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US Crypto Tax: How to Calculate IRS Taxes Due on Cryptocurrency Investments, Profits

Last Updated October 31, 2023 2:52 PM
Josh Adams
Last Updated October 31, 2023 2:52 PM
Key Takeaways
  • US taxpayers are due to file their returns by April 2024.
  • Experts agree it’s harder than ever to hide your taxable gains.
  • We’ve compiled a short, simple guide for you to start off with.

With governments keener than ever to raise revenue from crypto assets, it has never been harder to hide your crypto from the taxman. And just to make sure: crypto assets are most definitely taxable. And President Biden has recently doubled the staffing  of the Internal Revenue Service (IRS), so don’t count on them not catching you.

However, many remain confused on how digital assets like Bitcoin (BTC) and Ethereum (ETH) are taxed. This guide breaks down everything American crypto traders need to know to calculate taxes owed and remain compliant under complex IRS rules.

Long Term vs. Short Term?

The IRS considers crypto to be property for federal tax purposes. As such, capital gains tax applies when cryptocurrencies are sold for a profit, just like stocks or real estate. The specific rate you pay depends on whether gains are short-term or long-term.

Short-term capital gains arise when crypto is held for one year or less before being sold or traded. These gains are taxed as ordinary income at your marginal rate, which could be as high as 37% depending on your total taxable income.

Long-term capital gains apply when cryptocurrency is held over one year before selling. These enjoy special tax rates of 0%, 15% or 20% – much lower than short-term rates. So holding crypto long-term provides a significant tax advantage.

When and how much to pay on your US Crypto Taxes.
Source: tokentax.co

Taxable Events And Record-Keeping

Whenever you dispose of crypto in a taxable event like trading, selling, spending, gifting, etc., you must calculate the capital gain or loss incurred. You can calculate this by subtracting the sale price from your cost basis, which comprises the original purchase price and any fees you paid.

You can use losses to offset capital gains from other investments, along with up to $3,000 of regular income annually. Remaining losses carry forward to future tax years.

It’s critical to maintain thorough records of all cryptocurrency transactions in order to accurately report taxes. Kraken, a cryptocurrency exchange based in the US, has recently had to hand over details of thousands of its customers to the IRS. Meticulous documentation (and disclosure) can help avoid trouble later on.

Furthermore, for each taxable crypto event, you must complete IRS Form 8949 listing details like the asset name, dates acquired and sold, proceeds, cost basis, and gain/loss. This form comes with Schedule D of your Form 1040 tax return.

Importantly, in all jurisdictions, including the U.S, it is up to the taxpayer to prove they did not commit tax fraud, and not the other way around.

Staking, Mining And Strategy

Any crypto mining proceeds, staking rewards, interest income, or payments received for goods/services must also be reported on Schedule 1 of Form 1040 under “Additional Income and Adjustments to Income.”

If working manually is too much of a chore, consider using specialized crypto tax software and enlisting a savvy certified public accountant to ensure full compliance. Penalties for mistakes or non-compliance are a federal offence, and can be severe. Penalties include up to 75% of the tax due (maximum $100,000) and 5 years in jail.

Although, tax optimization is perfectly legal and highly advisable in crypto. Holding coins over a year to get lower long-term capital gains rates is a prime strategy, whilst loss harvesting  and strategic charitable donations  also lower tax bills. 

Cryptocurrency taxation is a challenge, but every US crypto investor must take it seriously. Follow the guidance above, keep immaculate records, and obtain expert help as needed. With the right moves, your tax planning will pay off for years to come.

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