet to be finalized, is a new IRS form designed for the reporting of transactions involving digital assets like cryptocurrencies and NFTs. This form is part of an effort to improve tax compliance and clarity around the taxation of digital asset transactions. If implemented, beginning in the 2025 tax year, the IRS will require digital asset brokers, centralized and decentralized, to send Form 1099-DA to investors who have engaged in certain crypto transactions including NFTs, staking, and mining.
Estimated Quarterly Taxes on Crypto
The IRS may require some taxpayers to pay estimated quarterly taxes on their income, including income from crypto transactions. This applies to individuals who expect to owe at least $1,000 in taxes when filing their return or if their withholding and refundable credits will not cover at least 90% of the tax owed for the current year.
If you expect to owe a substantial amount in crypto taxes, understand and plan for your quarterly tax obligations to avoid potential penalties. Calculate your estimated quarterly tax payments using Form 1040-ES, or submit payment on the IRS website.
Best Practices for Minimizing Crypto Tax Liabilities
Several strategies can help you minimize your crypto tax bill, leverage tax benefits allowed by the IRS, and ensure you stay in compliance with the IRS, including:
- Hold onto your crypto investments for more than one year: By holding onto your crypto investments for more than a year, you will be able to benefit from a long-term capital gains tax rate.
- Make use of tax-loss harvesting: Tax-loss harvesting is a strategy that involves selling crypto assets that have experienced a loss in value to offset capital gains from other assets. By strategically selling these underperforming assets, you can potentially reduce your overall tax liability.
- Plan for estimated quarterly tax payments: As mentioned earlier, some taxpayers may be required to pay estimated quarterly taxes on their crypto-related income. If you expect to owe a significant amount in crypto taxes, it’s essential to understand and plan for your quarterly tax obligations to avoid potential penalties.
- Utilize tax-advantaged accounts: Consider investing in crypto in tax-advantaged accounts, such as IRAs or 401(k)s. Moving digital assets into a tax-advantaged account may create a tax benefit by deferring or minimizing taxes on capital gains and income.
- Consult a tax professional: Crypto tax laws are complex and always changing. It’s always a good idea to consult with a crypto tax advisor or other tax professional who is knowledgeable about crypto taxation to ensure you’re in compliance with the latest regulations and taking advantage of any potential deductions or credits.
Crypto taxes FAQs
Do you have to report crypto under $600?
You are required to pay taxes on all profits from crypto transactions, even if they are only $1. Crypto exchanges are required to report earnings of more than $600 to the IRS for each taxpayer using Form 1099. Even if you do not receive a Form 1099, you are still required to pay taxes on crypto earnings under $600.
What happens if I don’t report crypto taxes?
Failure to report crypto transactions can lead to fines and penalties including prison in severe cases. Additionally, failure to report capital losses can lead to missed deductions which can lower your tax bill. If you realize that you missed reporting crypto transactions in the past, it’s safest to file an amended tax return. According to the IRS, you can file an amended tax return within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later.
Do you get a 1099 for crypto?
Yes, you may receive an IRS Form 1099 for your crypto transactions, depending on the nature of your transactions and the platforms you use. There are different 1099 forms you may encounter in crypto, including 1099-B, 1099-K, 1099-MISC, and likely coming in 2025, Form 1099-DA. Remember, whether you receive a 1099 form or not, you’re responsible for reporting all taxable crypto transactions on your tax return.
Do I have to report crypto if I didn’t sell it?
If you purchase a crypto asset, you will not have a taxable event directly from that capital asset purchase until the asset is sold, exchanged for another asset, or used to purchase a good or service. However, if you receive crypto from activities such as mining, staking, or lending, it is considered a taxable event for which you will pay the ordinary income tax rate.
Harness Can Help With Crypto Taxes
Navigating the world of crypto taxation is a challenging task, and it’s important to have a tax advisor on your side who truly understands the crypto landscape.
At Harness, we can help you find tax advisors who understand the complexities of crypto and are committed to addressing your unique needs. If you need assistance with crypto taxes or want to learn more about our full range of services, register for Harness and start working with an experienced crypto-focused tax advisor today.
Tax services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is an internet investment adviser registered with the Securities and Exchange Commission (“SEC”). Harness Wealth Advisers LLC solely acts as a paid promoter for unaffiliated registered investment advisers. Harness Wealth Advisers LLC’s registration as an investment adviser with the SEC does not imply a certain level of skill or training.
This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, the reader is encouraged to consult with the professional advisor of their choosing.
Risks Relating to Digital Assets: There are certain risks relating to digital assets, virtual currencies, cryptocurrencies and/or digital coins/tokens (collectively, “Digital Assets”). The investment characteristics of Digital Assets generally differ from those of traditional securities, currencies, commodities. Digital Assets are not backed by a central bank or a national, international organization, any hard assets, human capital, or other form of credit and are relatively new to the marketplace. Rather, Digital Assets are market-based; a Digital Asset’s value is determined by (and fluctuates often, according to) supply and demand factors, its adoption in the traditional commerce channels, and/or the value that various market participants place on it through their mutual agreement or transactions. The lack of history to these types of investments entail certain unknown risks, are very speculative and are not appropriate for all investors.
