Crypto Taxes Explained in December 2024

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Kane Pepi

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Kane Pepi

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Kane Pepi is a financial, gambling and cryptocurrency writer with over 2,000 published works, including on platforms like InsideBitcoins and Motley Fool. He specializes in cryptocurrency guides,...

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October 8, 2024 16:46 EDT

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The Internal Revenue Service (IRS) is very clear on crypto investments: digital assets are treated as property, meaning they’re taxed just like any other asset. Therefore, U.S.-based investors should have a clear understanding of their crypto tax obligations.

This guide on crypto tax explains everything for U.S. investors. We cover capital gains and income requirements, as well as what rates to expect and how to keep your tax liabilities to a minimum.

Do You Have to Pay Tax on Crypto in the US?

Cryptocurrencies like Bitcoin and Ethereum are unregulated financial instruments. However, the IRS treats digital assets as property, meaning they’re taxed like any other investment – such as stocks and mutual funds. Whether or not you’ll be required to pay tax depends on many different variables. Nonetheless, there are two forms of crypto tax that you need to be aware of. First, there’s capital gains tax.

Just like stocks, tax on crypto gains is only applicable to realized profits. In simple terms, this means that you’ve sold the cryptocurrencies for a profit. Suppose you bought 1 Bitcoin in January 2023 for $21,000. You sold your 1 Bitcoin in April 2023 when it was worth $30,000. Therefore, your realized capital gains are $9,000. In this instance, the crypto investment was held for under 12 months, so short-term capital gains tax rates apply.

Long-term rates apply if cryptocurrencies are held for over 12 months, just like other assets. The second tax obligation to be aware of is crypto income. The most popular income tools include staking and yield farming. Unlike capital gains, the IRS views crypto income the same as any other income stream, such as employment, stock dividends, or bond payments. Therefore, crypto income is always taxed in the same year it was received.

Not only is it important that you’re aware of how crypto taxes work, but how to avoid them. There are many different strategies used by seasoned investors, which we’ll unravel in this guide. Examples include crypto tax harvesting, taking advantage of long-term capital gains rates, gifting, and holding investments in Individual retirement arrangements (IRAs). Ultimately, the IRS is clamping down on crypto tax evasion, with U.S.-listed exchanges now reporting customer holdings. As such, this guide will prepare you accordingly.

How Is Cryptocurrency Taxed?

There are many different products and services in the crypto space. Some will trigger a tax obligation, while others won’t. The specific type of tax treatment and applicable rates will also vary.

This section discusses the most common scenarios crypto investors may face and how the IRS taxes them.

Profitable Crypto Investments

Most of you will be wondering about taxes on profitable crypto investments. If you’ve previously invested in stocks, the same rules apply to crypto assets. In a nutshell, the IRS is only interested in your crypto profits once the digital assets have been disposed of.

• So, suppose you bought 1 Bitcoin in April 2020 when it was worth $5,000.
• You’re still holding today. Let’s say at current BTC/USD prices, your 1 Bitcoin is worth about $59,000
• This investment has produced gains of $54,000

Crucially, the Bitcoin has not been disposed of, meaning that your $54,000 profit is unrealized. This will continue to be the case until you decide to sell. When you do, your profits are realized, meaning they are liable for capital gains tax.

In this example, the investment has been held for over 12 months. So, regardless of when you decide to cash out, long-term capital gains tax rates will apply. Conversely, selling within 12 months of making the investment triggers short-term capital gains tax rates.

Now, here is some important information on what the IRS considers realized profits.

There is a misconception that capital gains are only realized when cryptocurrencies are sold for U.S. dollars (or another fiat currency). However, this simply isn’t the case.

Gains are realized as soon as the cryptocurrencies are disposed of, whether that’s for U.S. dollars or another digital asset. For instance, in the above example, you had $54,000 of unrealized profit. If you exchanged Bitcoin for Ethereum, capital gains tax would still be due on the $54,000 gain – even though it hasn’t been converted to “real money”.

