Do you have to claim crypto income?
U.S. taxpayers are required to report crypto sales, conversions, payments, and income to the IRS, and state tax authorities where applicable, and each of these transactions has different tax implications. In this article, you'll learn when your crypto is taxed and how your activity might affect your taxes.
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.
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.
With relatively few exceptions, current tax rules apply to cryptocurrency transactions in exactly the same way they apply to transactions involving any other type of asset. One simple premise applies: All income is taxable, including income from cryptocurrency transactions.
The IRS has several penalties for the lack of reporting the right forms for crypto and for making mistakes on your tax return regarding digital assets. In the worst-case scenario, investors who fail to report their taxes and are guilty of tax fraud could face fines of up to $100,000 and up to five years in prison.
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.
For example, if you buy $1,000 worth of Bitcoin and later sell it for $1,200, you'd need to report this $200 gain on your taxes. The gain, whether it's a short-term or long-term capital gain, will depend on how long you've held the cryptocurrency.
“Truthfully, there are so many ways the IRS knows you've had something to do with crypto.” In fact, failing to report income, gains or losses from your crypto transactions on your taxes may come with stiff consequences.
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.
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.
Can IRS track crypto income?
Yes, the IRS can track cryptocurrency, including Bitcoin, Ether, and a huge variety of other cryptocurrencies. The IRS does this by collecting KYC data from centralized exchanges.
- Calculate your crypto gains and losses.
- Report gains and losses on IRS Form 8949.
- Include your totals from 8949 on Schedule D.
- Include any crypto income on Schedule 1 or Schedule C.
- Complete the rest of your tax return.
US taxpayers reporting crypto on their taxes should claim all crypto capital gains and losses using Form 8949 and Form Schedule D. Ordinary crypto taxable income should be included on 1040 Schedule 1 or with Schedule C for self-employment earnings.
Therefore, you can use a loss harvesting strategy to realize losses and use it to offset your capital gains and help reduce your crypto tax bill. Tax-loss harvesting consists of selling a crypto asset that has lost its value. You can sell for a loss and use it to offset your gains from other trades.
Regardless of the specific form, crypto income is taxable income to the IRS. If you received crypto income, but did not include it on your tax return, you have unreported crypto income. Unreported crypto income is treated the same as other types of unreported income by the IRS.
Attempting to hide cryptocurrency from the IRS is illegal and can result in serious penalties, including fines and imprisonment. Exchanges such as Coinbase, Binance.US, and Crypto.com report customer data to the IRS, while many international exchanges like KuCoin, OKX, and Bitget might not.
Even if you don't receive a 1099-NEC form, these earnings are still taxable and need to be reported on your tax return regardless if you are paid in cryptocurrency rather than another currency.
You may have to report transactions with digital assets such as cryptocurrency and non-fungible tokens (NFTs) on your tax return. Income from digital assets is taxable.
If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
Yes, you can write off crypto losses on taxes even if you have no gains. If your total capital losses exceed your total capital gains, US taxpayers can deduct the difference as a loss on your tax return, up to $3,000 per year ($1,500 if married filing separately).
Can the IRS see my crypto wallet?
Yes, Bitcoin and other cryptocurrencies can be traced. Transactions are recorded on a public ledger, making them accessible to anyone, including government agencies. Centralized exchanges provide customer data, such as wallet addresses and personal information, to the IRS.
1. Can the IRS track crypto? Yes, the IRS can track crypto as the agency has ordered crypto exchanges and trading platforms to report tax forms such as 1099-B and 1099-K to them. Also, in recent years, several exchanges have received several subpoenas directing them to reveal some of the user accounts.
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.
If you dispose of cryptocurrency after more than 12 months of holding, your cryptocurrency will be taxed as long-term capital gains (0-20%). Want to estimate your crypto tax bill? Check out our free crypto tax calculator.
However, there is no tax for simply owning cryptocurrency. What states have no crypto tax? Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income taxes (although New Hampshire and Tennessee tax interest and dividends while Washington taxes capital gains).
