Cryptocurrencies have gained global popularity, but their legal treatment varies significantly across different countries and regions. For enthusiasts in the United States, navigating tax obligations is a critical responsibility influenced by specific regulatory frameworks.
This article breaks down key aspects of U.S. cryptocurrency taxation to help you stay informed and compliant.
What Constitutes a Taxable Event in Crypto?
If you engage in cryptocurrency activities that generate taxable events within a given year, you are required to report these activities to the Internal Revenue Service (IRS). A taxable event is any action that triggers a tax liability.
According to the IRS 2014 guidelines, the following are considered taxable events:
- Exchanging cryptocurrency for fiat currency, such as U.S. dollars.
- Trading one cryptocurrency for another (you must calculate the market value in U.S. dollars at the time of the transaction).
- Using cryptocurrency to pay for goods or services (the fair market value in U.S. dollars must be reported; the recipient may also be subject to sales tax).
The most common taxable event is trading one digital asset for another—for example, exchanging Bitcoin (BTC) for Ethereum (ETH).
On the other hand, some common actions are not considered taxable events:
- Gifting cryptocurrency is not a taxable event (though gift tax may apply if the amount exceeds the annual exclusion).
- Transferring cryptocurrency between your own wallets is not taxable.
- Purchasing cryptocurrency with U.S. dollars is not a taxable event.
Example Scenario
Suppose you purchase 2 BTC on Coinbase and hold it for one year. No tax reporting is required since no taxable event has occurred. Similarly, moving your crypto to a private wallet does not trigger taxation.
However, if you transfer those 2 BTC to Binance and trade them for altcoins, this exchange is a taxable event. You must report this transaction—even if you incurred a loss—on your tax return for that year.
Note: Cryptocurrency mining is also considered taxable income and must be reported.
How to Report Cryptocurrency Taxes
If you buy, sell, or trade cryptocurrencies, you must report each transaction on IRS Form 8949 (Sales and Other Dispositions of Capital Assets).
Example Calculation
You bought Bitcoin on July 16, 2017, and sold it on December 17, 2017. You sold it for $9,848, and your original purchase cost was $970. Your capital gain is $8,878, which must be reported in column (h) of Form 8949.
Every taxable event must be documented on this form. You are required to report all transactions—whether they result in a net gain or loss—to accurately calculate your crypto tax liability.
Consequences of Not Reporting Crypto Transactions
While it might seem that no one can track whether you've conducted cryptocurrency transactions, the IRS has made crypto taxation a compliance priority.
The IRS explicitly stated on July 2, 2018, that enforcing virtual currency taxation is a key focus. Failure to report taxable crypto activities may be considered tax evasion, which can lead to penalties, interest, or legal action.
Using Capital Losses to Reduce Tax Liability
Yes, you can use capital losses from cryptocurrency transactions to offset your tax burden.
If your total capital gains and losses result in a net capital loss for the year, you can use that loss to reduce your taxable income:
- If the net capital loss is $3,000 or less ($1,500 if married filing separately), you can deduct the entire amount from other types of income.
- If the loss exceeds $3,000, the remaining amount can be carried forward to future tax years.
Why Don’t Exchanges Provide Complete Tax Documents?
Cryptocurrency exchanges generally cannot provide fully accurate tax documents for their users.
Due to the decentralized nature of blockchain technology, users can transfer assets between wallets and platforms freely. For example, if you buy Bitcoin on Coinbase and send it to a Binance wallet, Coinbase has no visibility into subsequent transactions on Binance.
Similarly, if you receive cryptocurrency from an external wallet into your Coinbase account, the exchange cannot determine when, where, or at what cost you originally acquired those assets. This lack of data makes it impossible for exchanges to calculate capital gains or losses accurately.
Most major cryptocurrency exchanges operate in isolation—they do not share data with one another. Therefore, it is the user’s responsibility to maintain comprehensive records of all transactions across platforms.
Frequently Asked Questions
Do I need to report crypto if I only bought and held?
No. Simply purchasing and holding cryptocurrency is not a taxable event. You only need to report when you sell, trade, or use crypto.
How is cryptocurrency taxed?
Cryptocurrency is treated as property by the IRS. Transactions are subject to capital gains tax, and mining is taxed as ordinary income.
What records do I need to keep?
Maintain records of dates, amounts, wallet addresses, transaction IDs, and the fair market value of assets in USD at the time of each transaction.
Can the IRS track cryptocurrency transactions?
Yes. The IRS uses blockchain analytics software and has issued summonses to exchanges to identify non-compliant taxpayers.
What if I use crypto for purchases?
You must report the fair market value of the cryptocurrency at the time of the transaction as a taxable event.
Are stablecoins taxable?
Yes. Trading stablecoins for other cryptocurrencies or using them for purchases are considered taxable events.
Staying informed and maintaining accurate records are essential for complying with U.S. cryptocurrency tax regulations. Always consider consulting a tax professional for personalized advice.