A Guide to Cryptocurrency Tax for US Individuals

Last updated: September 16th 2021


Introduction to Cryptoassets & Recap

Cryptocurrencies are a new asset class that has been developed over the last decade. They have changed dramatically throughout this time, and so we are noticing more and more governments introducing regulation. The Internal Revenue Service (IRS) first started offering guidance on Cryptocurrency in 2014 and updated and added to this guidance in 2019. Recap has produced this comprehensive Cryptocurrency Tax Guide to set out all of the relevant information regarding cryptocurrency taxation for US individuals.

Recap is a cryptocurrency tax solution. Our software, originally developed for the UK market takes a privacy first approach and allows you to calculate your crypto tax in minutes without compromising financial privacy. Recap’s founders Ben and Dan helped to define the UK’s regulatory position on Bitcoin and cryptocurrencies in 2013 and have been involved in the industry since then.

IRS terminology

The information in this guide has been sourced from the IRS and we will refer to their guidance notes and some of their terminology throughout.

Disclaimer: The information set out in this guide is intended to provide you with guidance on US cryptocurrency taxation. The information set out in this guide is not to be construed as accounting, tax or legal advice. Please speak to a qualified tax and/or legal professional about your specific circumstances before acting upon any of the information in this guide.


What is Virtual Currency?

The IRS uses the term “virtual currency” to describe Cryptocurrency. (The term is also used for other types of currency used as a medium of exchange, such as digital currency). Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.

Cryptocurrency is a type of virtual currency that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.”
IRS

Which Taxes Apply?

Cryptocurrency is an example of “convertible virtual currency” as it can be digitally traded between users and purchased or exchanged into US Dollars and other real/virtual currencies. The sale, exchange or use of any convertible virtual currency to pay for goods or services in a real-world transaction has tax consequences.

Capital Gains Tax

US federal law treats virtual currency as property. Therefore general tax principles that applicable to property transactions must be applied to crypto transactions. When you dispose of a cryptocurrency (by selling, trading or paying for a service or item) you are subject to capital gains or losses.

If purchased crypto increases in value, profits generated from its disposal are treated as a capital gain; if it decreases, the loss on disposal can be deducted against other capital gains including non-cryptocurrency capital gains.

Capital gains seems simple to establish but for those who trade often, it can be tedious and time consuming – this is where Recap can help. Users connect their exchange accounts or upload CSV data to the app. Once all the user’s data has been collected in the app, they can generate a tax report for the desired tax year.

Income Tax

Any cryptocurrency that you have not “bought” e.g. mining and staking can be classed as income tax and should be reported under the “other income” section of your Income Tax Return. Following an update to IRS guidance in 2019 this now also applies to airdrops.

Margin Trading

Margin trading or trading with futures/CFDs using crypto is not recognized by the US and so there is no tax treatment. When you eventually close (sell the property) gains (or losses) made at that point should be declared as capital gains.


Do I Need to Pay Crypto Tax and How Much Do I Need to Pay?

If you have sold, converted, paid, donated or earned using crypto you may owe tax. Even if you are a Hodlr it’s worth checking. The amount you need to pay depends on how long you have held the crypto - short or long term and your ordinary income tax rate.

In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”
IRS

Responsibility to report your income and transactions

Because of increasing pressure from the IRS a growing number of exchanges are now making an effort to send out IRS Form 1099-K to US users over certain thresholds, but you should not rely on or wait for this to arrive.

A copy of this is also sent to the IRS but you should not assume that you do not have to do anything. Form 1099-K is used to inform the IRS that you are a high transaction user, you must also use Form 8949 to report your crypto taxes yourself.

You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.”
IRS

Ultimately the IRS holds you responsible for reporting your income and transactions and you could face penalties or interest on tax owed if caught out.

We have written this guide to detail how cryptocurrency is taxed in the US to help you understand if you need to pay cryptocurrency tax and how to calculate the tax you need to pay. We cannot provide advice but if you are unsure you should consult with a tax professional about your individual tax circumstance.


When is there a taxable event?

