Crypto taxes: What is cryptocurrency and how is it taxed?

While the cryptocurrency ecosystem has been around for more than a decade, it has soared in popularity in the last few years. Even if you recently invested in crypto, you may still be wondering, “what is cryptocurrency exactly and how is crypto taxed?”

Whether you’ve purchased cryptocurrency to diversify your portfolio and generate crypto capital gains or you just wanted to explore this newer investment type, it’s useful to have a foundational understanding of what you’re investing in.

Additionally, it’s important to understand key details about cryptocurrency tax, like crypto capital gains tax, crypto tax rate and the crypto tax forms—before tax time arrives.

In this article, we’ll cover the basics of what cryptocurrency is, and what you need to know about cryptocurrency tax, including a breakdown of your crypto tax considerations by crypto transaction type.

What is cryptocurrency and how does it work?

A cryptocurrency is a digital or virtual currency that exists on multiple computer systems worldwide. Cryptocurrencies have no central storage, nor are they issued by any central authority. This sets cryptocurrency apart from other forms of investment. For some, that’s the appeal of buying into cryptocurrency.

This decentralization brings to light a few key aspects of virtual currency. For one, cryptocurrencies are designed to be tamperproof through the use of cryptography, which encodes transaction information between parties, ensuring that the data remains secure and unaltered during transmission, thereby maintaining the integrity and trustworthiness of the entire transaction process.

Here’s how cryptocurrency works

Cryptocurrency payment transactions are generally tracked on a platform called the “blockchain.” That leads us to a couple of terms that will be important for tax purposes:

• On-chain transactions are transactions stored on the blockchain.
• Off-chain transactions are transactions that are not stored on the blockchain

Some examples of cryptocurrencies are Bitcoin, Litecoin, Ethereum, and Dogecoin to name a few.

How does cryptocurrency gain value?

Simply stated, it is a matter of supply and demand. As demand increases, the value of that currency will also increase. By contrast, if demand falls, the value will also decrease.

That said, the value of your personal holdings can go up and down as supply and demand shift.  

How do cryptocurrency transaction fees play into it?

While it’s not likely to be your primary driver for your investment decisions, you should keep in mind that fees—and taxes—may impact your bottom line. The type of fees you pay will vary from one type of currency to another.

And the tax implications? Well, that’s where you can rely on H&R Block to explain the essentials you should know about. Let’s jump into it!

Need help filing your cryptocurrency taxes? No matter if you work with an H&R Block tax professional or use H&R Block Online Premium, we’re here for you!

*Comparison based on price on TurboTax.com as of 3/7/24. TurboTax is a registered trademark of Intuit, Inc.

Cryptocurrency taxes

Like other assets, crypto investments and digital assets may come with tax obligations. But, as we’ve mentioned above, crypto has unique features that makes it stand apart from other investment types in the eyes of the Internal Revenue Service. You could say that crypto taxes follow their own beat.  

Cryptocurrency vs. stocks

Sometimes it’s easier to see what something is by comparing it to what it’s not. For instance, let’s compare the tax implications between stock assets and cryptocurrency. Review the table below to understand the key tax differences between cryptocurrency vs. stocks for individuals under current U.S. tax law.

Factor	Stocks	Cryptocurrency
Classification	Capital asset; covered security requiring stock brokers to report information to the IRS	Capital asset; covered security requiring digital asset brokers to report information to the IRS
Tax rate	Taxed as either a short-term or long-term capital gain depending on the holding period	Variable – can be taxed as a capital asset (investment) or wages (services received).   See the next section.
Taxpayer reporting requirements	Only required to report upon selling	Several activities require reporting beyond selling crypto. See the next section.
Tax forms	Investment firms must report shares sold on Form 1099-B to the IRS and the taxpayer	Some exchanges may issue Forms 1099-K or 1099-B.*

*Read below to understand how a new law will change cryptocurrency tax forms, including new Form 1099-DA, Digital Asset Proceeds From Broker Transactions.

How is cryptocurrency taxed?

If ever there were a time to say, “it depends”—this is it. Answering the question, “Do you have to pay taxes on crypto?” will depend largely on what you do with crypto assets. Below we break out the tax treatment for the following scenarios: buying, exchanging, gifting, getting paid with cryptocurrency and selling it.

Before we begin, we should define a couple of terms: 

• Basis – The amount of capital investment in a particular property for tax purposes.
• Long-term vs. short-term capital gains – When you sell a capital asset for more than what you purchased it for, it’s called a capital gain. The type of gain is determined by how long you hold that asset. A short-term capital gain refers to the profits from assets you held for one year or less; while long-term capital gain refers to the profit from assets you held for over a year.