Trading Cryptocurrencies

Things get really complicated when you actively trade new cryptocurrencies. As emphasized above, the IRS considers every trade a disposal. This means that each sale must be accounted for in terms of cost and disposal prices. This can be challenging when you’re regularly buying and selling different cryptocurrencies on various platforms.

Let’s look at an example to clear the mist:

• Let’s say you buy $5,000 worth of Ethereum, as you’re planning to trade on the best no-KYC crypto exchanges. When you make the purchase, Ethereum is worth $2,000. This is your cost price.
• A few days later, you transfer Ethereum into Uniswap and exchange all of the tokens for Decentraland. At the time of the trade, Decentraland is worth $0.50.
• However, a few days have passed since you bought Ethereum. When you made the exchange for Decentraland, it was worth $2,200. You originally paid $2,000, so in the eyes of the IRS, you’ve made a capital gain of 10%.
• A few more weeks have passed, and you swap Decentraland back to Ethereum. When you trade, Decentraland is worth $1. This represents a capital gain of 100%, as you originally paid $0.50 per token.

In the above example, you bought Ethereum for cash, swapped the tokens for Decentraland, and then eventually went back to Ethereum. This triggered at least two realized capital gains, as tokens were sold for a higher price than you originally paid. This is the case even though crypto-to-crypto trades were involved.

Importantly, don’t think that you can evade crypto taxes just because you’re using a decentralized exchange. Although decentralized exchanges offer an anonymous user experience, blockchain transactions can still be tracked. For instance, suppose you bought Ethereum with a credit card on Coinbase.

You then transfer the Ethereum tokens from Coinbase to a decentralized exchange. Any future transactions can be traced back to your original purchase on Coinbase, which is associated with your identity.

Earning Crypto Income on DeFi Investments

Another misconception in the crypto space is that income from decentralized finance (DeFi), such as staking, yield farming, or crypto savings accounts, isn’t taxed. This is far from the truth. In simple terms, DeFi yields are taxed similarly to other forms of income, such as wages or sales on platforms like eBay.

Crypto income taxes are due in the same year they are received. This can be complicated, as crypto income should be reported based on its market price when received. For instance, some DeFi products distribute earnings weekly, or even daily. This means you’ll have many different cost prices to calculate.

Let’s look at an example of how DeFi income is taxed:

• You invest 10 ETH into a DeFi platform, opting for a staking pool that pays 30% per year. If you keep your ETH in the pool for a year, you’ll earn 3 ETH in rewards (30% of 10 ETH). However, distributions are made weekly.
• After the first week, you receive your first distribution of 0.057 ETH. At the time, ETH is worth $2,000, so your rewards are worth approximately $114.
• In the second week, you receive another 0.057 ETH, but now ETH is priced at $2,500. Therefore, our reward from this week is worth $142.50.
• You must repeat this process each week when receiving staking rewards.

As per the example above, you received $114 and $142.50 worth of ETH rewards. These amounts need to be reported as income to the IRS. These rewards are added to any other income you earn during the year.

For instance, if you earned $20,000 from a part-time job and $5,000 selling items on eBay, along with your staking rewards, your total income would be $25,256.50. This total income will be taxed according to your income bracket (more on this later).

Paying for Goods or Services With Crypto

There’s a lot of misinformation online about using crypto to pay for goods or services and the tax implications that follow. As mentioned earlier, the IRS considers crypto profits as realized once the crypto is used, not just when sold or exchanged.

When you spend crypto, it triggers a tax event based on the price when acquired versus when spent. Whether or not tax needs to be paid depends on the original and disposal prices.

For example:

• Suppose you buy 2 Bitcoins, each costing $15,000, and store them in a private wallet.
• After a few months, Bitcoin’s value rises to $20,000. You use 0.1 BTC to purchase an airline ticket.
• This transfer of 0.1 BTC to the airline counts as a disposal in the eyes of the IRS.
• At the time of disposal, Bitcoin’s value has increased by $5,000 per coin. Since you used 0.1 BTC, you realize a capital gain of $500 from this increase ($20,000 – $15,000 = $5,000 gain; $5,000 x 0.1 = $500).
• This $500 will be added to your capital gains liability for the tax year.