Capital Gains Tax

Selling crypto for fiat money

(i.e. USD, GBP EUR)

Exchanging one crypto for a different crypto

(e.g. exchanging Bitcoin to Ethereum)

Using crypto to pay for goods or services

  • Paying fees on trades, withdrawals and deposits of crypto
  • Buying a pizza
  • Paying for accountancy services

Income Tax

Being paid in crypto by employer

You will be taxed according to your income tax bracket.

Receiving crypto rewards

  • Rewards from staking or operating masternodes
  • Earning interest from a crypotcurrency loan

Receiving crypto from mining

The miner should determine if they are hobby mining or business mining.

Receiving crypto by airdrop or after a hard fork

Treated as ordinary income. (Soft forks do not create a taxable event).

Non-Taxable Events

Donating crypto

Donating crypto directly to a qualified tax-exempt charity or non-profit organisation

Moving tokens between wallets or accounts

Ensure that these are not logged as dispositions.

Gifting cryptocurrency to another person

Non-taxable up to the value of $15,000.

HODLing

No gain or loss is recognized until the crypto is disposed of.


Capital Gains Tax and Cryptocurrency

Capital gains tax seems logical but as you have to calculate the gain/loss on each individual cryptocurrency disposal throughout the whole tax year, it can be a tedious and time demanding process. You need an accurate record of all of your cryptocurrency transactions including date, amount, fees and costs. This is where a solution like Recap, which keeps track of transactions and calculates gains/losses is useful.

Short & Long Term Capital Gains

The amount of tax that you pay depends on how long you have held assets for - you need to determine if you have held for short or long term. The holding period begins on the day after you acquired the virtual currency and ends on the day you sell or exchange.

Short Term

  • Cryptocurrency held for less than a year.
  • Taxed at the ordinary income tax rate.

Long Term

  • Cryptocurrency sold after one year.
  • The tax rate is 0%, 15%, or 20% dependent on income.

The long term capital gains tax rate is often better than the short term rate so it can sometimes be beneficial to hold crypto for atleast a year before disposing of it.


Calculating Capital Gains and Losses

Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your Federal income tax return in U.S. dollars.

Gains

If your purchased property increases in value then the profit generated from its disposal realizes a capital gain.

Losses

If you dispose of your property for less than your cost basis it is classed as a loss. Losses can be deducted from any capital gains from other assets for the tax year (plus $3,000).

The math...

capital gains = selling price – purchase price (cost basis)

Seems simple but how do you determine cost basis?

For those who have purchased cryptocurrency at different times at different prices, determining the correct cost basis can be difficult. For example if you bought 3 BTC but on different dates at different prices and have sold 1BTC how do you decide which Bitcoin you sold?

There are a few approaches such as First In First Out (FIFO) and Last In First Out (LIFO) - you must choose which to use. Below, we explain the different cost basis calculation methods and show how they can affect your capital gain with an example.

The IRS do not provide guidance on cost-basis, although they prefer the FIFO approach. If you choose a different approach then you should get advice from a tax professional. It possible to tactfully choose an approach to optimize your taxes, but be careful in doing so – be consistent and do not switch between different methods as this could be seen as an attempt to avoid tax.

Cost basis methods

Example

On 09/22/2017 Dave buys 1 BTC for 2,000 USD. He buys 2 BTC for 5,000 USD on 01/06/2018 and then buys 1 BTC for 8,000 USD on 04/19/2018. On 05/03/2018 Dave sells 1 BTC for 4000 USD. To calculate his capital gains for this disposal, he must decide his cost basis.

TypeDateAmountPriceCost Basis
Buy09/22/20171 BTC2,000 USD2000 USD
Buy01/06/20182 BTC5,000 USD5000 USD
Buy04/19/20181 BTC8,000 USD8,000 USD
Sell05/03/20181 BTC4,000 USD???

