Taxes related to Crypto - Bitcoin, Ethereum, Solana

The IRS treats cryptocurrency as property, not currency, for tax purposes (per IRS Notice 2014-21). This means crypto transactions are subject to capital gains tax or ordinary income tax, depending on the nature of the transaction. Below is a breakdown:

1. Capital Gains Tax

• When It Applies: When you sell, trade, or spend crypto, you trigger a taxable event. The tax is based on the difference between the crypto’s fair market value at the time of the transaction and your cost basis (what you paid for it).

• Short-Term vs. Long-Term:

  • Short-Term Capital Gains: If you hold crypto for one year or less, gains are taxed at your ordinary income tax rate (10%-37%, depending on your income bracket).

  • Long-Term Capital Gains: If you hold crypto for more than one year, gains are taxed at preferential rates (0%, 15%, or 20%, based on income).

• Example: You buy 1 BTC for $20,000 and sell it for $50,000 after 14 months. Your long-term capital gain is $30,000, taxed at 0%-20% depending on your income.

2. Ordinary Income Tax

• When It Applies: Crypto received as payment for goods/services, mining rewards, staking rewards, airdrops, or hard forks is taxed as ordinary income based on the fair market value at the time you receive it.

• Example: You mine 0.1 BTC when it’s worth $5,000. You report $5,000 as ordinary income. If you later sell that 0.1 BTC for $6,000, the $1,000 gain is subject to capital gains tax.

• Tax Rates: Ordinary income tax rates range from 10% to 37%, depending on your income.

3. Taxable Events

Common crypto activities that trigger taxes include:

• Selling crypto for fiat (e.g., USD).

• Trading one crypto for another (e.g., BTC for ETH).

• Spending crypto on goods or services.

• Receiving crypto from mining, staking, airdrops, or forks.

• Gifting crypto (if the value exceeds the annual gift tax exclusion, currently $18,000 per recipient in 2025).

4. Non-Taxable Events

Some activities don’t trigger taxes:

• Buying crypto with fiat and holding it.

• Transferring crypto between your own wallets.

• Gifting crypto below the annual exclusion amount.

• Donating crypto to a qualified charity (if held over one year, you may deduct the fair market value without paying capital gains tax).

5. Losses and Deductions

• You can deduct capital losses from crypto (e.g., selling at a loss) to offset capital gains. Excess losses can offset up to $3,000 of ordinary income per year, with remaining losses carried forward.

• If your crypto becomes worthless or is stolen, you may claim a loss, but documentation is critical (e.g., proof of theft or exchange insolvency).

6. Reporting Requirements

• Form 8949 and Schedule D: Report capital gains/losses from crypto transactions.

• Schedule 1 or Schedule C: Report crypto income (e.g., mining, staking) as “other income” or business income if you’re self-employed.

• 1099 Forms: Exchanges like Coinbase may issue 1099-MISC, 1099-B, or 1099-K for certain activities, but they may not capture all transactions (e.g., wallet-to-wallet trades).

• Question on Form 1040: Since 2019, the IRS asks if you received, sold, exchanged, or disposed of any virtual currency. Answering “no” falsely can lead to penalties.

• Foreign Accounts: If you hold crypto on foreign exchanges and the total value exceeds $10,000, you must file an FBAR (FinCEN Form 114). High-value accounts may require Form 8938.

7. Record-Keeping

You must track:

• Date of acquisition and disposal.

• Cost basis and fair market value at the time of each transaction.

• Fees associated with transactions. Tools like CoinTracker or Koinly can help, as exchanges often don’t provide complete tax reports.

8. Special Considerations

• Decentralized Finance (DeFi): Staking, yield farming, or liquidity pool rewards are typically taxed as income when received, with subsequent sales triggering capital gains.

• NFTs: Buying, selling, or creating NFTs follows similar rules (capital gains for sales, income for creator royalties).

• Tax Evasion Risks: The IRS has increased enforcement, using tools like Chainalysis to track blockchain transactions. Failing to report crypto activity can lead to audits, penalties, or criminal charges.

• State Taxes: Some states (e.g., California, New York) impose state capital gains taxes, while others (e.g., Florida, Texas) don’t.

Tips to Minimize Taxes

• Hold Long-Term: Aim for long-term capital gains rates by holding over a year.

• Tax-Loss Harvesting: Sell losing positions to offset gains.

• Use Specific Identification: Choose which crypto units to sell (e.g., FIFO, LIFO, or HIFO) to optimize tax outcomes, if your records allow.