It’s important to keep adequate records of all transactions for accurate tax reporting.

Crypto Mining

Crypto mining is another area that will be taxed. Just like DeFi rewards, such as staking or yield farming, crypto mining is considered income. Income from mining cryptocurrency is taxed as ordinary income. The tax is based on the value of the coins at the time you receive them.

For example, imagine that in the first week, you mine 1 BTC, which is worth $40,000. You must report this $40,000 as part of your income for the year. Remember, this doesn’t mean you’ve made $40,000 clear because mining often has high costs.

As such, if you’re a registered mining company, you’ll be able to offset the expenses required for mining. This primarily includes energy costs and hardware maintenance. Additionally, selling the 1 BTC mined could trigger capital gains tax. Similar to DeFi income, this tax is based on the price at which the mining rewards are sold.

For example, if you sold the 1 BTC when it was worth $50,000, you would have made a capital gain of $10,000. This is because you initially received the 1 BTC when it was valued at $40,000.

Selling Goods for Crypto

We mentioned earlier that buying goods with crypto can trigger a taxable event. But what about selling goods for crypto? The same rules apply but in reverse.

• For example, suppose you sell your car for $20,000. You originally paid $30,000, so there are no capital gains on the sale.
• The buyer pays you in Bitcoin, which is currently worth $40,000. Therefore, you receive 0.5 BTC from the buyer.
• You hold onto the 0.5 BTC for a few more months.
• When you’re ready to sell, Bitcoin is valued at $80,000. As such, you sell your 0.5 BTC for $40,000, making a $20,000 profit.
• The realized capital gain is $20,000, which will be taxed accordingly.

Note that if you had sold the car for more than you originally paid, capital gains tax on the sale would also apply.

Unprofitable Crypto Investments

Although we often focus on profitable crypto investments, not all investments yield a profit. What happens when you make a loss? Fortunately, the IRS has very favorable rules on capital losses, which also apply to cryptocurrency investments.

Simply put, if you dispose of a cryptocurrency at a loss, you can use these losses to offset your capital gains liability.

Let’s look at a hypothetical example of how this works in practice:

• You buy 10,000 DOGE tokens when Dogecoin is worth $1. This takes your total investment to $10,000.
• A few months later, you sell your 10,000 DOGE tokens. At the time of the sale, Dogecoin is worth just $0.30. This means you receive $3,000 back, even though you originally invested $10,000.
• On this investment, you lost $7,000.
• Prior to this loss, your total capital gains for the year was $9,000. You can now offset the $7,000 Dogecoin loss from this liability. Therefore, your capital gains for the year is now just $2,000.

As we cover in more detail later, some investors will strategically sell their cryptocurrencies at a loss. This helps them reduce their tax bill for the year. This is known as tax harvesting and it’s one of the best ways to avoid crypto taxes.

It’s also important to note that if your capital losses exceed your gains, you can deduct up to $3,000 of these losses against your ordinary income each year. Any remaining losses can be carried over into future years indefinitely. As such, learning how to claim crypto losses on taxes can be helpful in 2024.

For instance, in the example above, you made $7,000 in capital losses from the Dogecoin investment. Suppose you made just $2,000 in capital gains in the same year. You would use $2,000 from your Dogecoin losses to bring the capital gains to $0. In the following year, you could use the remaining $5,000.

Receiving a Salary in Crypto

According to a CNBC report, more than half of Americans aged 25 or under would be happy to receive their salary in crypto. From a tax perspective, the rules are much the same as receiving your salary in dollars.

However, it’s important to remember that your income is based on the value of the crypto when it’s received. For example, suppose your monthly salary is 0.1 BTC. When paid, Bitcoin is worth $30,000. Therefore, you received 0.1 BTC, making your income $3,000 for that month. This amount needs to be added to your income for the tax year.

Additionally, don’t forget about disposals. At some point, whether through cashing out or spending the crypto, it will be sold. If this disposal results in a profit, capital gains tax will apply.

