US Tax Guide 2022

This guide details the tax obligations for crypto investors and answers many commonly asked questions on a wide range of scenarios that may apply to your crypto investments.

Crypto from a tax perspective

A key distinction between cryptocurrency and fiat money (like the US dollar) is that cryptocurrency is viewed as property rather than as a currency in the US by the Internal Revenue Service. This means that the taxation rules for cryptocurrency are those which apply for capital assets. However, there is no one clear rule which dictates how your cryptocurrency transactions will be taxed, but rather the IRS has released a set of guidelines on how cryptocurrency is taxed. Depending on your circumstances, you may have to pay Capital Gains Tax or Income Tax for cryptocurrency transactions.

We understand that cryptocurrency tax is a relatively nuanced space, and that these guidelines are subject to change, so we have broken down the main guidelines for crypto tax compliance, ensuring that this guide is updated regularly to reflect the most recent guidelines by the IRS.

Continue reading to understand the tax implications of cryptocurrency in different situations and how Crypto Tax Calculator can assist you by automatically recognizing and categorizing your transactions where possible.

Short term vs long term capital gains

Cryptocurrency is treated like a capital asset and therefore taxed as such. However, the amount you are taxed is primarily dependent on how long you have held your cryptocurrency. To determine how long you have held your cryptocurrency is quite simple; the IRS considers the ‘holding period’ to start the day after you acquired the currency and ends on the day you dispose of your virtual currency.

If you have held your cryptocurrency for less than a year

The tax rate you will be paying is the short-term Capital Gains rate. This is identical to the tax rate you pay on normal income, in accordance with the Income Tax Brackets, which range from 10% to 37%.

We have included below the short-term tax rates for the 2022 tax year.

Note that your capital gains amount is added to your income, and you are then taxed according to the bracket you fall in. We understand that this may be difficult to conceptualize, so we have included an example below to demonstrate how Capital Gains Tax works with short term tax rates.Short Term Tax Rate Example (Please note that transactions fees have been ignored for simplicity):

Say you purchase 2 BTC in June 2021 for $70,000 (at a cost of $35,000 for 1 BTC). 4 months later, you decide to sell your 2 BTC for a price of 80,000 (at a cost of $40,000 for 1 BTC).

The capital gains that you need to pay short term tax on, is the difference between your cost base and selling price; $80,000 - $70,000, which amounts to $10,000.

This $10,000 is added to your income. If your base income is $50,000, you fall within the 22% tax bracket, so adding the gains from your BTC sale will result in $60,000. This is still within the same 22% tax bracket, so the amount you are taxed for the BTC sale is 22% of $10,000 ( $2,200).

Alternatively, if your base income is $85,000, then adding the $10,000 will bring you up to the next tax bracket of 24%, and so you will pay 22% for the first $4,075, and 24% for the remainder $5,925.

If you have held cryptocurrency for more than a year

An advantage to holding cryptocurrency for more than a year is that you may qualify for lower long-term tax rates on capital gains, which range from 0% to 20%.

Exceptions to Tax Rules

Not all your transactions incur taxable events, and it is important to also be aware of non-taxable events so that you report crypto taxes only where it may be appropriate. The following are typically seen as non-taxable transactions:

• Gifting crypto less than $15,000 (USD equivalent).
• Receiving a Gift of Crypto
• Buying crypto with fiat money (e.g purchasing BTC with USD)
• Transferring crypto between different wallets owned by you, or between different accounts owned by you on exchanges.
• Donating crypto to 501(c) approved charity
• Rebrands of currencies I.E. VEN to VET
• Putting Crypto up for stake & withdrawing from stake
• Taking a crypto loan
• Putting crypto up as collateral

Capital gains and losses for cryptocurrency

A major challenge for investors in the cryptocurrency realm is being able to track their capital gains and losses, because many exchanges do not support the ability to track yearly gains and losses. Moreover, it is common for investors to hold cryptocurrencies in more than one wallet, which makes it challenging to produce a report encompassing all their trading activity.