Buying crypto

Buying cryptocurrency is not a taxable event by itself, so there are no tax implications or cryptocurrency tax reporting requirements when you purchase crypto. However, for your records, you’ll want to know your purchase price to avoid paying unnecessary taxes down the line. Here’s where on-chain and off-chain transactions matter.

If you purchase cryptocurrency, the basis of your crypto (i.e., the purchase price) is determined based on whether it’s an on-chain transaction or an off-chain transaction.

• For an on-chain transaction, the exchange will be valued in U.S. dollars as of the time and day the transaction took place, based on the amount recorded on the block chain.
• For an off-chain transaction, you must determine the fair market value at the time and date the transaction occurred as if it were recorded on the blockchain. You can use a cryptocurrency or blockchain explorer to determine this value, and it will be accepted by the IRS.

If you don’t know the published value, you will need to use the fair market value of the property or services exchanged to determine the value of the crypto you purchased. For example, if you exchanged $100 for cryptocurrency, the fair market value of the money you exchanged will determine the value of the crypto at $100 (i.e., your basis).

Any cryptocurrency transaction fees you pay at the time of purchase can be added to your cost basis. When you eventually sell your crypto, this will reduce your taxable capital gain by the same amount (ultimately reducing the capital gains tax you pay).

Exchanging crypto for property

If you exchange cryptocurrency for property, you’ll have immediate tax consequences in that tax year. You must subtract the fair market value of the property received from the basis of the crypto you exchanged. This will show you if you have a capital gain or loss.

Here’s an example:

• Anjali pays $10,000 for a certain amount of cryptocurrency and holds it for 10 months as it grows in value.
• She then exchanges the same amount of cryptocurrency to pay for a piece of land with a fair market value of $12,000 (unimproved land for tax purposes).
• The difference between $12,000 (the exchange price) and $10,000 (her basis) is a $2,000 short-term capital gain. (It’s a short-term capital gain because she held the crypto for under a year.) 

Exchanging crypto for goods/services

If you exchange cryptocurrency for goods or services, you’ll be taxed on the fair market value of the full amount of cryptocurrency minus your cost basis. The person providing the services in exchange for cryptocurrency will be taxed on the fair market value of the cryptocurrency as if it were ordinary income.

Here’s an example:

Zach pays Elias $50 worth of cryptocurrency to fix a computer. Elias does not own a computer repair business.

• Elias will recognize $50 of ordinary income for the cryptocurrency he received.
• Zach purchased the cryptocurrency he paid to Elias for $20 as an investment four years back. Zach will recognize $30 of long-term capital gain.

Note: In addition to treating the amount as ordinary income, self-employed taxpayers will need to pay self-employment tax on the amount of cryptocurrency received for goods/services.

Gifting crypto

If you receive cryptocurrency as a gift, you won’t have any immediate income tax consequences. You may also have the same basis and holding period as the person who gave it to you. Crypto gifts can be subject to gift tax and generation skipping tax if the value is above the annual and lifetime exclusion amounts.

Getting paid with crypto 

If you are receiving your wages in cryptocurrency, your employer should treat the fair market value of the crypto you receive similarly to other wages. This means it will be subject to various taxes and withholdings, just like traditional wages.  Specifically, the fair market value of the cryptocurrency you receive will be subject to Social Security tax, Medicare tax, Federal Unemployment Tax Act taxes, and federal income tax withholding. Depending on your state, the amount may also be subject to state tax rules.

Selling crypto

When you sell your cryptocurrency, you’ll owe taxes on any capital gains that result from the sale. As mentioned above, a capital gain occurs when you sell an asset for more than you purchased it. 

You may be wondering if cryptocurrency fees are tax deductible. While there’s not a specific deduction, any cryptocurrency transaction fees you pay when you sell your cryptocurrency can be subtracted from your proceed amount. But remember, the person purchasing the crypto from you will add the fees to the cost basis of the purchased crypto.

Here’s a crypto capital gains tax example:

• Carolina pays $15,000 for a certain amount of cryptocurrency and holds it for two-years as it grows in value.
• She then sells the same amount of her cryptocurrency for $17,000 and she incurs fees of $500. She can subtract the fees ($500) from her proceeds ($17,000), and the total value she received that has to be reported is $16,500.
• The difference between $16,500 and $15,000 (her basis) is a $1,500 long-term capital gain (It’s a long-term capital gain because she held the crypto for over a year). 

