Understanding crypto taxes
Your guide to 2021 crypto taxes
From laser eyes to all-time-highs, 2021 was quite a year for cryptocurrencies. More than 10 percent of Americans traded crypto in the last year — if you're one of them, you're probably wondering how your trades and other crypto activity will impact your taxes.
U.S. taxpayers are required to report crypto sales, conversions, payments, and income to the IRS, and state tax authorities where applicable, and each of these transactions has different tax implications. In this article, you'll learn when your crypto is taxed and how your activity might affect your taxes. Let's dive in.
First things first...
Coinbase doesn’t provide tax advice. This article represents our stance on IRS guidance received to date, which may continue to evolve and change. None of this should be considered as advice or an individualized recommendation, but it’s important to us that our readers have relevant information available to them in the most accessible way possible. With this article, we've tried to consolidate all relevant crypto tax information into one place. Please consult a tax professional regarding your own tax circumstances.
Do I owe crypto taxes?
In the U.S., crypto is considered a digital asset, and the IRS treats it generally like stocks, bonds, and other capital assets. Like these assets, the money you gain from crypto is taxed at different rates, either as capital gains or as income, depending on how you got your crypto and how long you held on to it.
To understand if you owe taxes, it’s important to look at how you used your crypto in 2021. Transactions that result in a tax are called taxable events. Those that don’t are called non-taxable events. Let’s break them down:
- Buying crypto with cash and holding it: Just buying and owning crypto isn’t taxable on its own. The tax is often incurred later on when you sell, and its gains are “realized.”
- Donating crypto to a qualified tax-exempt charity or non-profit: If you give crypto directly to a 501 (3) charitable organization, like GiveCrypto.org, you may be able to claim a charitable deduction.
- Receiving a gift: If you’re lucky enough to get crypto as a gift, you’re not likely to incur a tax until you sell or participate in another taxable activity like staking.
- Giving a gift: How thoughtful! You can gift up to $15,000 per recipient per year without paying taxes (and higher amounts to spouses). If your gift exceeds $15,000 per recipient, you’ll need to file a gift tax return (which generally does not result in any current tax liability). If you transfer crypto to someone else outside of a purchase for goods or services, it may count as a gift, even if you didn’t mean it that way.
- Transferring crypto to yourself: Transferring crypto between wallets or accounts you own isn’t taxable. You can transfer over your original cost basis and date acquired to continue tracking your potential tax impact for when you eventually sell.
Taxable as capital gains
- Selling crypto for cash
: Did you sell your crypto for U.S. dollars? You’ll owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss on your taxes.
- Converting one crypto to another: When you use bitcoin to buy ether, for example, you technically have to sell your bitcoin before you buy a new asset. Because this is a sale, the IRS considers it taxable. You’ll owe taxes if you sold your bitcoin for more than you paid for it.
- Spending crypto on goods and services: If you use bitcoin to buy a pizza, for example, you’ll likely owe taxes on the transaction. To the IRS, spending crypto isn’t that much different from selling it. You need to sell the asset before it can be exchanged for a good or service, and selling crypto makes it subject to capital gains taxes.
Taxable as income
- Getting paid in crypto: NFL offensive tackle Russell Okung was one of a few big names to take their paychecks in bitcoin in 2021 — and he’s likely paying income tax on it. If you followed Okung’s lead and were paid in crypto by an employer, your crypto will be taxed as compensation according to your income tax bracket.
- Getting crypto in exchange for goods or services:
- If you accept crypto in payment for a good or service, you’re responsible for reporting it as income to the IRS.
- Mining crypto: If you mined crypto, you’ll likely owe taxes on your earnings based on the fair market value (often the price) of the mined coins at the time they were received. Crypto mined as a business is taxed as self-employment income.
- Earning staking rewards: Staking rewards are treated like mining proceeds: taxes are based on the fair market value of your rewards on the day you received them.
- Earning other income: You might earn a return by holding certain cryptocurrencies. This is considered taxable income. Although this is sometimes referred to as interest, the IRS treats it differently than interest you'd earn from a bank.