Unfortunately, this challenge does not make users exempt from the cryptocurrency tax regulations, and any taxable capital gains must be reported. By the same token, this also means that if you have disposed of any cryptocurrency at a loss (e.g the cryptocurrency you bought fell in value since you bought it), then you are able to claim capital loss, which you may then use to offset other income taxes. If your losses are more than your gains, you can deduct the difference on your tax return by up to $3,000 per annum from your ordinary income i.e W2, Interest earnings, Self-Employment income.

For example, if your capital losses in a year exceed your capital gains by $5,000, you can deduct $3,000 from your ordinary income, leaving you with $2,000 additional ‘loss’ that can be used to offset capital gains in future years.

Unlike stock, cryptocurrency is not subject to the “wash sale” rule. For securities, there is a 30 day waiting period after selling shares at a loss that you cannot rebuy that same stock or you will not realize capital losses. For crypto, there is no such rule and you can sell in a loss position and rebuy without worrying about not realizing a loss on the sale. It is recommended that you wait 24 hours to rebuy that currency.

Using Crypto Tax Calculator to file your taxes

It can be a difficult process to manually calculate the taxes incurred from your crypto transactions, and they are quite new for many accountants. We have made it simple to import all your crypto activity into one place by simply copying and pasting your public wallet address into our application. Once you have done this, you can select different types of transaction categories which are relevant to the data you imported. This will allow Crypto Tax Calculator to produce a tax report for any financial year, in line with the IRS guidelines. When you import your data, you can import data for all the cryptocurrencies you have traded with which Crypto Tax Calculator will combine into one report, which can be exported into TurboTax. For more information on the different transactions you may need to consider in your lodgement for the current tax year, we have summarized and provided examples for you.

Please see below, an explanation of the common transactions that may result in Capital Gains Tax or Income Tax liability and how your tax will be calculated.

Capital Gains Tax Events

Anytime that an individual disposes of a cryptocurrency, either at a profit or loss, a Capital Gains event is triggered.

Selling Crypto

To calculate your capital gains when you sell cryptocurrency , you can simply subtract the cost basis from your capital proceeds. Consider the below example on calculating your capital gains.

Say you purchase 2 BTC for $60,000 (at a price of $30,000 for 1 BTC). 3 months later you sell your 2 BTC for $70,000 (at a price of $35,000 for 1 BTC). The capital gains from this transaction can be determined by first ascertaining your cost base and capital proceeds

Cost base : $60,000

Capital proceeds: $70,000

Capital Gains = Capital proceeds - cost base

= $70,000 - $60,000

Therefore your capital gains equates to $10,000.

Note that if your cost basis exceeds your capital proceeds, then this will result in a capital loss. As mentioned earlier, you can use capital losses to offset capital gains in the future (to an extent of $3,000 per year).

Crypto to crypto trades:

This is a similar transaction to selling cryptocurrency, the only difference is that instead of receiving Fiat currency (e.g. USD) in exchange for crypto, you receive another cryptocurrency.

Say you purchase 1 BTC for $30,000 and one month later you exchange this for 20 ETH valued at $35,000 (at the time of exchange).

Cost basis: $30,00

Capital proceeds: $35,000

Capital gain = cost base - capital proceeds

= $35,000 - $30,000

Therefore your capital gains equates to $5,000

Income Tax events

In scenarios where profits earned from cryptocurrency are akin to income rather than capital gains, the rules for Income Tax are applied instead. In each of the transaction types below, any profits earned are taxed according to your income bracket’s tax rate.

Decentralized Finance (DeFi)

Decentralized Finance, more commonly known as DeFi, is a relatively new area in crypto that covers a variety of peer-to-peer financial applications that run on the blockchain. DeFi differs from traditional finance in that financial intermediaries such as banks and brokerages are no longer required, allowing individuals to have full control over their investments and finances. By removing the central entity from the equation, DeFi improves efficiency and allows individuals access to a wide range of financial products that they could not access through traditional forms of finance, such as loans, derivatives and leveraged trading.

