If you’ve received, mined, invested, or simply taken an interest in virtual currencies, it’s important to understand how these transactions affect your taxes. We’ve outlined the rules for reporting your cryptocurrency, determining fair market value, calculating capital gains and losses, and more in this article.
Do I have to report cryptocurrency on my taxes?
If you mine, receive, trade, sell, or exchange cryptocurrency during the year, you’ll need to report that activity on your tax return.
When you file your taxes with TaxSlayer, you’ll answer a question about any transactions related to cryptocurrency. This information will be entered on your IRS Form 1040. Note—you’ll need to report your transactions in U.S. dollars, which means converting the value of your cryptocurrency to dollars at the time you buy, sell, mine, or use it.
How is cryptocurrency taxed?
If your employer or client pays you in cryptocurrency, it’s considered taxable income and is subject to income tax withholdings. The fair market value of the cryptocurrency (in dollars) should be reported on your W-2.
If you earn money by mining virtual currency, it’s considered self-employed income and is subject to the self-employment tax.
Once you have the cryptocurrency, you can hold onto it without paying taxes on its value. Any cryptocurrency that you’re holding is treated as property. You’ll only need to pay taxes when you have a taxable event that results in a gain. If you sell, trade, convert, or dispose of your cryptocurrency in any way, that is a taxable event. A gain means that the currency has increased in value since you first bought/received it.
If you own your cryptocurrency for 365 days or less, you’ll pay short-term gains taxes. Short-term gains are taxed at the same rates as your regular income. See 2021 federal income tax rates.
If you own the cryptocurrency for longer than 365 days, you’ll pay long-term gains taxes. Learn how capital gains are taxed.
Do I have to report a capital gain or loss if I buy something with cryptocurrency?
Yes. When you use your virtual currency to make a purchase—big or small—the IRS considers it a taxable event. Here’s an example of how it works:
Let’s say you receive $500 worth of cryptocurrency from a client on July 1. Six months later, on December 1, the fair market value of the currency has increased to $1,000, and you decide to spend that on a new computer.
In this example, two taxable events occurred:
- You were paid in cryptocurrency
- You made a purchase with your cryptocurrency
Now, when you file your tax return, you’ll report the $500 you received from your client as ordinary income. Then, you’ll report a short-term capital gain of $500* because the currency increased in value.
*After you received the payment from your client, you held onto the cryptocurrency for six months. This allowed it to increase in value by $500. As long as you were holding it, the cryptocurrency was not taxable. But when you bought the computer, that created a taxable event, so you’ll report your $500 gain.
What kind of records do I need to be able to report cybercurrency on my taxes?
If you mine, buy, or exchange cybercurrency, you might not receive an official tax form—like a 1099-B or 1099-K. But the IRS is paying more attention to activities involving cybercurrency, so it’s important to keep your own records.
You’ll need to be able to account for:
- the fair market value on the date you mined, bought, or received it
- the fair market value on the date you sold, spent, used, or exchanged it
How do I calculate gain or loss from the sale of cryptocurrency?
Your capital gain or loss is the difference between the fair market value of the virtual currency on the date you used it (traded, exchanged, sold, etc.) and the amount you originally paid for the crypto.
How do I determine the fair market value of my cryptocurrency?
The IRS will accept the fair market value “determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time.”
What should I report for taxes if I transfer my virtual currency from one digital wallet/account to another?
Transferring cryptocurrency is a non-taxable event. You won’t have a gain or a loss
, because you’re still holding the currency. So, you don’t need to report this activity on your return.
My virtual currency lost value. Can I write it off?
The value of virtual currencies can fluctuate dramatically. If yours lost value since you acquired it, you could deduct the loss up to $3,000. Note: You won’t report a loss until there is a taxable event—such as a sale. If you’re holding onto the currency even though it has lost value, you won’t report or deduct that loss.
Can I report virtual currency using TaxSlayer?
Yes! For more info about reporting cybercurrency using our program, check out this support article.
To learn more about cybercurrency and taxes, visit the IRS website.
This article is up to date for tax year 2021 (returns filed in 2022).