For instance, if you sell your monthly salary of 0.1 BTC when Bitcoin is worth $40,000, and you originally received it at $30,000, this would represent a capital gain of $1,000 ($40,000 – $30,000 = $10,000; $10,000 * 0.1 BTC = $1,000).

Donating Crypto

The IRS views cash and crypto donations similarly. This means that crypto donations can help you offset your tax liability. However, it’s important to consider the cost basis and the fair market value at the time of the transaction.

For example, let’s say you bought 1 Bitcoin in 2020 for $6,000. By 2023, that Bitcoin is worth $40,000. This increase would represent a capital gain of $34,000 if you were to sell it. However, if you donate the Bitcoin to charity, you could potentially offset $40,000 from your taxable income. This is because the deduction is based on the market value at the time of the donation.

There are specific rules to be aware of before donating crypto for tax advantages. For instance, the maximum you can deduct for non-cash assets like crypto is 30% of your adjusted gross income (AGI). Anything exceeding this limit can be carried over into future tax years. Additionally, for donations exceeding $5,000 in value, you must obtain a qualified appraisal to substantiate the claimed value of the cryptocurrency.

Gifting Crypto

Similar to donating crypto, gifting is another common way for investors to reduce their tax burden. There are two angles to consider: the person giving the crypto gift and those receiving it.

The Giver

• Suppose an investor buys 1 BTC at $15,000.
• Two years later, Bitcoin is worth $25,000. This would trigger a capital gain of $10,000 if sold.
• However, the investor decides to gift 0.5 BTC. The other 0.5 BTC remains in the investor’s private wallet.
• The 0.5 BTC gifted does not trigger a taxable event if the gift’s value is below the annual gift tax exclusion limit.

The Receiver

• The person receiving the crypto gift receives 0.5 BTC.
• When the gift was received, Bitcoin was valued at $25,000. This means the receiver has $12,500 worth of Bitcoin.
• However, the receiver acquires the original cost basis that the investor paid, which was $15,000 for the 1 Bitcoin.
• So, for the 0.5 BTC gift, the receiver’s basis is $7,500.
• If the receiver sells the 0.5 BTC for $10,000, the capital gains on the sale would be $2,500 ($10,000 – $7,500), which the receiver must report and pay tax on, depending on whether the holding period qualifies for short- or long-term capital gains.

In 2023, you could gift up to $17,000 without reporting the transaction to the IRS. Anything above this needed to be reported. In 2024, the exclusion amount is $18,000. If the gift exceeds this amount, the giver will need to report it using IRS Form 709, but no taxes are owed unless they exceed the lifetime gift limit ($12.92 million in 2023 and $13.61 million in 2024).

How Much Are Crypto Taxes in the U.S.?

Unless you’re heavily invested in DeFi earning tools like staking or yield farming, your main tax liability will likely come from capital gains. In general, the amount you pay depends on two key factors:

• How much profit you made from the cryptocurrency investment
• How long you held the cryptocurrency investment before selling

First, the profit is simply the sale price minus the original cost. For example, you buy 10 ETH for a total outlay of $10,000. Later, you sell the 10 ETH for $15,000, meaning your capital gains are $5,000.

Now, the amount you need to pay on the $5,000 gain depends on whether you held the investment for more or less than 12 months.

• Let’s say you bought the 10 ETH in January 2023 and sold the tokens in October 2023.
• Since this is less than 12 months, short-term capital gains tax applies.
• In this case, your $5,000 gain is simply added to your total income for the year.
• If you earned a salary of $50,000, your total income is $55,000, and it will be taxed accordingly.

That said, different rules apply for certain situations, such as filing jointly as a married couple. The section below provides a breakdown of what to expect.

So, what about selling crypto after holding it for at least 12 months? In this case, long-term capital gains tax rates apply. These offer more favorable rates, as U.S. investors are encouraged to hold long-term.

There are three potential long-term capital gains tax rates: 0%, 15%, and 20%. The rate is based on your total taxable income for the year, which includes capital gains. For instance, suppose you earn a salary of $30,000 and make $5,000 in long-term crypto gains. This would bring your total taxable income to $35,000.