There is no central entity responsible for keeping records of the financial activities individuals are participating in. However, the blockchain keeps an immutable record of transactions that are associated with your wallets. Crypto Tax Calculator can pull in this data, and convert many different transaction types from lines of code on the blockchain into a format that is both easy to read and relevant for tax purposes.

The DeFi space is very nuanced in terms of taxable outcomes due to the large number of radically different financial products, many of which are covered below.

Yield Farming

The invention of DeFi brought a whole host of new financial products to the crypto market. One of the most widely used products in DeFi is called ‘Yield Farming’. This term covers a broad range of different activities in DeFi, but all have a similar process. Yield farming involves depositing capital (such as other cryptocurrencies and/or stablecoins) into a decentralized protocol and being rewarded in return.

There are over a thousand such DeFi protocols, across multiple blockchains, each with their own distinct rewards for depositors. Some protocols, known as yield aggregators, use the depositor’s funds for short term lending or investment to earn passive income for investors. Others may need liquidity for their platform to function, and reward depositors by sharing the platform’s native token and/or a share of the revenue the platform generates. While there are thousands of versions of these two reward systems, they generally use similar methods for deposits, withdrawals and paying out rewards.

Each protocol handles each of these steps uniquely. We will now cover some of the most common ways that these transactions are recorded.

Receipt Tokens

One of the most common methods for protocols to record who deposits funds to the platform is by issuing a ‘receipt’ token. This token is issued to depositors, allowing them to redeem their funds by sending the receipt token back to the platform.

This process of depositing could be considered a ‘taxable disposal’ event because investors are arguably giving up beneficial ownership of their funds by depositing them into the platform and then receiving a receipt token with fundamentally different properties in return. When investors go to withdraw their deposit, again, it could be considered a ‘disposal’ event as the receipt token is sent back to the platform and the deposited funds are withdrawn back into the wallet. Rewards are paid out to depositors using three methods.

Some practitioners believe receiving a ‘receipt’ token may not be considered a trade and wouldn’t likely be considered a taxable transaction if the receipt token is non-disposable or worthless.

Yield Farming: Income Events

The first method is by sending a share of the rewards automatically to the wallets holding these ‘receipt tokens’. These rewards transactions are recorded on the blockchain as a pay out, similar to how interest is paid to a bank account and are income at the time of receipt.

The second method is similar to the first, however, the rewards build up on the platform, and must be ‘claimed’ by the depositor. Many practitioners believe that the income is earned when you have the ability to “claim” the rewards, not when you actually “claim” them. The more aggressive approach is to take income when the rewards are “claimed.”

The third method differs from the first two entirely, where the rewards grow with the deposited funds, and the receipt token represents an increasing amount of deposited funds. In this scenario, when the receipt token is returned and the deposited funds are withdrawn, the investor would receive a larger amount of funds than they had deposited. In this scenario, The excess rewards returned are income at the time of receipt.

Yield Farming without Receipt Tokens

Another method that protocols use to keep records of deposits is using the immutable blockchain record. These records are always available and the platform can see which wallets have deposited to the platform, when they deposited, and how much they deposited. These immutable records allow the platform to verify which wallets are entitled to deposits on the platform and will only allow the wallet that deposited to withdraw the funds they are entitled to. This form of depositing is more straightforward as the protocol is the "bailee" of the funds and the wallet owner still has beneficial ownership over the funds.

Similar to the first deposit method, rewards are paid out in the same three ways as above. The difference is that the rewards are sent to wallets that have been recorded as depositing into the protocol.

