Crypto Taxes: Full Guide on When and How to Pay Them
August 27, 2024
Crypto taxes are taxes levied on cryptocurrencies that are sold, traded, or used to pay for goods and services.
Since cryptocurrency enables individuals to make payments or purchase items they want or need, the Internal Revenue Service classifies it as ‘digital assets’ and treats it as though it were any other capital asset, stock, or bond.
It is vital to understand how taxes on crypto work to determine whether you owe taxes or not and ensure that you are not violating any tax regulations.
In that regard, this article will explain the basics of cryptocurrency taxes, including the different taxable and non-taxable events in crypto, crypto tax rates, and more.
Key Takeaways
- Crypto taxes refer to the taxes levied on cryptocurrencies or digital assets. In that regard, there are two ways in which crypto is taxed—as capital gains or taxable income.
- Taxable events in crypto are transactions that subject cryptocurrency to capital gains or income taxes. Meanwhile, non-taxable events in crypto pertain to transactions that do not yield crypto taxation.
- Cryptocurrencies that are held for less than a year are subject to short-term capital gains tax, while cryptos that are held or owned for more than a year are subject to long-term capital gains tax.
- Use IRS Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040) to report crypto taxes on your returns.
Do You Have to Pay Taxes on Cryptocurrency?
Yes, you have to pay taxes on cryptocurrency, most often when you sell crypto or pay for goods and services using cryptocurrency.
Also, if you mine Bitcoin, Ethereum, Dogecoin, or any other form of cryptocurrency or earn staking rewards, then you are likely to pay crypto taxes as well.
Now, you may be wondering, ‘’What about the crypto tax rates?’’ Generally, the tax rates levied on cryptocurrency depend on whether short- or long-term capital gains tax rates apply to your digital asset.
Short-term capital gains tax rates apply if you owned cryptocurrency for a year or less before you sold your digital asset. The rates for short-term capital gains tax range from 10% to 37%.
On the other hand, long-term capital gains tax applies if you sell crypto after it has been in your possession for over a year. Compared to short-term capital gains, long-term tax rates range from 0–20%.
Take note that the crypto tax brackets are also based on your filing status. That said, below are the short- and long-term tax rates for cryptocurrency for your 2024 tax return (filed on or before April 15, 2025).
Short-term Capital Gains Tax Rates
Tax Rate | Married Filing Jointly | Head of Household | Single |
|---|---|---|---|
10% | $0 to $23,200 | $0 to $16,550 | $0 to $11,600 |
12% | $23,201 to $94,300 | $$16,551 to $63,100 | $$11,601 to $47,150 |
22% | $94,301 to $201,050 | $63,101 to $100,500 | $47,151 to $100,525 |
24% | $201,051 to $383,900 | $100,501 to $191,950 | $100,526 to $191,950 |
32% | $383,901 to $487,450 | $191,951 to $243,700 | $191,951 to $243,725 |
35% | $487,451 to $731,200 | $243,701 to $609,350 | $243,726 to $609,350 |
37% | More than $731,200 | More than $609,350 | More than $609,350 |
Long-Term Capital Gains Tax Rates
Tax Rate | Married Filing Jointly | Head of Household | Single |
|---|---|---|---|
0% | $0 to $94,050 | $0 to $63,600 | $0 to $47,025 |
15% | $94,051 to $583,750 | $63,001 to $551,350 | $47,026 to $518,900 |
20% | More than $583,750 | More than $551,350 | More than $518,900 |
Types of Taxable Events in Crypto
There are two types of taxable events in crypto: one occurs when your cryptocurrency is taxed as capital gains, and the other takes place when your crypto is considered taxable income.
Taxable events in crypto refer to transactions that lead to you owing taxes on your crypto or digital assets. Let’s take a closer look at each of these taxable events.
Cryptocurrency Taxed as Capital Gains
When you pay crypto taxes as capital gains, it is because you either sold it in exchange for cash, converted one form of crypto into another, or used crypto to acquire certain goods and services.
Selling your crypto in exchange for cash yields crypto taxes if the virtual currency is sold at a higher price than the original rates that you paid when you acquired it.
Conversely, converting your cryptocurrency to another type of crypto entails selling your digital asset first before acquiring or purchasing a new one. The transaction then makes your cryptocurrency taxable.
In the same manner, if you spend your Bitcoin, Ethereum, or any other type of crypto to purchase goods or pay for services, you also need to sell your crypto first so you can exchange it for tangible goods.