Here’s how different cost basis methods would affect Dave’s capital gains…

LIFO - Last In First Out

Assumes the last assets you bought are the first assets you sold or exchanged. Using this method your gains are calculated by using the price you paid for the most recently purchased assets and the asset price at time of disposal. The last coin was bought on 04/19/2018 for 8,000 USD, so his cost-basis is 8,000 USD.

selling pricepurchase price (cost basis)=capital gains
4,000-8,000=-4,000 USD (loss)

FIFO - First In First Out (Preferred by the IRS)

Assumes that the first assets you purchased are the first assets you sold or exchanged. So using this method your gains are calculated using the price paid for the oldest assets in your portfolio, and the asset price at the time of disposal. The first coin was bought on 09/22/2017 for 2,000 USD, so his cost basis is 2,000 USD.

selling pricepurchase price (cost basis)=capital gains
4,000-2,000=+2,000 USD (profit)

SpecID

This method can be used alongside FIFO/LIFO to give more control. The investor specifies the assets they sold or exchanged to determine the cost basis. If the 3 crypto transactions were made to separate BTC wallets - he would have been able to use the cost-basis for the wallet that he sold from. Therefore, first wallet cost-basis; 2,000; second wallet; 5,000; third wallet; 8,000.

selling pricepurchase price (cost basis)=capital gains
First Wallet4,000-2,000=+2,000 USD (profit)
Second Wallet4,000-5,000=-1,000 USD (loss)
Third Wallet4,000-8,000=-4,000 USD (loss)

HIFO - Highest In First Out

Calculated using the highest purchase price first, generating the lowest total gain. The highest purchase price was on 04/19/2018 for 8,000 USD, so his cost basis will be 8,000 USD.

selling pricepurchase price (cost basis)=capital gains
4,000-8,000=-4,000 USD (loss)

LOFO - Lowest In First Out

Calculates this highest total gain by using the lowest purchase price first. The lowest purchase price was on 09/22/2017 for 2,000 USD, so his cost basis will be 2,000 USD.

selling pricepurchase price (cost basis)=capital gains
4,000-2,000=2,000 USD (profit)

What are my disposal proceeds?

It is vital to identify the correct disposal proceeds in USD for each disposal made but not always as straightforward as you might think. Read on to understand the treatment of each type of taxable disposal, but first a bit of guidance about non-taxable events…

Non-Taxable Events

Although these are non-taxable events or activity they can impact your tax liability...

Buying cryptocurrency

Buying cryptocurrency with fiat is not a taxable event but it is important to record all transactions so that you can calculate your cost-basis when you dispose of your crypto.

Moving tokens between wallets or accounts

Not a taxable event but you should ensure that these are not logged as dispositions (which would face capital gains tax) incorrectly.

HODLing

No gain or loss is recognized until the crypto is disposed of. Now and then it is worthwhile to check for any rewards such as airdrops which incur tax.

Taxable Events

Selling crypto for fiat money

Selling cryptocurrency for fiat money is classed as a taxable event and you are subject to capital gains tax. Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency.

If you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss.”
IRS

Using crypto to pay for goods or services

Any use of cryptocurrency to pay for goods and services is a taxable event. This could be for a crypto related service or for a “real world” transaction like using crypto to pay for a coffee.

Your cryptocurrency is held as a capital asset. In these circumstances the IRS views that you are effectively exchanging that capital asset for property or services and so you must recognize a capital gain or loss.

If you pay for a service using cryptocurrency, the gain or loss is the difference between the fair market value of the services you received and your adjusted basis in the cryptocurrency exchanged.

If you use virtual currency to purchase property, including goods as part of an arms length transaction the gain or loss is the difference between the fair market value of the property and your adjusted basis in the cryptocurrency exchanged.

Exchanging cryptoassets for a different cryptoasset

All crypto to crypto exchanges are classed as taxable events and are subject to capital gains tax. Your gain or loss is the difference between the fair market value of the cryptocurrency you received and your adjusted basis in the cryptocurrency exchanged.

This is frustrating for investors who have exchanged one cryptocurrency for another that has dropped in value because it means that they are still subject to the capital gains from the time of the transaction. If in this situation before the end of the tax year, you could sell this crypto at a loss and offset your gains.

Like-kind exchanges allow for exchange of property of like-kind or similar nature without tax being applied. Many traders wrongly assume that crypto to crypto transactions (such as exchanging some Bitcoin for Ethereum) meet this description. However, the IRS have clarified that like-kind exchanges are not applicable to cryptocurrency and exchanging crypto for crypto is subject to capital gains tax.

Selling cryptocurrency for Stablecoins is subject to capital gains tax. Stablecoins are backed by fiat currency but are not a fiat currency. Therefore the same rules apply as a cryptocurrency to cryptocurrecy exchange.