Airdrops

Another way in which a user may earn income through cryptocurrency is via airdrops. An airdrop occurs when cryptocurrencies or blockchains distribute a coin or token, often employed as a marketing mechanism to gain momentum in the early stages. There are 2 different ways in which airdrops are conducted; one requires users to engage in a particular action or task, and the other is when the user is automatically given an airdrop as a holder of the chain’s coin.

Example of airdrops:

Whilst generally used to increase awareness and traction, airdrops may also be attached with governance rights for blockchain protocols. Following the above example of Uniswap’s airdrops in September 2020, an auxiliary benefit for airdrop receivers was the inclusion of governance power on the Uniswap platform. This allows these users to vote on future decisions regarding the protocol. This can be advantageous to both users that are invested in the protocol and wish to contribute and make their voice heard, as well as for the blockchain itself by securing transparency by distributing authority to its stakeholders, and moving away from centralized governance. You can read more about this trend of decentralized governance and its benefits here.

How to find Airdrops

Airdrops can be quite rewarding for users, but can often be difficult to track and find for users that are new to the space. There are many ways in which you can actively be on the lookout for airdrops and attempt to be eligible for upcoming aidrops:

• Regularly researching online for airdrops
• Following third party aggregators and joining exclusive signups and groups
• Check social media, and keep a lookout for the #airdrop hashtag
• Constantly looking out for new platforms and signing up to receive benefits
• Engaging in forums and discussions for new and established projects

Tax on Airdrops

Any airdrop into your wallet will likely be taxed as ordinary income. The value of the cryptocurrency used is the fair market value of the token at the date and time you become the beneficial owner. In situations where you need to claim an airdrop, the fair market value is likely dated at the point in time where you receive or are able to claim it. Some practitioners believe that you can recognize income at the time you actually claim it, not when you are eligible to claim but this is a more aggressive approach.

It is important to note that if, in the future, you decide to dispose of the tokens you received by airdrop, it is likely you may also have to pay Capital Gains Tax on these tokens, with the cost basis being the value of the token when you received it.

• Marketing/scam airdrops are likely still considered by the IRS as an ascension to wealth and should be reported as income at the time of receipt. However, a more aggressive position could be taken that marketing/scam airdrops are immediately abandoned and therefore not includible in income, but the taxpayer needs to be sure to actually abandon or dispose of them.

Airdrop Example:Say you have a cryptocurrency wallet and are airdropped 100 units of UNI.

The value of 100 units of UNI at the time of the airdrop is $1000 in total.

The $1000 worth of UNI will be considered income for tax purposes.

In the future, if you exchange the coins, the Capital Gains Tax you pay will be calculated with the cost basis being $1000.

Staking

Staking is a process that allows users to participate in the validation mechanism for blockchains, by delegating their crypto to a validator. The validator essentially receives the weighting of the delegated tokens, increasing their share of network fees, without actually receiving the assets directly. In return, validators pay their delegators a percentage of the fees as a ‘staking reward’. One of the ‘catches’ of staking can involve a ‘lock-up’ period, where the tokens are locked in a smart contract and are inaccessible whilst they are delegated.

• We realize there have been some legal moves in US courts to try and make staking rewards a nontaxable event, but these cases have not reached a final ruling, they do not provide any precedent on your taxes at this point - but may in the future.

For the blockchain involved, this staking mechanism assists with operation and security. For the individual, they earn rewards by participating in staking, similar to the manner in which individuals can earn interest from bank deposits. Any rewards earned from staking is viewed as an income tax event.

Example:

Say you hold 100 SOL in a Solana staking pool. Your pool reaches a consensus and as a reward you receive 20 SOL valued at $2000. This $2000 worth of SOL is considered income. You will therefore be taxed as per your income tax bracket.Note that if you decide to exchange your coins in the future, after at least 1 year, you will pay Capital Gains Tax with the cost base being $2000, since that was the price of SOL when your staking rewards were received.