Crypto Tax Rates

We’ve clarified that the duration you hold your crypto investment—less than 12 months for short-term and over 12 months for long-term—affects the tax rates. To help you determine your potential IRS dues, we’ve created the tables below. Please refer to the short-term crypto tax rate table below for investments held less than 12 months. Short-term capital gains are taxed as ordinary income according to federal income tax brackets.

If you held the investment for 12 months or more, refer to the long-term crypto tax rates below.

You pay taxes on your income based on different rates, grouped into what are called tax brackets. Here is how it works: as your income increases, the amount of tax you pay on new earnings rises, moving you into a higher bracket. However, this higher rate only applies to the portion of your income that falls within that new bracket, not your entire income.

Are There Any Tax-Free Crypto Transactions?

Fortunately, not all crypto transactions trigger a taxable event.

Here are some examples of tax-free transactions available to U.S. residents:

• Buying Crypto With Fiat: No tax is due when purchasing crypto with fiat money. This is similar to buying stocks, ETFs, or any other investment asset.
• Transferring Crypto Between Your Own Wallets: You can freely transfer crypto between your own wallets without triggering a tax event. For instance, moving Ethereum from MetaMask to Trust Wallet, or Bitcoin from Electrum to Coinomi. Additionally, you can transfer crypto from a private wallet to an exchange without the transaction being taxed. However, once you dispose of the crypto (either for fiat or another crypto), this will trigger a tax event.
• Gifting Crypto: In 2024, you can gift up to $18,000 worth of crypto without triggering a tax event. While you can gift more than this without paying tax, amounts above $18,000 need to be reported to the IRS.
• Donating Crypto: You can donate crypto to a registered charity without being taxed. Additionally, you can offset the donation as a tax-deductible expense.
• Holding Crypto: In the U.S., only realized capital gains trigger a tax event, meaning tax is due when the crypto is actually disposed of. This means you can hold crypto in your wallet for as long as you want without needing to worry about taxes.

How to Calculate Crypto Tax

We briefly covered some examples of how to calculate crypto taxes, including capital gains and income. Let’s look at some more detailed examples to help clear the mist.

Calculating Short-Term Crypto Gains

• In March 2023, you buy 5 BNB tokens, each valued at $200, for a total investment of $1,000. In April 2023, BNB’s value rises to $250, and you sell all 5 tokens for $1,250. Your short-term capital gain on this trade is $250.
• In June 2023, you buy 1 BTC for $25,000. By November 2023, Bitcoin is worth $35,000, so you sell your BTC and make a short-term capital gain of $10,000.

To sum up, you made two short-term crypto trades in 2023. The first trade earned you $250, and the second earned you $10,000, giving you total short-term capital gains of $10,250.

In 2023, you also earned a salary of $45,000. Adding your short-term capital gains of $10,250 brings your total income for 2023 to $55,250.

Since these assets were sold in 2023, you calculate your taxes using the 2023 tax rates.

• You’ll pay 10% on the first $11,000 of income, which equals $1,100.
• For income between $11,000 and $44,725, you’ll pay 12%. That’s $33,725 taxed at 12%, which totals $4,047.
• The remaining $10,525 of your income ($55,250 – $44,725) is taxed at 22%, which comes to $2,315.50.

In total, your tax for the year is $7,462.50 ($1,100 + $4,047 + $2,315.50).

Calculating Long-Term Crypto Gains

Now let’s look at how to calculate long-term capital gains. We’ll use the same figures to show how long-term holders benefit from more favorable tax rates.

To recap, you made two separate trades, earning profits of $250 and $10,000, for a total capital gain of $10,250. This time, you held both cryptocurrency investments for over 12 months, so long-term capital gains rates apply. Adding in your annual salary of $45,000, your total income becomes $55,250.

As a single filer, you would pay a capital gains tax of 15%, as your total income falls between the $44,626 and $492,300 threshold. However, the 15% tax only applies to the capital gains portion of $10,250. So, your total capital gains tax for the year is $1,537.50.

