How are Cryptocurrencies Taxed in the U.S.?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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When cryptocurrencies came to the forefront in 2009, they were something that had never been seen before in the world’s economy. This ultimately led to large amounts of confusion, especially in their treatment of taxes and other government records. 

Are Bitcoin and other DeFi (decentralized finance) tools taxed in the U.S., despite not being backed by a government? Yes, and here’s what you have to know about them.

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What the IRS Says About Virtual Currencies

The IRS defines a “virtual currency” as any “digital representation of value” that’s not of a traditional currency, such as USD or GBP. This, in essence, means that all generally accepted cryptocurrencies, such as Bitcoin and Ethereum, fall under the definition of a virtual currency for IRS purposes as they’re a digital representation of value. Stablecoins, crypto that has a value directly relatable to some world currency, are also considered virtual currency. 

Cryptocurrency and other virtual currencies don’t have legal tender status within the U.S. and are therefore not official currencies accepted by the government. However, because Bitcoin and similar coins are decentralized, a merchant can accept crypto as a form of currency without government approval, though the merchant does have to record this on their tax records.

Most importantly, when trading crypto, it’s vital to remember that though it may seem more elusive and less traceable to have cryptocurrency rather than a physical bank balance, it’s ultimately similarly regulated and shouldn’t be thought of as a way to avoid paying taxes. 

How Is Cryptocurrency Taxed?

Virtual currencies are considered a form of property for tax purposes, similar to stocks or bonds. This officially means that your virtual currency is regarded as a “capital asset,” which means that it’s definitely taxable in the U.S. 

For capital assets, you pay a capital gains tax. This means that when you sell a piece of capital that has appreciated in value over the time you’ve held it, you’re required to pay a portion of the increase in value as taxed income. Conversely, because of the dynamically fluctuating nature of crypto, you may also have made a loss over this time. In this case, you record a capital loss and don’t have to pay a tax on that loss. 

The way your crypto is taxed also depends on how long you’ve held it. If you’ve held the asset for less than a year, then it’s classed as “short-term” taxable income when you sell it. In most cases, the amount of tax you pay on a short-term held-and-sold asset is equivalent to your income tax rate, given that your earnings from selling currency effectively improve your income for the year. 

If you sell your crypto after a year, it’s classified as “long-term” taxable income, receiving much lower rates than income tax rates, even reaching as low as 0%. The exact amount of tax you pay depends on your income level. 

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How Do You Know If You Owe Taxes for Crypto?

You can do some activities with crypto that don’t require you to pay any tax. These include buying and holding cryptocurrency, sending or getting a gift of cryptocurrency, transferring crypto you own between your own accounts, or giving crypto to a nonprofit organization. 

To determine whether you owe crypto taxes, check to see if you did any of the following things: 

  • Receiving traditional income for selling your cryptocurrency
  • Exchanging your cryptocurrency from one form to another 
  • Using your cryptocurrency to purchase goods or services

Each of the above activities requires you to pay capital gains tax on the income you received for holding your cryptocurrency. As explained above, capital gains tax on cryptocurrency is taxed, and your taxable capital gains rates are generally lower if you’ve held your crypto for more than a year. 

Some of your income in cryptocurrency is always taxed as personal income, including in the following ways:

  • Receiving an airdrop from a crypto company 
  • Earning bonus income from staking  
  • Using mining software to receive crypto
  • Getting your personal income paid in crypto (e.g., for a job)
  • Receiving crypto from a hard fork
  • Generally receiving additional cryptocurrency (e.g., for signing up to a platform)

Understanding how your crypto income is taxed is important for proper tax filing. 

What Were the 2021 Crypto Tax Rates?

As stated previously, the exact rate of tax you pay on any of your crypto assets depends upon your income and the duration you’ve held your asset. In many cases, holding your cryptocurrency for more than a year results in you paying a lower tax rate, though the amount you do pay depends on what income bracket you sit in. 

This is the list of tax rates for long-term capital gains on cryptocurrency for 2021:

Tax RateSingleMarried Filing JointlyHead of Household
0%$0–$40,400$0–$80,800$0–$54,100
15%$40,401–$445,850$80,801–$501,600$54,101–$473,750
20%>$445,850>$501,600>$473,750

And these are the tax rates for short-term capital gains and income on cryptocurrency for 2021: 

Tax RateSingleMarried Filing JointlyHead of Household
10%$0–$9,950$0–$19,900$0–$14,200
12%$9,951–$40,525$19,901–$81,050$14,201–$54,200
22%$40,526–$86,375$81,051–$172,750$54,201–$86,350
24%$86,376–$164,925$172,751–$329,850$86,351–$164,900
32%$164,926–$209,425$329,851–$418,850$164,901–$209,400
35%$209,426–$523,600$418,851–$628,300$209,401–$523,600
37%>$523,600>$628,300>$523,600

How to Report Your Cryptocurrency Taxes

Cryptocurrency laws are fickle when it comes to reporting cryptocurrency on your taxes because the line between differing income types is sometimes unclear. Making sure you keep a proper and comprehensive list of all transactions you completed specifically with cryptocurrency is the best thing you can do to make tax time easier.

  1. Make a list of all your trades and exchanges (including any IRS Form 1099 exchanges sent to you).
  2. Determine the value of your capital gains and losses.
  3. For any events that are taxable as property, fill out IRS Form 8949.
  4. Transfer totals from your Form 8949 to your Schedule D on IRS Form 1040.
  5. Complete Form 1040 with any residual cryptocurrency income.

If you’ve done these five things, you should have correctly and fully fleshed out your crypto documentation to maintain accurate crypto tax records. Not keeping comprehensive records can have disastrous results. 

Consider a Crypto IRA for Tax Advantages

The IRS has heavy and thorough legislation surrounding the proper assessment of crypto assets and their taxability. Due to the legislation surrounding normal crypto transactions, crypto holders have no legal tax exemptions.

One way of limiting the amount of tax you pay on the cryptocurrency you hold is to place the asset into a crypto IRA (Individual Retirement Account). IRAs hold money for a long-term period, offering a tax benefit that incentivizes holding for a longer duration. In the long run, greater returns can be earned. 

One example of a Crypto IRA offerer is iTrustCapital, a secure Crypto IRA self-trading platform. iTrustCapital allows users to place their cryptocurrency into a SOC 2 Type II security that maintains the safety of digital assets over the period for which it’s stored. 

Funds can be transferred from any existing IRA into a crypto IRA or deposited. So while receiving the benefits of a traditional IRA or Roth IRA, you’re able to hold an account exposed to cryptocurrency. 

Click here to learn more about iTrustCapital’s crypto IRA offerings and here to view iTrustCapital’s website. 

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