There is a question of when the interest or ‘staking rewards’ are beneficially owned. In most cases, validators pay delegators network fees in real-time, i.e after every block. This means that, potentially, delegators could be receiving income every few minutes or even seconds. To keep a record of this would be next to impossible for regular users. For most staking contracts, the rewards are distributed by a smart contract that assigns a proportion of the generated fees to each delegator depending on the number of tokens they have delegated. The delegator will then have to ‘claim’ this reward in most cases. It is only at this point that the delegator will have the funds accessible in their account.

Most practitioners agree that income is earned when you are able to “claim” the rewards. The more aggressive approach is that at the point of “claiming” the rewards is when the taxable income event occurs. From here, if you sell the staking rewards, this will be a capital disposal event and the cost base of the staking rewards will be the market price at the time they became beneficially owned.

Some centralized exchanges and custodial wallets offer ‘staking’ to users. These entities generally will do the ‘hard work’ of staking your assets for you and in return, will take a cut of your staking rewards. The staking rewards are usually paid to the user’s account/wallet on regular intervals. In this situation, users will generally lock their tokens in a specific wallet or section of their account. Doing this generally has some limitations, such as time constraints on when the assets can be withdrawn etc. This is again a gray area, and it could be argued either way depending on the facts and circumstances to determine whether this would be considered a disposal event or not. Similarly to the above, the staking rewards would be considered income at the time the user can “claim” the rewards.

Some decentralized platforms use the term ‘staking’ for other events such as locking assets into a pool to earn yield or to get a share of the platform’s fees. In reality, this use of the term ‘staking’ is not exactly true to the typical delegation transaction that is outlined above. Instead, these transactions are more likely to fall into the scenarios outlined in the section ‘Yield Farming’ (above) so it is important to know what scenario your transactions would fall into.

Liquidity Pools and LP Tokens

A liquidity pool is essentially a group of tokens locked into a smart contract that enables decentralized token swaps, lending, borrowing, and other activities, all on-chain. Each liquidity pool will have a specific composition of assets (usually 2-3 specific tokens) where the amount of Token A + Token B = 'LP token AB', and liquidity providers must deposit predetermined proportions of each token to enter the pool. Liquidity pools form the backbone of decentralized exchanges and many DeFi applications.

When you deposit your tokens into a pool and receive an LP token in return, it is likely that you are 'disposing' of the tokens (relinquishing control of them) and receiving an LP token, with substantially different properties, in return. The same is true when you withdraw your liquidity. Tax authorities may see this as a ‘disposal’’ of the LP token and receiving the proportion of the tokens in the pool you are entitled to plus the rewards/interest that were accrued during the time your original assets were deposited in the pool and when they were removed.

Hard Forks

Similarly, you may also earn income from a hard fork. A hard fork is when there is a radical change in a blockchain’s protocol; the software which determines whether a transaction on the blockchain is valid or not. Therefore, forking causes the blockchain to ‘split’ into two, and consequently allows for validation of blocks that were previously invalid, or vice-versa. In simple terms, the blockchain splits into two, one which follows the set of old rules, and one which follows a set of new rules. Typically, when a new blockchain is created, it is represented by a new token that is different from the old token.

For the purpose of this guide, we will only be discussing hard forks, which can generate income through the creation of a new blockchain. Soft forks, in comparison, do not create new blockchains, but rather two versions of the protocol software which are compatible with each other. For example, in 2015 the Segregated Witness (SegWit) Bitcoin protocol forked off the Bitcoin protocol, although it maintained compatibility with the original Bitcoin blockchain.

However, if you wish to learn more about both types of forks, you can watch this video which details the difference between soft and hard forks.

A prominent instance of hard forking occurred in 2017, when Bitcoin Cash was created as a hard fork of Bitcoin. Bitcoin Cash aspired to reach better scalability and higher transaction amounts per block as compared to Bitcoin, by increasing the block size from 1MB to up to 32MB. However, since this required a significant change in the blockchain’s protocol, a new cryptocurrency ‘Bitcoin Cash’ was created. Bitcoin Cash became a completely separate cryptocurrency, with separate blockchains that were incompatible with each other.