The $45,000 salary is taxed at the ordinary income rate. As explained earlier, you’d pay $1,100 on the first $11,000 earned and $4,047 on the next $33,725. This leaves $275, which falls into the 22% tax bracket, adding $60.50 in tax. In total, your income tax for the year is $5,207.50.

• Total Capital Gains Tax: $1,537.50
• Total Income Tax: $5,207.50
• Total Tax for 2023: $6,745

So, by holding your cryptocurrency investments for at least 12 months and including your $45,000 salary, you paid $6,745 in taxes for 2023 as a single filer.

In contrast, using the same figures, you paid $7,462.50 when holding your cryptocurrency investments for less than 12 months. Therefore, you saved $717.50. While this might not sound like much, consider an investor with significantly higher profits—simply holding for at least one year can result in substantial savings.

Calculating Crypto Income

Now that we’ve explained how to calculate capital gains taxes, let’s move on to crypto-related income. Generally, most income sources—whether from staking, yield farming, or mining—follow the same tax rules.

• In this example, we’ll consider an investor who buys Bitcoin with a credit card, for a total of $20,000. At the time, Bitcoin is worth $20,000, so the investor receives 1 BTC.
• They instantly deposit the 1 BTC into a savings account that offers a 5% annual yield. At this point, no taxable event has occurred.
• The Bitcoin savings account pays out quarterly. Over the course of a year, 5% of 1 BTC earns 0.05 BTC in rewards. Split across four quarters, this results in four distributions of 0.0125 BTC each.

Naturally, on each quarterly payment, the value of Bitcoin will be different.

So, the table above shows the value of each quarterly distribution in dollars. Added together, the total income generated from the Bitcoin savings account was $1,450.

This amount simply needs to be added to the total income for the year. For instance, if the investor’s salary was $50,000, their total income for 2023 would be $51,450. This amount will be taxed according to the progressive tax system discussed earlier.

However, this assumes that the Bitcoin rewards were not sold. If they were sold, it would trigger a taxable event, as the Bitcoin would be considered disposed of. For example, if the investor received their first distribution when Bitcoin was valued at $25,000 and instantly sold it at the same price, there would be no capital gains because the cost basis and sale price are the same.

Conversely, if the investor held onto the rewards for a few more weeks, the situation would change. Initially, the 0.0125 BTC reward was worth $313. But if the investor sells it later for $333, they would have a capital gain of $20. This would need to be added to any other short-term capital gains for the tax year.

That said, if the investor sold their Bitcoin rewards for a lower price than when they were originally received, a capital loss would occur. As noted, this can be offset against capital gains liabilities for the year.

Additionally, the investor must also consider the tax implications once the 12-month savings period ends.

This is because the investor will receive their original 1 BTC back from the savings account. When it was originally deposited, the 1 BTC was worth $20,000. After 12 months, it is worth $40,000. Therefore, the investor has made long-term capital gains of $20,000.

Crucially, the capital gain is only realized if the investor sells the 1 BTC. If they choose not to sell, no tax is due since the asset hasn’t been disposed of.

When Do You Have to Pay Crypto Taxes?

In general, any capital gains or income made from crypto needs to be paid the following year. More specifically, “tax season” runs between January 1st and April 15th each year, meaning you’ll need to pay within this time frame. This is why it’s crucial to get your crypto taxes in order.

• April 15: Deadline to file your crypto tax return and pay taxes for the previous calendar year (January to December). This includes taxes on crypto gains, income, and other sources from the prior year.
• October 15: Extended deadline to file your tax return if you requested an extension. This is still for taxes owed from the previous calendar year, but any unpaid taxes should have been settled by April 15.
• January 15: Deadline for the last estimated tax payment. This covers income from September to December of the previous calendar year.

Leaving things to the last minute can result in delays, meaning potential fines from the IRS. Keep thorough records as you go. If you’re an active trader, it’s a good idea to use a crypto tax software provider. Examples include Koinly, CoinTracker, and CoinLedger, among others.

