If you mine, receive, trade, sell, or exchange cryptocurrency during the year, you must report that activity on your tax return. The IRS treats crypto as property, so each transaction may result in income or a capital gain/loss.
To report crypto, you’ll typically list sales and exchanges on Form 8949 and summarize them on Schedule D, while income such as mining or wages is reported on Schedule C. You must report all transactions in U.S. dollars, which means converting the value of your cryptocurrency to dollars at the time of each transaction.
How is crypto taxed?
Cryptocurrency is taxed based on how you receive and use it. In general, crypto is taxed as either ordinary income or capital gains depending on the type of transaction.
For example, if your employer or client pays you in cryptocurrency, it’s treated as taxable income and may be subject to income tax withholding. The fair market value of the crypto (in dollars) should be reported on your W-2 or 1099.
If you earn money by mining virtual currency, it’s typically considered self-employed income and is subject to the self-employment tax.
Holding cryptocurrency itself is not taxable. However, you trigger a taxable transaction when you sell, trade, convert, or otherwise dispose of it.
You’ll only need to pay taxes when you have a taxable event that results in a gain. . 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 before selling, the gain is taxed as short-term capital gains. Short-term gains are taxed at the same rates as your regular income. If you own the cryptocurrency for longer than 365 days, you’ll pay long-term capital gains taxes, which are generally lower.
How to report crypto tax on my return
To report cryptocurrency on your taxes, you’ll need to document all transactions and report them using the appropriate IRS tax forms. For tax purposes, the IRS treats digital assets as property, so your cryptocurrency is taxed as a capital gain. You must recognize any capital gain or loss from the sale or exchange of your virtual currency on your tax return. These transactions are reported on Form 8949, where you list each transaction’s description, acquisition and sale dates, proceeds (USD value at disposal), cost basis, and resulting gain or loss. Totals from Form 8949 are then summarized on Schedule D and carried to your Form 1040.
If you receive cryptocurrency as payment (wages, freelance work, mining, or staking), it is taxed as ordinary income based on its fair market value at the time received. This is typically reported on a W-2 or Form 1099 (such as 1099-NEC or 1099-MISC). Self-employed individuals may also need to report income on Schedule C and pay self-employment tax using Schedule SE.
You may also receive Form 1099-B from exchanges for crypto sales, but you are responsible for reporting all activity regardless.
To complete these forms accurately, keep records of transaction dates, USD values, cost basis, and exchange or wallet activity.
How do I determine the fair market value of my cryptocurrency?
In on-chain transactions, the fair market value (FMV) is the amount recorded by the cryptocurrency exchange at the time of the transaction and is documented on a cryptographically secured distributed ledger.
If the cryptocurrency was an off-chain transaction and not recorded on a distributed ledger, you should use the FMV that would have been recorded at the date and time of the transaction if it had been an on-chain transaction.
When it comes to peer-to-peer transactions, the IRS will accept the FMV determined by a cryptocurrency or blockchain explorer that can analyze an index of historical cryptocurrency and calculate the FMV for a specific date and time.
The IRS FAQ on crypto tax provides more scenarios of calculating FMV in unique circumstances, such as receiving cryptocurrency in exchange for property or services.
Are crypto losses tax deductible?
The value of virtual currencies can fluctuate dramatically. If your virtual currency lost value since you acquired it at the time of a transaction, you can deduct the loss up to $3,000.
To deduct a crypto loss, you must first have a taxable event, such as selling, trading, or using the cryptocurrency. Unrealized losses (when you’re still holding the asset) are not deductible. When reporting the loss:
- Report the transaction on Form 8949, including the asset description, acquisition date, sale date, proceeds, and cost basis.
- The difference between your proceeds and cost basis will be your capital loss.
- Transfer the totals from Form 8949 to Schedule D, where losses are netted against any capital gains.
Note: You won’t report a loss until there is a taxable event — such as a sale. If you’re holding onto the currency, you won’t report or deduct that loss even though it has lost value.
Which forms report my crypto transactions?
If you mine, buy, or exchange cryptocurrency, you may receive an official tax form – like a 1099-B or 1099-K – from a cryptocurrency exchange, payment processor, or other platform that facilitated your transactions. The IRS isn’t requiring those forms until tax year 2024 (returns filed in 2025), so it’s important to keep your records just in case you don’t receive a form.
The IRS is paying more attention to activities involving cryptocurrency, so 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 a gain or loss from selling cryptocurrency?
Crypto tax is calculated based on the amount of capital gain or loss from the transaction. 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.
Capital gains are categorized as either short-term or long-term, depending on how long you held the cryptocurrency before disposing of it.
Short-term gains apply to assets held for one year or less and are taxed at your ordinary income tax rate.
Long-term gains apply to assets held for more than one year and are generally taxed at lower capital gains rates.
Do I pay taxes if I transfer crypto?
Transferring cryptocurrency between your own accounts is a non-taxable event. In this scenario, you are not transferring ownership to another person, you still own the asset, so you won’t have a gain or a loss and don’t need to report this on your return.H
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 receiving your client’s payment, 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 be required to report your $500 gain.
What happens if I don’t report crypto taxes?
It’s important to report all taxable crypto activity to the IRS, because failing to do so can be considered underpayment of taxes. The IRS may view unreported income as negligent, which can result in penalties, interest, and additional taxes owed.
In many cases, cryptocurrency exchanges and platforms issue Forms 1099 to both you and the IRS to report transaction activity. If a form is issued but not reflected on your return, it can trigger a discrepancy and increase the likelihood of IRS follow-up. However, even if you don’t receive a 1099, you are still required to report all crypto gains, losses, and income.
There is no minimum threshold for reporting crypto transactions. All capital gains must be reported, no matter how small, and the same applies to losses.