Does forking result in free tokens?

When a blockchain is forked, this essentially creates a new ledger that is identical to the original ledger. This means that any user with crypto holdings on the original ledger will also hold an equal amount of the coin on the new ledger. However the value of the coins on the new ledger is determined purely by the market interest and investment. Whilst a fork can be generated for most chains by anyone, it requires enough miners (or stakers for PoS chains), users and support by exchanges to gain enough traction and be reasonably deemed as a functional alternative.

Tax on Hard Forks

The value of the tokens received through a hard fork are taxable as income. To determine when these tokens are actually ‘received,’ the IRS defines this as when the transaction is ‘recorded on the distributed ledger’, and allows you to have control over the crypto asset such that you are able to sell, transfer or otherwise dispose of it. However, there is some uncertainty as to what is the fair market value of a token in a brand new market (as created by a hard fork). It may be that that value is $0, or it could also be that it is measured in some other way, such as by taking the daily average. The IRS has not yet provided any guidelines to resolve this uncertainty.

Moreover, similar to staking and airdrops, you may also be liable to pay capital gains tax if you later decide to sell these coins received through the fork. To determine how much income you made from the new token, you can use the Fair Market Value of the coin on the day that you received it. Once again the Fair Market Value will be used to represent your cost base when you dispose of the coins.

Hard Forking Example:

Say you hold 2 units of Bitcoin. A hard fork occurs, and as a result you now own 2 BTC (Bitcoin) and 2 BCH (Bitcoin Cash). At the time you received the 2 BCH, it had a market value of $10,000 total. The $10,000 will be subject to income taxes. If you decide to sell these 2 BCH tokens a few months later when they have accrued to a value of $50,000 combined you will incur Capital Gains Tax with a capital gain of $40,000 since your cost base for the 2 BCH sold was $10,000.

Mining

Another way you may be taxed in a similar fashion to staking and airdrops, is if you partake in crypto mining at a ‘hobby’ level. Mining involves using computing power to solve cryptographic equations to validate and add new transactions to the blockchain. This also secures the network by preventing double spending of cryptocurrencies. A key incentive for people to engage in mining is the provision of new coins upon validating transactions.

Mining utilizes a Proof of Work (PoW) mechanism, whereby the first miner that can demonstrate they have completed the ‘work’ of solving the cryptographic equation, is given rights to verify and add a block to the blockchain. Mining can be undertaken on two levels:

1. Individual Hobbyist - solo mining and mining pools
2. Mining as a business activity - self employed or otherwise

Solo mining vs mining pools

Mining can have significant costs and require intensive resources. A way this can be relieved is by sharing these resources with others by joining a mining pool. Mining pools enable users to cooperate and mine together. However, this also means that the profits earned are also shared amongst the pool, proportionate to the quantity of resources that each member of the pool contributed. You can find and compare different mining pools here. Note that you may have to pay fees for being in a mining pool.

Tax on Mining activities

If you are mining as an individual hobbyist, then any profit you make will be taxed according to your income bracket. However, if you are partaking in mining in the course of business or trade activities, your profits will be taxed as business income, reported on various business forms depending on your business structure. If you are a corporation, you will file using Form 1120; if an s-corp then Form 1120S, and a partnership then Form 1065. If you are conducting your business as a sole proprietor or a single member LLC, you will use Schedule C to report your income and expenses, but you will also be required to pay self-employment tax. Note that businesses may qualify to deduct expenses associated with mining from their income.

Stablecoins

Stablecoins are cryptocurrencies that are tied to an underlying asset, usually a fiat currency. For example, Tether (USDT) is a cryptocurrency pegged to the US Dollar. As their name suggests, stable coins offer the benefits of cryptocurrency whilst also maintaining the relative stability of fiat currencies.

