Let’s go over a few scenarios to make this clearer.
Bought and HODL’d
The tax situation is straightforward if you bought crypto and decided to HODL. The IRS does not require you to report your crypto purchases on your tax return if you haven't sold or otherwise disposed of them. Like buying and holding onto shares of stock, the tax event occurs when you sell.
Earned crypto as payment
If you receive crypto as payment for goods or services, it's a different story. The IRS requires you to report this as income, and the taxable amount is the value of the crypto at the time you received it. So, if you're a freelance graphic designer and a client pays you in Bitcoin, you need to report the value of that Bitcoin as income.
Received crypto from mining and airdrops
The IRS will consider mined crypto as taxable income based on its value in the market when you receive it. Similarly, receiving cryptocurrency from an airdrop also counts as income and must be reported.
Received crypto from trading and swapping
If you exchange one type of cryptocurrency for another - say, Bitcoin for Ethereum - the IRS views this as a taxable event. Here, the difference in price between the two at the time of the trade would need to be reported as a capital gain or loss.
Earned interest on crypto
If you earn interest on your crypto by lending it out, this is considered taxable income. The amount you report should be the amount of interest earned when it was received. Often crypto lending platforms will have a tax portal where you can find the numbers.
Hard forks
If you receive new coins from a hard fork, this is a taxable event. The new coins are considered income, with the amount to report being the value of the new coins at the time they are received.
Keep track of your tax obligations with Bitwave
Navigating the labyrinth of crypto taxation can be daunting, given the complexity of transactions, the need for precise calculations, and the constantly shifting tax laws. Crypto accounting software, like Bitwave, transforms this challenge into a manageable task. It helps track your multiple currencies, wallets, and exchanges, automates the computation of cost basis and capital gains or losses when you sell, and ensures compliance with the latest regulations. Additionally, it enhances your audit resilience by maintaining a clear trail of all your transactions. Don't let crypto tax complexities dampen your digital asset experience. Try Bitwave today and streamline your crypto tax management.
Photo by Shubham Dhage on Unsplash
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
FAQs
The IRS does not require you to report your crypto purchases on your tax return if you haven't sold or otherwise disposed of them. Like buying and holding onto shares of stock, the tax event occurs when you sell.
Do you have to report crypto even if you don't sell? ›
Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell. If you earned crypto through staking, a hard fork, an airdrop or via any method other than buying it, you'll likely need to report it, even if you haven't sold it.
Do I have to answer IRS crypto question? ›
Everyone must answer the question
The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.
Will the IRS know if I don't report crypto? ›
If, after the deadline to report and any extensions have passed, you still have not properly reported your crypto gains on Form 8938, you can face additional fines and penalties. After an initial failure to file, the IRS will notify any taxpayer who hasn't completed their annual return or reports.
How do I sell crypto without IRS knowing? ›
There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Do I have to pay tax for withdrawing crypto? You may or may not pay taxes depending on the nature of your 'withdrawal'.
Do you have to claim crypto on taxes if you don't cash out? ›
As long as you hold digital assets you purchased with fiat currency without converting them into cash or other crypto, you are not required to report or pay taxes on any potential gains to the IRS.
What is the penalty for not reporting crypto gains? ›
Not reporting your cryptocurrency transactions can result in civil fines and penalties of up to $100,000 and criminal sanctions of up to five years in prison.
What triggers IRS audit crypto? ›
Crypto audit triggers include failure to accurately report transactions and income, large transactions or significant gains, inconsistencies or discrepancies in reporting, use of privacy-focused coins, and participation in offshore exchanges.
How does IRS check crypto? ›
More recently crypto exchanges must issue 1099-K and 1099-B forms if you have more than $20,000 in proceeds and 200 or more transactions on an exchange the exchange needs to submit that information to the IRS.
When to report crypto on taxes? ›
When you dispose of your crypto by trading, exchanging, or spending it, you'll need to report these transactions on Form 1040, Schedule D. You may also need to report this activity on Form 8949 in the event information reported on Forms 1099-B needs to be reconciled with the amounts reported on your Schedule D.
US taxpayers must report any profits or losses from trading cryptocurrency and any income earned from activities like mining or staking on tax return forms, such as Form 1040 or 8949. Not reporting can result in fines and penalties as high as $100,000 or more severe consequences, including up to five years in prison.
Which exchanges don't report to the IRS? ›
Certain cryptocurrency exchanges and apps do not report user transactions to the IRS. These include decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms that do not have reporting obligations under US tax law.
Can the IRS see my Coinbase wallet? ›
Under some circ*mstances, Coinbase does report to the IRS, but that doesn't imply the individual taxpayer is not responsible for reporting. Coinbase's reports to the IRS can include forms 1099-MISC for US traders earning over $600 from crypto rewards or staking in a given tax year.
Do I report crypto if I didn't sell? ›
If you received crypto as income, you do need to report it as income, even if you didn't sell it.
How to pay zero taxes on crypto? ›
9 Ways to Legally Avoid Paying Crypto Taxes
- Buy Items on BitDials.
- Invest Using an IRA.
- Have a Long-Term Investment Horizon.
- Gift Crypto to Family Members.
- Relocate to a Different Country.
- Donate Crypto to Charity.
- Offset Gains with Appropriate Losses.
- Sell Crypto During Low-Income Periods.
If you own cryptocurrency for one year or less before selling, you'll pay the short-term capital gains tax. Short-term capital gains taxes are higher than long-term capital gains taxes.
Do I need to declare crypto? ›
Like stocks and shares, the value (in 'normal' currency) of cryptoassets can go up or down. HMRC do not consider cryptoassets to be currency or money, or that buying or selling cryptoassets is gambling. This means that, in HMRC's view, profits or gains from buying and selling cryptoassets are taxable.
Can you lose money in crypto if you don't sell? ›
You DO NOT lose money until you sell
This is an important tenet to remember!. Especially when you are playing in a speculative market like crypto currencies. You have to decide if you are investing or speculating. There is money to be made on both sides of this, but you have to be clear what your strategy is.
Do you have to pay taxes on crypto if you buy it? ›
The IRS treats cryptocurrencies as property for tax purposes, which means: You pay taxes on cryptocurrency if you sell or use your crypto in a transaction, and it is worth more than it was when you purchased it. This is because you trigger capital gains or losses if its market value has changed.
What crypto exchanges don't report to the IRS? ›
Certain cryptocurrency exchanges and apps do not report user transactions to the IRS. These include decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms that do not have reporting obligations under US tax law.