Cryptocurrency Taxed as Income
When your digital asset is classified as crypto taxable income, it may be due to the fact that you acquired your cryptocurrency through any of the following circumstances:
- Your compensation is in crypto form
- You accept crypto payments for your services
- You mined a cryptocurrency or used software and hardware to generate new coins and receive Bitcoin rewards
- You received cryptocurrency as a reward or incentive
- You earned staking rewards
If you acquired crypto from a hard fork, levying crypto taxes depends on how you used your digital asset. In crypto terms, a hard fork means that there has been a fundamental upgrade or change to the blockchain, thereby creating a new cryptocurrency.
In line with that, the IRS treats hard forks as taxable income. However, hard forks may also be subject to capital gains taxation when spent, sold, or exchanged for another cryptocurrency.
Non-Taxable Events in Crypto
Contrary to taxable events, non-taxable events in crypto are transactions that do not result in incurring crypto taxes. Examples of non-taxable crypto events include:
- Gifting cryptocurrencies. Cryptocurrencies sent as gifts are non-taxable as long as the equivalent amount does not exceed $18,000. Otherwise, you’ll have to file a gift tax return on the excess amount.
- Receiving crypto as a gift. Similar to gifting crypto, receiving it as a gift also does not incur crypto taxes unless you stake, swap, or sell your digital asset.
- Purchasing crypto with cash. Not all purchased cryptocurrencies are subject to crypto taxes. If you buy Bitcoin, Solana, and the like with cash and hold it, then you won’t owe the IRS taxes.
- Donating cryptocurrencies. You don’t have to pay crypto taxes when you donate crypto to qualified and tax-exempt non-profit organizations and charitable causes.
- Transferring crypto to your own wallet or account. If you transfer cryptocurrency to your own account or digital wallet, that means you did not make any sales or profit by doing so. Thus, the IRS cannot impose capital gains or income tax on your digital asset.
How Much Do You Owe in Crypto Taxes?
To determine the amount you owe in crypto taxes, you must take note of your annual earnings, filing status, and whether the federal tax on crypto you owe falls under income tax or capital gains tax.
Once you’ve narrowed down all the essential information mentioned above, you can proceed to calculate your crypto taxes.
Calculating Capital Gains Taxes
To calculate your capital gains taxes, you should first assess whether you held your crypto for more or less than a year before trading or selling it. If you held it for less than a year, then use short-term capital gains as your basis.
Next, get the difference between the original or acquisition value of your cryptocurrency and its sale value. The acquisition value is the asset’s value when you first purchased it, while the sale value is the amount you sold the cryptocurrency for.
Finally, use the table for the short-term capital gains tax rate provided at the beginning of this article to assess the applicable tax rate on your asset.
Calculating Income Taxes
Regular income tax rates are used to calculate your crypto income taxes. That means you must use the federal income tax bracket to determine the taxes you owe.
The income tax brackets for the 2024 tax year are as follows:
Tax Rate | Single | Married Filing Separately | Married Filing Jointly | Head of Household |
|---|---|---|---|---|
10% | $0 to $11,600 | $0 to $11,600 | $0 to $23,200 | $0 to $16,550 |
12% | $11,601 to $47,150 | $11,601 to $47,150 | $23,201 to $94,300 | $16,551 to $63,100 |
22% | $47,151 to $100,525 | $47,151 to $100,525 | $94,301 to $204,050 | $63,101 to $100,500 |
24% | $100,526 to $191,950 | $100,526 to $191,950 | $204,051 to $383,900 | $100,501 to $191,950 |
32% | $191,951 to $243,725 | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,700 |
35% | $243,726 to $609,350 | $243,726 to $365,600 | $487,450 to $731,200 | $243,701 to $609,350 |
37% | Exceeds $609,351 | Exceeds $356,601 | Exceeds $731,201 | Exceeds $609,350 |
How to Report Crypto Taxes
To report your crypto taxes, you must file Form 8949, Sales and Other Dispositions of Capital Assets, as well as Schedule D of Form 1040.
Use Part 1 of your Form 8949 to report short-term investment sales and Part 2 to report long-term crypto investment sales.
On your Form 8949, specify when your crypto was purchased, when it was sold, as well as the acquisition and selling rates. Make it a point to provide the specific dates when you purchased and sold your crypto to ensure you calculate the correct crypto tax rates.
Generally, both Part 1 and Part 2 of the Sales and Other Dispositions of Capital Assets require similar information about your transaction.
You can provide all necessary information about your crypto gains and losses by filling out the following fields:
(a). Name or description of the sold asset
(b). Date when the asset was acquired
(c). Date when the asset was sold
(d). Price the asset was sold for
(e). The cost of the asset plus other factors
(h). Calculated gain or loss from selling the asset
Upon completing your Form 8849, check that you have provided accurate entries before transferring all the information to the corresponding fields on your Schedule D.