Despite their relationship to fiat currencies, they are still cryptocurrencies, and thus treated as capital assets for taxation purposes by the IRS. Due to the nature of stablecoins, it is unlikely that you will make any considerable capital gains or losses, since stablecoins attempt to maintain a 1:1 relationship with the fiat currency they are tied to. However, an exact 1:1 relationship is not always possible, due to slight fluctuations which may result in small amounts of gains or losses. If you have traded significantly large amounts of stablecoins, or provided liquidity to a platform such as Curve, even small fluctuations can equate to a material gain/loss. In this event, you will have to pay Tax for your capital gains. Consider the below example for calculating Capital Gains Tax for stablecoins.

Say the price of USDT is $1. You purchase 100,000 USDT at a price of $100,000. 2 months later, you decide to sell when the price of USDT is 1.01, so that the selling price is $101,000. You have made a capital gain of $1,000 which you may have to pay CGT for.

Alternatively, you may also earn stablecoins as a form of income. For employers that seek to pay salaries in cryptocurrency, stablecoins are a favored cryptocurrency as they lack the volatility of other virtual currencies. In the event that you are being paid stablecoins as a form of income, you may have to pay income tax according to your income bracket. If you later decide to dispose of these assets that you have been paid with, you will also have to consider Capital gains tax as per the example above.

Rebase TokensRebase (or elastic supply) tokens, refer to tokens or protocols which automatically adjust their circulating supply as a response to price fluctuations. Similar to stablecoins, rebase tokens seek to fix their price marks. However, unlike stablecoins, rebase coins employ a different mechanism of elastic supply to achieve this. This is often in the form of an expanding token supply, whereby users that get in early are rewarded by this expanding supply. This expansion is exponential, and thus the earlier that a person enters, the more profit they make.

Wonderland’s TIME token is a popular example of a rebase token, which is backed by a number of assets on the Avalanche chain, such as MIM and TIME-AVAX LP. Wonderland allows token holders to stake their TIME tokens and receive MEMories, with the compound interest added periodically on every epoch; 8 hours for Wonderland (although this may differ for other protocols/tokens). The rebases are allocated at the end of each epoch, and the high frequency of these epochs means that these rebases can compound and produce significant returns.

From a tax perspective, Rebase tokens are still an uncertain area with no specific guidance about whether rebase tokens may be taxed as income (similar to staking), or whether they only incur capital gains tax when disposed of. Some people consider that rebasing can be parallelled to a stock split, which would make it nontaxable. On the other hand, some people take the safer approach and report all of their rebase earnings as income based on fair market value at the time they were received. To ensure that you remain compliant, it is best to seek advice from a tax professional about your specific circumstances.

Forms you may need

Form 8949 For transactions that qualify as a capital gain or loss. These can be filled out using your transaction reports from various exchanges.

Form 1040 (Schedule D, Capital Gains and Losses) Commonly referred to as just Schedule D, this is the summary of your capital gains and losses from Form 8949.

Form 1099-MISC (Miscellaneous Income) This Form is used to report rewards/ fees income from staking, Earn and other such programs if a customer has earned $600 or more in a tax year.

Inventory Methods

There may be different methods you can apply to determine your cost basis such as First-in First-out and specific identification using a Last-in First-out order. The IRS guidance requires First-in First-out unless a specific identification of the cryptocurrency can be made. Crypto Tax Calculator allows you to choose the inventory method which best suits your needs such as First-in First-out or Last In, First Out. See our Inventory Method Guide for Cryptocurrency for more information about the different inventory methods you can use for determining your cost basis.

Specific Identification Method to support Last In, First Out or First-in First-out

According to the guidance issued by the IRS (A39), you can use the Specific ID method to calculate the cost basis of each unit of crypto asset you are disposing of. Specific ID means that when you dispose of your crypto asset, you must document the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address.you are specifically identifying the exact units you are selling. The information for specific identification must show:

(1) The date and time each unit was purchased

(2) Your cost basis and fair market value of each unit at the time it was purchased

(3) The date and time each unit was sold, exchanged, or otherwise disposed of

(4) The fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.