How to Report Cryptocurrency Tax

Once you’ve calculated your crypto taxes for the year, the next step is filing them with the IRS. The process generally involves the following forms:

IRS Form 8949

First, you’ll need to complete IRS Form 8949. This form is used to report any capital gains or losses for the year. For each transaction, you’ll need to fill out the date you bought and sold the cryptocurrency, alongside the respective cost and sale prices.

This form is only for capital gains; we’ll come to crypto income shortly. Moreover, you should also add any other capital disposals made for the year, such as stocks, ETFs, or property.

Schedule D on IRS Form 1040

Now that you’ve totaled all of your capital gains and losses for the year, you’ll need to transfer the totals to Schedule D on IRS Form 1040.

Add Crypto Income to IRS Form 1040

Now that you’ve covered capital gains, let’s move on to crypto income. This also needs to be added to Form 1040, but in Schedule 1 under ‘Additional Income and Adjustments to Income’.

Submit to the IRS

Once you’ve completed IRS Form 8949 and 1040, you can submit them to the IRS. Just make sure this is done before tax season closes on April 15th.

Does the IRS Track Crypto?

As explained by CNBC, the IRS has many ways to track cryptocurrency investments made by U.S. residents. The best crypto exchanges in the U.S., such as Coinbase, Gemini, and Kraken, are legally required to submit customer transactions to the IRS.

Therefore, if the IRS opens an investigation into your trading activities, you’ll want to ensure you’ve already submitted the correct tax reports. If taxes have been understated, or not reported at all, serious penalties could apply. Moreover, the IRS has other ways to track your cryptocurrency transactions, even if you’ve withdrawn to a private wallet.

• For example, suppose you originally bought $10,000 worth of Ethereum on Coinbase. As a regulated U.S. exchange, Coinbase conducts KYC (Know Your Customer) checks on all registered users.
• Therefore, you would have had to provide Coinbase with your personal information and government-issued ID before making the purchase.
• Next, you withdraw your Ethereum to a decentralized wallet like MetaMask. You use MetaMask anonymously and connect it to a decentralized exchange like Uniswap, where you swap Ethereum for Sandbox tokens.
• At this stage, although you’re trading anonymously, your original Ethereum purchase is still linked to your Coinbase account. Blockchain transactions are transparent, meaning all subsequent transactions can be tracked.

Ultimately, we strongly advise that you accurately report all cryptocurrency activities to the IRS. If you’re ever unsure about what needs to be reported, consult a qualified tax advisor.

Are There Ways to Reduce How Much Crypto Tax You Pay?

Now that we’ve covered everything there is to know about crypto trader tax in the US, we can now discuss some tax avoidance strategies. Read on to discover legal ways to reduce your taxes on crypto.

Tax-Loss Harvesting

In simple terms, tax-loss harvesting involves intentionally selling a cryptocurrency investment at a loss. This is done to gain tax advantages, as the loss can be offset against capital gains for the year.

For example:

• As the end of 2024 approaches, you’ve accumulated $20,000 in capital gains.
• Let’s say that you’re still holding 1 BTC in your crypto wallet, which you purchased for $50,000.
• Right now, Bitcoin is trading at $40,000, meaning you’re down $10,000.
• If you sell your 1 BTC, you can offset part of the $10,000 loss against your $20,000 capital gains.
• Only $3,000 can be offset per year against ordinary income, but any remaining losses can be carried over to future years.

Now, you may not have wanted to sell Bitcoin, you did it to reduce your tax liabilities. Therefore, you could repurchase Bitcoin afterward to ensure you continue holding it. This strategy of selling and repurchasing is not allowed in traditional investments due to the “wash sale” rule, which requires investors to wait 30 days before buying the same asset.

However, because the IRS treats Bitcoin as property and not a security like stocks and bonds, the wash sale rule doesn’t apply to cryptocurrency. If you’re an active trader holding many different cryptocurrencies, it can be difficult to know which investments to sell to benefit for tax-loss harvesting. In this case, using crypto tax software is the way to go.