Example

  • Melanie buys 10 Token A for 20,000 USD in 2016.
  • In 2018 she trades her Token A (now worth 30,000 USD) for 10 Token B.
  • A few months later Token B’s value drops to 10,000 USD but Mel decides to hodl.
To work out her capital gains the trade of Token A for Token B is broken down into a sale and then a buy.
TypeDateAmountPriceCost basis
Buy01/01/201610 A20,000 USD20,000 USD
Sell01/07/201810 A30,000 USD20,000 USD
Buy01/07/201810 B30,000 USD30,000 USD

Capital gains = 30,000 (sell price) - 20,000 (cost basis) = 10,000 USD gain

Mel’s capital gains are 10,000 USD and she must pay tax on this even though Token B is now worth less.

If instead, Mel had sold her Token B at a loss she could have offset her gains.

TypeDateAmountPriceCost basis
Buy01/07/201810 B30,000 USD30,000 USD
Sell04/03/201810 B10,000 USD30,000 USD

Capital gains = 10,000 (sell price) - 30,000 (cost basis) = -20,000 USD (loss)

Mel would then have had an overall capital loss of -10,000 USD from this exchange that she could have used against other capital gains.


Donating cryptocurrency to a charitable organisation

If you donate cryptocurrency directly to a 501(c) charitable organization or an organisation that falls under Section 170(c) then you can avoid capital gains tax and claim a charitable deduction on your tax return of the fair market value at the date of donation.

The amount that can be deducted depends on how long you held the crypto for...

Crypto owned for more than 1 year

Your charitable deduction is equal to the FMV of the virtual currency at the time of the donation. Your deductible allowance is up to 30% of your Annual Gross Income.

Crypto owned for less than 1 year

Your charitable deduction is whichever is lowest:

  • your basis in the virtual currency or
  • the virtual currency’s FMV at the time of the contribution

Your deductible allowance is up to 50% of your Annual Gross Income.

You should get a receipt or written acknowledgement for all donations because the IRS may ask you to provide evidence. Any charitable donations of over $500 should be reported on Form 8283


Gifting cryptocurrency to another person

Cryptocurrency Tax for the Gifter

You can gift up to $15,000 per recipient each year before this becomes a taxable event. This can be gifted all at once or in more than one transaction but must not exceed the threshold.

If the total gifted to one person exceeds $15,000, the giver needs to file a gift tax return - Form 709.

Cryptocurrency Tax for the Recipient

Providing the gift does not exceed $15,000 you do not generate a taxable event until you dispose of the currency, at this point it should be treated as capital gains.

If the fair market value of the gift at the time you received it was equal to or more than the donors adjusted cost basis, then the cost basis for your disposal is the donors cost basis.

If the fair market value of the gift at the time you received it was less than the donors cost basis, then the cost basis for your disposal is:

For a gain – the donor’s cost basis

For a loss – the fair market value at the time you received the gift.

This approach ensures there is no sharing of losses in order to deduct against capital gains.

Example 1

  • Dave bought 10 LTC in 2016 for 200 USD.
  • In 2017 Dave gifted it to Ben, when the LTC was worth 500 USD.
  • As the gift was less than $15,000 Ben did not need to declare income and Dave did not have to file a gift tax return.
  • Ben sells the crypto for $500.
  • As the FMV was equal, to calculate his capital gains he takes on Dave’s cost basis of 200 USD to calculate his capital gains: 500 (sell price) - 200 (cost basis) = 300 USD (gain)

Example 2

  • Sam bought 100 BTC in 2014 for 10000 USD.
  • She gifted it to George in 2016, when the BTC was worth 8,000 USD.
  • Because this was less than the gifting threshold he did not need to declare income and Sam did not have to file a gift tax return.
  • George thought about selling the crypto in 2017 for 7,000 USD
  • As this was a loss, his cost basis would have been the FMV when he received the gift - 8,000 USD:
  • Capital loss = 7,000 (sell price) - 8,000 (cost basis) = -1,000 USD
  • George sold the crypto in 2018 for 12,000 USD
  • As this was a gain he takes on Sam’s cost basis of 10,000 USD to calculate his capital gains: 12,000 (sell price) - 10,000 (cost basis) = 2,000 USD

Income Tax and Cryptocurrency

Cryptocurrency that you have not “bought” can be classed as Income and reported under other income on Schedule 1 of your income tax return. Here’s a summary of how different incomes should be treated.

