Resources/guides/US Tax Guide 2022

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. 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.

Income Tax Capital Gains Tax
Mining Profit made from selling crypto (e.g selling BTC for USD)
Staking Rewards & Yield Farming Profits made from exchanging cryptos (e.g selling BTC for ETH)
Airdrops Purchasing items with cryptocurrency
Forks & Airdrops Profits made from trading NFTs
Salary paid in crypto

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 CryptoTaxCalculator 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%.

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 CGT 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, which range from 0% to 20%

Exceptions to Tax Rules

Not all transactions incur tax 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).
  • 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 charity

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 not uncommon 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 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.

For example, if your capital losses in a year amount to $5,000, you can deduct $3,000, leaving you with $2,000 additional ‘loss’ that can be used to offset future capital gains. Keep in mind, however, that there is a 30 day period after selling assets during which any similar asset can not be purchased (e.g if you sell ETH to realize tax advantages and then purchase ETH again in 2 weeks). Otherwise, the original transaction will be treated as a ‘wash sale’ and you will not be able to claim tax benefits. This 30 day period also applies before the transaction, so for example if you had bought 10 ETH 3 weeks before selling 10 ETH, this may also be considered wash trading.

Using CryptoTaxCalculator 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 CryptoTaxCalculator to produce a tax report for any financial year, in line with the IRS guidelines. You can import data for all the cryptocurrencies you have traded with, and CryptoTaxCalculator will combine them all into one report, exportable 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 CGT or Income Tax liability 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 Tax event is triggered.

Selling Crypto

To calculate your capital gains when you sell cryptocurrency , you can simply subtract the cost base 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 base 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 being 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 base: $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 than capital gains, the rules for Income Tax are applied instead. In each of the below transaction types, any profits earned are taxed according to your income bracket’s tax rate.

Airdrops

One 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, generally 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:

No action required (automatic airdrops) Actions required by user (bounty airdrops)
Holder airdrops - Airdrops given to users for simply holding particular cryptocurrencies. For example, Stellar in 2016 airdropped over 1 billion XLM tokens to holders of BTC. Users simply had to prove BTC holdings to receive this. Sharing a post on social media to promote a blockchain, and receiving airdrop in return
Exclusive airdrops - Given to loyal users of a platform as rewards. For example, Uniswap in September 2020 distributed 400 tokens to loyal users that had used the Uniswap protocol in the past. Subscribing to the blockchain’s newsletters and receiving airdrops in return
Standard Airdrops - Receiving an amount of the native token, simply requires the user to have an account with the protocol. Joining a forum to engage or collaborate with the project

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 airdrops:

  • 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 profit you earn from airdrops into your wallet, may 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 it, not at the point in time where you’re eligible. 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 CGT on these tokens, with the cost basis being the value of the token when you received it.

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

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, 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 are many complexities around staking.

One of these is the process of delegation, also known as the ‘staking deposit’. If this is viewed by a tax jurisdiction as a disposal of beneficial ownership, then it would be a taxable event, similar to selling the token. Delegating tokens generally locks tokens into a smart contract, with only the delegator being able to ‘unstake’ the tokens. This stops malicious entities hiding behind the disguise of a validator and running away with delegated tokens, as they should never have any access to the tokens (in genuine decentralized blockchains).The IRS has not released specific guidelines around the process of delegation, and as the staking mechanism can vary greatly from blockchain to blockchain, it is important to consult a tax professional if you are unsure.

There is also the 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. From a reporting perspective, it is likely that this is the point where staking rewards are beneficially owned and 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 grey area, and it could be argued either way whether this would be considered a disposal event or not. If the centralized exchange still gives the user full control over the staked asset, it may not be considered a disposal event.Similarly to the above, the staking rewards would be considered income in most cases, with this being realized at the time the staking reward is deposited into the user’s wallet.

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 the pool, it can be argued 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. As soft forks can not result in any income, soft forks are unlikely to be relevant for taxation purposes.

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 CGT 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 CGT 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. 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 corporate income, reported through form 1120. If you are conducting your own business, use Schedule C 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 CGT for your capital gains. Consider the below example for calculating CGT 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 CTG tax as per the example above.

Rebase Tokens

Rebase (or elastic supply) tokens, refer to tokens or protocols which automatically adjust their circulating supply as a response to price fluctuations. Similar to [stablecoins](link to above header), 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 a 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 CTG 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.

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 taking part in. However, the blockchain keeps an immutable record of transactions that are associated with your wallets. CryptoTaxCalculator can pull in this data, and convert many different transaction types from lines of code on the blockchain to 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 were covered above.

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.There are thousands of different versions of these two reward systems, however, they generally use similar methods for deposits, withdrawals and paying out rewards.

Each protocol handles each of these steps uniquely but we can cover some of the most common ways that these transactions are recorded.

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 ‘disposal’ event as investors are possibly giving up beneficial ownership of their funds by depositing them into the platform and are 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. In this scenario, rewards are generally paid out to depositors using three methods.

The first method is by sending wallets holding these ‘receipt tokens’ a share of the rewards directly to their wallet. These rewards are paid out to wallets as a transaction recorded on the blockchain, similar to how interest is paid to a bank account. The receipt of these rewards to the wallet would likely be considered income by the IRS.

The second method is similar to the first, however, the rewards build up on the platform, and must be ‘claimed’ by the depositor. This method differs slightly, as the beneficial ownership of the tokens would occur when the tokens are ‘claimed’ and have arrived in the wallet. This allows investors to decide when to trigger the taxable event of receiving the income.

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. This process falls into a grey area for tax purposes, as it could be argued that the disposal of the receipt token for a larger amount of funds could be considered a capital gains (or loss if the dollar value has decreased) event.

Another method that protocols use to keep records of deposits is through the use of 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 also 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 of a grey area than the first situation, as it is difficult to determine whether the deposit is a disposal of beneficial ownership or whether beneficial ownership is retained, as only the wallet that deposited can withdraw 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.

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 are different methods you can apply to determine your cost basis such as First-in First-out (FIFO) and Last-in First-out (LIFO). FIFO is the most commonly used method, although CryptoTaxCalculator allows you to choose the inventory method which best suits your needs. See our Inventory Method Guide for Cryptocurrency for more information about the different inventory methods you can use for determining your cost basis.

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 are specifically identifying the exact units you are selling. In order to use this method, you need to keep track of the following:

  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.

The information provided on this website is general in nature and is not tax, accounting or legal advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and seek professional advice. Cryptotaxcalculator disclaims all and any guarantees, undertakings and warranties, expressed or implied, and is not liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or Consequential Loss or damage) arising out of, or in connection with, any use or reliance on the information or advice in this website. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information in this website is no substitute for specialist advice.

Shane Brunette

CEO

Shane Brunette founded CTC back in 2018 after dealing with his own crypto tax nightmare. He has worked closely with accountants and tax lawyers to make it easy for fellow cryptocurrency users to be tax compliant.

Recommended Reads

Calculate Your Crypto Taxes Now!

CryptoTaxCalculator does the hard work so you don’t have to.

Copyright © 2022 CryptoTaxCalculator