You will need to use the specific identification method if you want to use any method other than First-in First-out, and these are elements we help you track using Crypto Tax Calculator.

What is better, Last In, First Out or First-in First-out?

What works best for you might not be the best for someone else. For example, if cryptocurrency prices are rising quickly (like with a bull market), using Last In, First Out will most likely lead to significantly less total taxable gains. If it’s a bear market, First-in First-out will most likely yield better results, but neither is guaranteed to do so. It's also important to note that using Last In, First Out may minimize the likelihood of having long term capital gains since you dispose of the most recently acquired tokens first; remember that long term gains are taxed at a much lower tax rate than short term.

Keep in mind the IRS only accepts First-in First-out or specific identification as acceptable accounting methods.

Wash Sales

A wash sale occurs if you buy a stock or security that is identical to one you sold or traded at a loss 30 days before (or after) the sale. For example, if you sold XYZ stock at a loss and repurchased it 27 days later, the trade would trigger a wash sale. If you waited to repurchase ABC until 31 days after your first trade, however, a wash sale would not be triggered.

Does the Wash Sale Rule Apply to Cryptocurrency?

It is arguable that cryptocurrency is not subject to the wash sale rule because the IRS classifies it as property, not a stock or security. This means that you can sell your crypto at a loss and buy it back within 30 days and still record a capital loss. Keep in mind you must also meet the IRS “economic substance doctrine”, which means that there must be an economic change for a transaction to have a reportable tax loss. So if you sell and immediately buy back, not letting any time or price fluctuation occur, then the IRS may say it lacks “economic substance” and disallow the loss.

There have been several efforts in US Congress to make cryptocurrency subject to the Wash-sale rule, which could negate this loophole. However, at this time none of these efforts have been made into law. The IRS advice on Cryptocurrency is more straightforward, while the SEC uses the Howey test to establish whether a token is a security or property.

“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” - IRS

“An investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Therefore, issuers and other persons and entities engaged in the marketing, offer, sale, resale, or distribution of any digital asset will need to analyze the relevant transactions to determine if the federal securities laws apply. - SEC

In summary, the SEC's guidance provides that the Howey test may be avoided where there is a specific use case for a digital asset, and the asset has limited prospects for appreciation-characteristics which are not present in the vast majority of cryptocurrencies.

• Indeed, most crypto developers create their digital asset first and develop a use case after introducing the asset.
• This approach therefore would technically result in the creation of an asset that would violate SEC regulations, in the event that the asset is not registered.

Given the numerous regulations that may apply, users should coordinate with their financial advisor to ensure their investments avoid violations of SEC requirements, money transfer regulations, and other laws that may apply.

How can Crypto Tax Calculator help?

Crypto Tax Calculator aims to make the complicated process of assessing and following these ever evolving tax rules around the blockchain a little bit easier. From DEX & DeFi to NFT’s, we have some of the most integrations on the market. If you’re not already taking advantage of crypto tax software, try it today for free, with a 30-day money back guarantee on all purchases.

Disclaimer: The content of this guide is for general informational purposes only. It is not legal or tax advice. Viewing this guide, purchasing or using Crypto Tax Calculator does not create an attorney-client relationship or a tax advisor-client relationship.

The information in this guide represents the opinions of experienced crypto tax professionals; however, some of the topics in this guide are still subject to debate amongst professionals, and the IRS could ultimately release guidance that conflicts with the information in this guide. The information contained in this guide is based on the authors’ interpretation of the Internal Revenue Code (“Code”). Changes to the Code may be retroactive and could significantly alter the views expressed herein. Therefore, use this information at your own risk and for information purposes only.

Consult a professional regarding your individual tax or legal situation.