Receiving cryptocurrency from mining

Mining – hobbyist or business miner?

Tax and expenses are treated differently for those mining as a hobbyist and those who mine for business so you first need to determine your activity.

The IRS lists the following factors for determining whether activity (general not just crypto) is a business or a hobby, adding that all facts and circumstances should be considered:

  • If the activity is carried out in a business like manner with accurate records
  • Whether the amount of time and effort put into the activity shows intent to make it profitable
  • If you are dependent on the income for your livelihood
  • Whether any losses are out of your control (or normal in a start-up business)
  • Whether you change operating methods to improve profitability
  • Whether you (or your advisors) have knowledge to continue the activity as a successful business
  • Whether you have historical success (profit) in similar activities in the past
  • Whether your activity makes profit and how much
  • Whether there is expectation of future profit from appreciating assets used in the activity

Cryptocurrency Mining Tax for Hobbyists

Hobbyists should declare cryptocurrency received from mining as additional income on line 21 (other income) of Form 1040 Schedule 1. Expenses can be claimed on Schedule A (Itemized Deductions).

Hobbyists can deduct ordinary and necessary expenses within certain limits:

  • Ordinary expense is common and accepted for the activity
  • Necessary expense is appropriate for the activity

There is no guidance from the IRS, but expenses might include mining hardware, electricity costs, pool fees, internet costs and accounting costs.

Total deductions cannot exceed the amount of income made from mining. In this case there would be a loss but this cannot be deducted from other income.

Cryptocurrency Mining Tax for Businesses

If determined a business miner, both income and expenses should be reported for tax on Schedule C - Profit or Loss from Business or on applicable Business Returns (form 1065, 1120 or 1120S).

Income from a cryptocurrency mining business is subject to the 15.3% self-employment tax but business miners are eligible for a wider range of business related expenses that can be deducted from mining income. In addition to the list for hobbyists above this could also include home office costs, supplies and equipment.


Receiving cryptocurrency rewards

Staking

Networks operating a Proof of Stake mechanism reward participants for holding cryptocurrency whilst contributing to the operation of a blockchain.
Income from Cryptocurrency staking is treated similarly to mining income. Those who generate an income from staking should determine if their activity is classed as a hobby or a business and should report on Form 1040 Schedule 1 or Schedule C - Profit or Loss from Business respectively.

Masternodes

A Masternode hosts an entire copy of a coins ledger. Blockchain networks operating in this way reward the Masternode with cryptocurrency. As this crypto is received in the same way as mined crypto it is treated in the same way for tax.

Tax on Cryptocurrency Loans

The income generated from lending cryptocurrency for interest should be taxed in the same way as mining and staking.

You should refer to the approach on page 10 to consider if your lending activity is classed as a hobby or business and from there file income tax accordingly.

Borrowing Fiat Against Your Cryptocurrency

The IRS do not currently consider a fiat loan against cryptocurrency a taxable event. Because of this some choose this option as an alternative to selling cryptocurrency for fiat currency which would incur capital gains tax (and fees).

It is however a risk and if the crypto’s value falls dramatically many providers will liquidate. If this happens and there is a sale then this is treated as such and capital gains tax is applied as per the normal IRS rules.

Tax on Proceeds from ICOs / IEOs

Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs) are both methods of raising funds for a new cyrptocurrency offering. You use your crypto to receive the new tokens in return, the only difference is where the coin/token is offered. In an ICO basically anyone can participate but in an IEO only members of the exchange can. The type of tokens received fall into two categories:

Utility tokens - these provide the holder with access to particular goods or services on a platform usually using Distributed Ledger Technology (DLT) – such as Ethereum. Security tokens - these may provide the holder with particular interests in a business, including debt due by the business or a share of profits in the business.

The treatment for tax is the same. The IRS recognise that a taxable event occurs when you exchange one Cryptocurrency for another. In an ICO/IEO you may receive the tokens in the future, so it is on this date that capital gains are realised. Your cost basis however relates to the date when you participated in the ICO/IEO.