Filling out your Schedule D will help you determine the total crypto taxes you owe, as well as any tax deduction that applies to your tax situation. To do this, get the difference between your cost basis and total proceeds.
The resulting value will specify whether you incurred a capital gain or loss. Capital gains are subject to taxation, while capital losses may be used to reduce taxable income on your return.
How Do Crypto Taxes Affect Your W-2 and 1099?
Crypto taxes affect your W-2 and 1099 if you need to file both forms during tax season. This is usually the case if you’re a full-time employee who also has a self-employed venture or an independent contractor job on the side.
Similarly, if you receive crypto-based miscellaneous payments in the form of royalties, awards, prizes, or rent while working a full-time job, then you can expect to receive either a 1099-MISC or 1099-NEC form along with your W-2 form.
Introduction of the IRS Form 1099-DA
You need all necessary tax forms to report all income and payments received within the year. Plus, you must also keep an eye out for IRS Form 1099-DA, Digital Assets, after January 1, 2025.
Form 1099-DA is a tax form recently introduced by the Internal Revenue Service. Digital brokers must complete and send the said form to investors who participated in NFT and cryptocurrency transactions.
In response, recipients of the 1099-DA form will use it to report all gross proceeds, cost-basis information, gains, and losses.
How Paystub.org Can Help
Since the idea of filing multiple IRS forms can leave anyone confused and unsure of where to start, you can use cost-effective online tools like Paystub.org’s online generators to simplify the process.
Our W-2 form generator comes in handy when reporting your annual income, withheld taxes, and contributions as a regular employee.
Meanwhile, our 1099 form generator enables you to report all independent contractor earnings and miscellaneous payments seamlessly without mixing up your different sources of income.
The best part about our generators is the templates that help you save time filling out all the necessary information, as well as the built-in calculator to aid you in determining your gross and net wages and taxes.
More importantly, you can download or print a PDF or physical copy of your completed forms.
Does the IRS Track Your Cryptocurrency?
Whether you like it or not, the IRS tracks your cryptocurrency investments and transactions using the following methods:
- Blockchain Analysis. This is the process of utilizing a variety of tools and strategies, such as data science and in-depth research, to identify, collect, investigate, analyze, and interpret crypto data.
- John Doe Summons. A John Doe Summons is an authorization granted by a judge that allows the IRS to access user data to identify, audit, and investigate taxpayers.
- Third-Party Reporting. Governed by the Know Your Customer (KYC) regulations, this involves major cryptocurrency exchanges collecting your personally identifiable information and reporting it, along with your crypto transactions, to the IRS.
In August 2023, the IRS released a proposal that detailed their plans and suggestions for monitoring how crypto brokers report cryptocurrency on their tax information.
In addition, the Internal Revenue Service teamed up with the Civil Office of Fraud Enforcement in 2021 to launch Operation Hidden Treasure, which aimed to expose crypto investors evading their tax obligations.
Furthermore, it is also worth noting that blockchain technology is transparent, meaning that it is maintained by a digital ledger that’s accessible to the public. As such, it is impossible to conceal attempts to evade your crypto tax responsibilities.
What Happens if You Don’t Pay Your Crypto Taxes?
If you don’t pay your crypto taxes, you risk facing IRS penalties ranging from $100,000 to $500,000. You will also likely be charged as much as 75% of your unpaid taxes on top of your existing balance.
Worse, you may also face up to five years of imprisonment for your unpaid crypto taxes.
To give you more context on how not paying your cryptocurrency taxes is penalized, there are two types of tax evasion when it comes to crypto taxes: evasion of assessment and evasion of payment.
Evasion of assessment means that you intentionally withhold information about your crypto income and taxes on your tax returns. It is said to be the most common type of crypto tax offense.
There are also other forms of crypto tax assessment, including:
- Failure to report all capital gains from selling or receiving cryptocurrency as payment
- Willfully omitting crypto wages paid within the tax year
- Not including additional crypto income or business crypto earnings
Meanwhile, evasion of payment occurs when taxpayers attempt to hide cryptocurrency funds or assets instead of using them to pay off their tax dues.
If you unintentionally forgot to report your crypto transactions and earnings on your returns, you must file Form 1040-X immediately to amend the missing information on your return.
Final Thoughts
Calculating, monitoring, and reporting your crypto taxes can be quite confusing and complicated if you are unsure about how or where to start.
Remember, the only time that the cryptocurrency in your possession gets subjected to taxation is if you generate income or realize its value following a transaction.
On that note, keep in mind that you are responsible for monitoring all of your crypto-related profits, losses, and compensation.
Finally, it would also be helpful to stay up-to-date with the latest crypto news and changes in IRS tax regulations to ensure you adhere to all the requirements for reporting your crypto income and taxes.