Hold Your Crypto for at Least 12 Months

Another way to reduce your crypto taxes is to avoid selling for at least 12 months. In doing so, you’ll benefit from long-term capital gains rates. These are a lot more favorable than short-term capital gains, as we identified earlier.

For example, suppose you originally bought 5 BTC at $10,000 each, totaling $50,000. Each BTC is now worth $50,000, so your portfolio is valued at $250,000. If you sell today, that’s capital gains of $200,000. Selling within the 12-month period could mean paying a tax rate as high as 37%. Holding for at least 12 months means the most you can pay is 20%.

Gifting Crypto to Somebody on a Low Tax Bracket

Another strategy is to gift cryptocurrencies to someone. More specifically, to someone in a low tax bracket.

Here’s how it works:

• Let’s say you own 1 BTC, which you originally paid just $2,000 for. Bitcoin is now worth $50,000, so your capital gains would be $48,000 if you cashed out.
• This could mean a huge tax bill as you’re in a high-income bracket. As such, you decide to gift the 1 BTC to a family member who is a low-income earner.
• Once you’ve made the transfer, you no longer own the Bitcoin, meaning you’re not required to pay tax.

The person who received the 1 BTC will inherit your original cost price, which was $2,000. If they sell it, they will have triggered capital gains of $48,000. However, as they’re in a low-income bracket, they pay significantly less tax.

Do note that the rules around gifting are very clear. The person receiving the crypto is the rightful owner. If they transfer the proceeds to you, they would be breaking the law. Additionally, we mentioned earlier that gifts of over $18,000 in 2024 need to be reported to the IRS. That said, this doesn’t mean that you’ll need to pay tax.

Donating Crypto to a Registered Charity

You might also consider donating crypto to a charity, which is another way to reduce or eliminate taxes. The donation can then be used to offset your taxable income. This is based on the market price at the time of the transfer.

Suppose you bought 3 ETH when they were worth $500 each. Let’s say ETH is now worth $1,500, so your investment is valued at $4,500. If you donate the 3 ETH tokens to a registered charity, you can offset the $4,500 donation as a tax-deductible.

Conclusion

In summary, crypto taxes in the U.S. can no longer be ignored. Whether you’ve made capital gains or income, it’s likely you’ll need to submit a tax report to the IRS. That said, there are several tax avoidance strategies to consider before proceeding, such as tax-loss harvesting and ensuring you hold at least 12 months.

Overall, the best practice is to speak with a qualified tax advisor who has experience with crypto assets. Not only will they ensure you file your taxes correctly, but they might be able to help you reduce them.

References

• Frequently Asked Questions on Virtual Currency Transactions (IRS)
• Crypto Exchanges to Report Customer Data Under Treasury Proposal (Bloomberg)
• Bitcoin Quote (CNBC)
• Topic No. 409 Capital Gains and Losses (IRS)
• Want to Be Paid in Bitcoin or Dogecoin? Here Are the Rewards and Risks (CNBC)
• Charitable Deductions: Donating Cryptocurrency and NFTs for Tax Purposes (Reuters)
• Frequently Asked Questions on Gift Taxes (IRS)
• What Cryptocurrency Investors Should Know About Filing Taxes (CNBC)

FAQs

Do you have to pay tax on Bitcoin?

Tax needs to be paid if you sell Bitcoin at a profit. Fortunately, you can keep Bitcoin in your private wallet without paying tax, as capital gains are only realized on disposals.

How much tax do you pay on crypto?

Crypto trading tax depends on how much profit you made from the disposal and how long you held the tokens before selling. Taxes are more favorable when you hold for at least 12 months, as you’ll pay long-term capital gains rates.

Do you have to report crypto under $600?

The $600 rule is what U.S. crypto exchanges need to report to the IRS. From a personal standpoint, you must report any crypto gains made during the year, irrespective of the amount.

Do I need to report crypto if I didn’t sell?

No, the IRS only considers crypto gains that have been realized, meaning you’ve already sold. No reports need to be filed while the crypto tokens remain in your wallet.