Example

  • Sam exchanged 50 Token A for 1000 Token B on 03/22/2018
  • Sam received 1000 Token B on 04/02/2018
  • The cost-basis for Token B will be the fair market value of 50 Token A on 03/22/2018

Forks

Some cryptoassets operate by consensus amongst that cryptoasset’s community. When a significant minority of the community want to do something different they may create a ‘fork’ in the blockchain.

There are two types of forks, a soft fork and a hard fork. The blockchain for the original and the new cryptoassets have a shared history up to the fork. If an individual held tokens of the cryptoasset on the original blockchain they will, usually, hold an equal numbers of tokens on both blockchains after the fork.

A soft fork

A soft fork updates the protocol and is intended to be adopted by all. No new tokens, or blockchain, are expected to be created and there is no impact on the tax position.

A hard fork

A hard fork is different and can result in new tokens coming into existence. Before the fork occurs there is a single blockchain. Usually at the point of the hard fork, a second branch (and new cryptoasset) is created.

The IRS have stated that new coins received after a hard fork are taxable and should be treated as ordinary income equal to the fair market value of the new cryptocurrency when it is received.

Airdrops

An airdrop is when an individual receives an allocation of tokens or cryptoassets. Examples of airdrops may be marketing campaigns or involve tokens being provided automatically due to other tokens being held or where an individual has registered to become eligible to take part in the airdrop.

Until 2019 there was little guidance from the IRS about how tokens received from airdrops should be taxed, then it was generally considered that because airdrops are normally low value and similar to a gift they should be treated tax like a gift. This meant no tax up to a value of $15,000, unless the airdrop could be considered an incentive (e.g. the amount received related to an amount already owned of that coin) in which case it should be declared as additional income.

An update from the IRS in 2019 states that airdrops should now be taxed as ordinary income. The income to be taxed is the fair market value of the airdropped coins at the time they are received.

This is a controversial decision by the IRS when we consider that the receiver often has no control over the airdrop in the first place or might not even know they have received the reward. As the IRS are now beginning to work with the crypto industry to get a better understanding of crypotcurrency we expect to see more detailed (and hopefully more favourable) guidance on crypto activity like airdrops in the future.

Example

  • Sean receives 1 Token A on 15.03.2018. It has a Fair Market Value (FMV) of $10 so he pays ordinary income tax on $10.
  • Sean sells Token ABC for $11. The cost-basis is $10 - the FMV of the token when he recieved it on 15.03.2018.
  • His capital gains calculation is: 11 USD – 10 USD = 1 USD (gain)

For airdrops and hardforks the IRS classes new cryptocurrency as received when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency. If there is a delay in the receipt of the cryptocurrency - for example if your exchange does not yet support the airdropped currency then a taxable event does not occur until you have full control over the coins.

Tax on Tokenswaps and Mainnet swaps

This is where a cryptocurrency moves to a different technology. Providing all tokens on the original blockchain are destroyed and the holder receives the same value of tokens on the new blockchain a taxable event does not occur.


Deductibles and Reducing Capital Gains

It is possible to minimise your capital gains tax and a couple of methods have been mentioned throughout this guide. Here is a summary…

Offset your losses

You can deduct your capital losses against capital gains. This applies to all types of capital gains, so you can use them against property that is not cryptocurrency, for example if you sold your house for profit.

You must always offset your losses against your capital gain first, but if your losses are higher then you can also use those remaining against your income up to $3,000 per year. Your capital losses can also be carried over to the following tax year.

If your portfolio has made large gains during the tax year but decreased in value then you could apply a tax loss harvesting strategy to realise your losses and offset your gains.

Tax Loss Harvesting

If you have purchased cryptocurrency that has since nose-dived in value then you can strategically sell it to realise your losses and then buy back straight away to offset your gains. This doesn’t seem very legitimate and there is a rule called the Wash Sale Rule to prevent this happening for stocks and shares. However, at the moment the IRS classes Cryptocurrency as property and there is no such rule for them.

