What Taxes Should I Pay on Cryptocurrency Transactions?
It’s important to understand that you will have to pay taxes for almost all transactions you make with cryptocurrencies. However, the good news is that you won’t be breaking the law.
This is what you will have to pay taxes for:
- Selling crypto for cash: Did you sell your crypto for U.S. dollars? You’ll owe taxes if you sell your assets for more than you paid for them. If you sell at a loss, you may be able to deduct that loss from your taxes.
- Converting one crypto to another: When you use bitcoin to buy ether, for example, you technically have to sell your bitcoin before purchasing a new asset. Because this is a sale, the IRS considers it taxable. You’d owe taxes if you sold your bitcoin for more than you paid.
- Spending crypto on goods and services: If you use bitcoin to buy a pizza, you’ll likely owe taxes on the transaction. To the IRS, spending crypto isn’t that different from selling it. It would help if you sold the asset before it can be exchanged for a good or service, and selling crypto makes it subject to capital gains taxes.
When earning cryptocurrency, you will also have to pay taxes:
- Getting paid in crypto: NFL offensive tackle Russell Okung was one of a few big names to take their paychecks in bitcoin in 2021 — and he’s likely paying income tax on it. If you followed Okung’s lead and were produced in crypto by an employer, your crypto will be taxed as compensation according to your income tax bracket.
- Getting crypto in exchange for goods or services: If you accept crypto in payment for a good or service, you’re responsible for reporting it as income to the IRS.
- Mining crypto: If you mined crypto, you’d likely owe taxes on your earnings based on the fair market value (often the price) of the mined coins when they were received. Crypto mining as a business is taxed as self-employment income.
- Earning staking rewards: Staking rewards are treated like mining proceeds: taxes are based on the fair market value of your tips on the day you received them.
- Earning other income: You might earn a return by holding specific cryptocurrencies. This is considered taxable income. Although this is sometimes referred to as interest, the IRS treats it differently from the interest you earned from a bank.
- Getting crypto from a hard fork: Taxes on crypto you got from a hard fork depend on how you use the asset when it’s available to withdraw from your exchange. See the latest IRS guidance on hard forks
- Getting an airdrop: You might receive airdrops from a crypto company as a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. See the latest IRS guidance on airdrops
- Receiving other incentives or rewards: This list isn’t comprehensive — there are many reasons why you might receive free crypto. These can include tips from Coinbase Earn or incentives like getting $5 in bitcoin for referring a friend to a crypto exchange. Regardless, you’ll need to report these as income.
Is Cryptocurrency Anonymous?
No. Bitcoin transactions can be traced. Cryptocurrency transactions are recorded on a blockchain, which is generally public. At the same time, crypto trades are not necessarily linked to an identity, which provides a bit of anonymity for users. While there are select goods and services you can buy directly using bitcoin, in most cases, it needs to be exchanged into local currency actually to spend it. And converting bitcoin into U.S. dollars, a heavily regulated currency backed by the federal government, creates a distinct paper trail. While there are specific ways that cryptocurrency does provide a level of anonymity, be aware that nobody today can claim 100% anonymity at this point. However, compared to the money in your bank account, cryptocurrency can still be considered a more anonymous asset.
Anonymity is the most important benefit of cryptocurrency, but in reality sending and receiving bitcoin can be simply determined. Learn more about the main myth – bitcoin anonymity: Bitcoin anonymity is just a big myth.