Here’s a quick breakdown of a few more crypto scenarios you may encounter:

• Transferring crypto to yourself: Transferring crypto between wallets or accounts you own is not taxable.
• Trading one crypto for another: If you make a crypto trade for another type of cryptocurrency, the IRS considers it a taxable event.
• Mining crypto: If you earn cryptocurrency by mining it, it’s considered taxable income reported on Form 1099-NEC at the fair market value on the day you received it.
• Donating crypto: If you make a crypto donation to a qualified tax-exempt charity or non-profit and itemize your deductions, you may be able to claim a charitable deduction on your tax return. You can typically deduct the fair market value of your crypto at the time the donation was made, and you won’t have to pay capital gains tax.

*Comparison based on price on TurboTax.com as of 3/7/24. TurboTax is a registered trademark of Intuit, Inc.

What is the crypto tax rate?

The federal crypto tax rate is between 0% and 37% depending on how long you held the cryptocurrency and under what circumstances you received your cryptocurrency.

• Ordinary income rates are between 10% and 37% depending on your income tax bracket.
• Short-term capital gain rates are between 10% and 37% depending on your income tax bracket.
• Long-term capital gain rates are between 0% and 20% depending on where your income level is in a special bracket for long-term capital gains*.

* High-income earners may be subject to an additional 3.8% tax called the net investment income tax on both short- and long-term capital gains.

Review details for your income tax bracket and rates.

Are crypto losses tax deductible?

While not tax deductible, cryptocurrency losses can be used to offset other capital gains. Learn more about offsetting taxable gains in our article on tax loss harvesting.

How does the Infrastructure Investment and Jobs Act affect cryptocurrency taxes?

In late 2021, the Infrastructure Investment and Jobs Act was signed into law, bringing significant changes to the tax reporting requirements for cryptocurrency transactions. 

According to the new rules, cryptocurrency exchanges will be required to send a tax form to both the IRS and to the taxpayer, detailing the sale of cryptocurrencies. This change aims to improve transparency and ensure proper tax compliance for cryptocurrency transactions.

However, the implementation date for this new rule has been delayed. This new requirement to issue Form 1099-DA is scheduled to take effect beginning January 1, 2025 (for tax forms issued during 2026). As more information becomes available, we’ll provide additional details to keep you informed about when these changes will take place and how they might impact your tax reporting obligations. It’s important to stay updated on these developments to ensure you remain compliant with the latest tax regulations.

To see how crypto tax reporting works now, check out the next section.

How to report cryptocurrency on taxes: Using crypto tax forms

To figure out how to report cryptocurrency on taxes, gather and refer to the tax forms sent to you while filing your income tax return along with additional tax forms.

While none of these are exclusively a crypto tax form, any of them may be used to report your crypto taxes.  

Tax forms you might receive:

• Forms 1099-K and 1099-B: Depending on your activity and the exchange you use, you may receive either Form 1099-K or Form 1099-B to report your crypto transactions.
• Forms 1099-NEC: You may receive Form 1099-NEC if you are an independent contractor paid in cryptocurrency for performing services.
• Form 1099-MISC: You may receive Form 1099-MISC reporting crypto rewards or staking rewards.
• Forms W-2: If your employer pays your wages in cryptocurrency, you will receive a Form W-2.  

Tax forms you must complete:

• Form 8949: You may need to complete Form 8949 to report any capital gains or capital losses. Be sure to use information from the Form 1099-B you received when completing Form 8949. If you receive a Form 1099-K, be sure to report both your basis, your gains and losses for your cryptocurrency transactions on Form 8949.
• Form 1040:
  • If you did have capital gains or capital losses, you’ll also record them on your Form 1040/Schedule D.
  • If you received wages in cryptocurrency, you’ll record that amount as wages on your Form 1040.
  • If you were paid for services in cryptocurrency as a contractor or self-employed individual, you’ll record that amount as either other income on Sch 1 or income on Schedule C.
  • Additionally, a checkbox on Form 1040 will require you to state yes or no to the following question: “At any time during 2024, 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 financial interest in a digital asset)?”

Get help reporting crypto taxes from H&R Block

Sound complicated? It can be, but that’s why we’re here.

• Working with an H&R Block tax pro: Our tax pros speak the tricky language of taxes and can help with your cryptocurrency tax reporting . Find an H&R Block tax pro.  
• Filing your taxes on your own: If you’re using H&R Block Online Premium, we’ll walk you through what you need to know. If you get stuck, help is just a few clicks away.