Cryptocurrency Trading Fees

There are some incidental costs of purchase and disposal that can be deducted from capital gains. There is not yet much IRS guidance on what is acceptable so best practice is to assume that if the cost relates to the acquisition and disposal of cryptoassets then it is allowable. Therefore Cryptocurrency Trading fees are deductible however we would not deduct transfer fees.

Mining Expenses

Different rules apply depending on if the miner identified as a hobbyist or business miner.

Hobbyist miners

Hobbyist miners can only deduct expenses to the value of the mining income. They can deduct ordinary and necessary hobby expenses within certain limits:

  • Ordinary expense is common and accepted for the activity.
  • Necessary expense is appropriate for the activity.

Deductions should be itemized on the tax return. If the expenses are higher than the mining income then there is a loss but this cannot be deducted from other income.

Business miners

Business miners can deduct the expenses allowed to hobbyists as well as additional business expenses. These should be reported on Schedule C. If the business operates at a loss they may be able to use their losses to offset income.

Stolen/Hacked Cryptocurrency

Legislation changed for tax year 2017 and onwards - losses as a result of stolen cryptocurrency are not deductible unless attributable to a federally declared disaster.

if you are an individual, casualty and theft losses of personal-use property are deductible only if the losses are attributable to a federally declared disaster”
IRS

Prior to 2017, a victim may be able to claim a capital loss if they can prove they did hold the cryptoasset at some point and yet there is no chance of recovering the cryptoasset.


Reporting Income and Gains to the IRS and Paying the Tax

Capital Gains

You should calculate your capital gains using your chosen accounting method and report these on Form 8949 and Form 1040 (Schedule D) of the tax return.

Form 8949

Lists all of your transactions that qualify as a capital gain or loss with the date acquired, the date of disposition, your proceeds (FMV), your cost basis and your gain or loss. At the bottom of the form you need to declare your total proceeds, cost basis and gain/loss.

Form 1040 Schedule D

Summarizes your total capital gains and losses, taking into account if they were held short term or long term.

How Recap can help

Recap securely manages your cryptocurrency data and calculates your gain/loss based on your chosen cost basis method. You can download a ready to file Form 8949 and file yourself or you can pass our report to your CPA and they will be able to complete the Tax Return and advise on your tax position, based on your specific circumstances.

Capital Losses

Capital losses can be deducted against any capital gains in a tax year. For example if you sell your house and make a profit then you can use any losses incurred from cryptocurrency to reduce your taxable gains.

If your capital loss is higher than your capital gains then you can use it to offset ordinary income up to $3,000 per year. If you have more than $3,000 in losses then the remaining amount rolls over to the next year. As income is taxed at a higher rate than capital gains tax any losses must be used against capital gains first. You also cannot choose to pay capital gains tax and roll capital losses over to the following year; you must use any losses to offset capital gains in the current tax year first.

All capital losses should be reported on Schedule D of your tax return. It is important to do this as this ensures they can be ‘claimed’ to use against future gains.

Income

Cryptocurrency classed as Income should be reported under “Other income” on Schedule 1 of your income tax return.

Tax Deadline

The deadline for filing your taxes to the IRS is normally April 15.

There are two penalties - one for filing late and one for paying late. They can add up fast. Interest accrues on top of penalties. To avoid penalties you can apply for an extension of 6 months by submitting Form 4868 before the tax return deadline. (In 2020 this should be applied for if you will miss the amended July 15 deadline - you will be granted a 3 month extension).

If you need to amend a previous tax return you can do this using Form 1040X.

Keeping Records of Activity

One of the most important messages to come from the sudden worldwide regulation on cryptocurrency is the importance of keeping records of all activity.

You should be responsible for your own data and be proactive in exporting a copy from exchanges and wallets that you use on a regular basis.

Additionally keeping this data even after submitting tax returns for the relevant year is vital to aid any IRS compliance checks, find cost basis’ for future tax returns and allow you to adapt to any changes in IRS guidance.


For More Information…

We hope that you found this guide helpful – if you have any more questions, feel free to reach out to us on twitter @recap_io


Disclaimer: The information set out in this guide is intended to provide you with guidance on US cryptocurrency taxation. The information set out in this guide is not to be construed as accounting, tax or legal advice. Please speak to a qualified tax and/or legal professional about your specific circumstances before acting upon any of the information in this guide.

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