- Getting crypto from a hard fork: Taxes on crypto you got from a hard fork depend on how you use the asset, when it’s available to withdraw from your exchange, and more. See the latest IRS guidance on hard forks
- Getting an airdrop: You might receive airdrops from a crypto company as part of a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. See the latest IRS guidance on airdrops
- Receiving other incentives or rewards: This list isn’t comprehensive — there are a variety of reasons why you might receive free crypto. These can include rewards from Coinbase Earn or incentives like getting $5 in bitcoin for referring a friend to a crypto exchange. Regardless, you’ll need to report these as income.
- Good news for hodlers
If you’re holding crypto, there’s no immediate gain or loss, so the crypto is not taxed. Tax is only incurred when you sell the asset, and you subsequently receive either cash or units of another cryptocurrency: At this point, you have “realized” the gains, and you have a taxable event.
How much do I owe in crypto taxes?
So it looks like some of your crypto activity is taxable — what now? You can estimate how much you’ll owe in taxes by calculating your income, gains, and losses. Here’s what that means:
- Calculating crypto income
If you’re a U.S. taxpayer, you’re probably used to seeing your federal and state income tax deducted from your pay stubs. The crypto you receive as income (like mining, staking, and rewards) is also subject to these taxes, which generally will not have already been deducted or withheld . When you report it, you’ll generally owe according to the income tax rate appropriate to your tax bracket. Word of caution: If you’ve earned a lot from crypto activity, it might affect what tax bracket you’re in and you may end up paying a higher tax rate on some of your earnings.
Calculating capital gains and losses
To calculate the amount you gained or lost, you’ll first need to know how much crypto you started with. This is called your cost basis.
Knowing your cost basis
When you buy cryptocurrency, your cost basis is generally determined by how much you paid for it. However, if you received crypto from mining or staking, your cost basis is determined by the fair market value when you received it. Your cost basis for gifted crypto will depend on both the basis the person who transferred it to you had and the fair market value when you received it.
When you sell your crypto, you can subtract your cost basis from your sale price in order to figure out whether you have a capital gain or capital loss. If your proceeds exceed your cost basis, you have a capital gain. If not, you have a capital loss.
- Short-term vs. long-term capital gains
Capital gains taxes are applied at both the federal and state (where applicable) level. They can be long-term or short-term, and how long you’ve held your crypto affects how much tax you’ll end up owing. If you held onto your crypto for more than a year before selling, you'll generally pay a lower rate than if you sold right away.
- Long-term gains are taxed at a reduced capital gains rate
. These rates (0%, 15%, or 20% at the federal level) vary based on your income. Higher income taxpayers may also be subject to the 3.8% Net Investment Income Tax on their gains or other income.
- Short-term gains are taxed at your ordinary income rate
, which is usually a higher, less-favorable rate.
Remember, taxable events happen when you realize losses or gains, meaning you’ve sold your crypto by either selling for cash, converting to another crypto, or spending it on a good or service. The gains are unrealized if you still own the original shares.
Understanding your capital losses
You’ve realized a capital loss when you sold an asset for less than you paid for it. Losses can work to your advantage, though. You can use losses to offset other capital gains (including from non-crypto assets, like stocks) you may have had during the year on a dollar-for-dollar basis, potentially reducing your overall tax bill.
If you have more losses than gains or have no gains at all, the maximum amount of losses that you can declare each year to offset other income is $3,000. Any remainder carries over to subsequent years until the full amount of the loss is applied.
Coinbase Gain/Loss Report
This tax season, Coinbase customers will be able to generate a Gain/Loss Report that details capital gains or losses using a HIFO (highest in, first out) cost basis specification strategy. This report is designed to help taxpayers quickly and easily understand their gains or losses for the tax year, using our calculations.
The report will only have information about activity on Coinbase. It won’t have information about crypto-related transactions outside of Coinbase. It’s important to review and verify the information for accuracy before you use it to file. The tool should not be used as official tax documentation.