The Ultimate Crypto Investor’s Tax Guide: Make Sure You Have a Plan
If you engaged in cryptocurrency-related activities in 2022, you could have taxable gains. If you are unsure whether this applies to you, ask yourself if you made a monetary profit when dealing in crypto. If you have, then you owe taxes.
This could be as straightforward as buying and selling crypto, but it also includes staking, Airdrops, and more. Today, we’re going to make sure you know everything you need to file your crypto taxes for 2022.
Now, in some ways, taxable gains in crypto resemble taxable gains in other investments, such as stocks. But there are also several significant differences that could trip you up when filing your taxes this year.
As a crypto investor, you need to know those differences and plan for them or risk the wrath of the Internal Revenue Service (IRS). The IRS is not to be tangled with in any way, and your best option by far is to be as transparent as possible – so be prepared to break out that Excel sheet.
Our team here at American Institute for Crypto Investors created this guide to help you avoid the pitfalls you’ll encounter when dealing with paying taxes on your crypto gains. We’ll tell you what activities are taxable and how to keep track of them so you come out on top this tax season.
We know it can be tempting to try to avoid paying taxes on your crypto gains.
But you should know that the IRS’s scrutiny of cryptocurrency-based gains has ramped up substantially over the past few years. If you try to evade paying taxes on crypto gains, then it’s not a matter of if you’ll be caught; it’s when.
And with that happy thought, let’s get started…
Know Your Taxable Events
All crypto investors need to be familiar with what constitutes a taxable event and what does not. Some resemble taxable events in traditional investing, but crypto adds a bunch of wrinkles:
1. Selling Crypto for Fiat (U.S. dollars)
This is treated like selling a stock or any other investment. You will owe taxes on any gain – the difference between what you paid for the crypto (your cost basis) and the sale price. And don’t forget to tally up any crypto you sold for a loss. As with gains from stocks, you can deduct those losses from your gains.
Factoring your losses into your taxes could make a big difference as you might have made a $10,000 gain on Bitcoin (BTC), but a $5,000 loss on Cardano (ADA). Why pay the taxes for $10,000 when you only made $5,000.
2. Interest Payments
Numerous crypto sites offer interest-bearing products. You deposit your crypto on their site and receive regular payments in crypto over the course of the year. Those interest payments are taxable.
3. Staking
Many cryptocurrencies let you “stake” some or all of your crypto in return for regularly-paid rewards for actively participating in and supporting the network. Those rewards are taxable.
4. Forks
Although this is less common now than it was a few years ago, sometimes a cryptocurrency will “fork” into two distinct cryptocurrencies. One of the best-known examples was Bitcoin Cash (BCH) forking from Bitcoin (BTC) in 2017. Owners of the original cryptocurrency will own an equivalent amount of the forked cryptocurrency. This “new” crypto is taxable (with a cost basis of zero) but only if the owner has access to it and controls it.
5. Airdrops
This has been a popular way of increasing the number of investors for a new cryptocurrency for a while, and airdrops are essentially crypto giveaway programs. Some airdrops have a specific claim process, like SingularityNET (AGIX), although often just owning a particular crypto will entitle you to an airdrop. If you received any airdropped crypto last year, it’s taxable with a cost basis of zero.
6. Mining
Crypto mining by individuals isn’t as common as it once was, but it’s not unheard of. Mined crypto is taxable with a cost basis of zero if you do it as a hobby. The value is based on the price of the mined crypto when it lands in your wallet. You can only deduct the mining costs (mostly electricity and hardware) if you set up your mining operation as a business.
7. Crypto-for-Crypto Trades/Exchanges/Swaps
This one is unique to the crypto world. If you trade, exchange, or swap any crypto for another, it’s a taxable event. Note that this isn’t an issue when using stablecoins to buy other cryptocurrencies since their value is tied to the U.S. dollar. But for trades in which neither is a stablecoin, the crypto being “sold” will have a taxable gain if it is worth more than when you bought it. If it’s worth less, you can use the loss to offset gains elsewhere.
8. Spending Crypto
Another crazy quirk of crypto is that – unlike with U.S. dollars – you create a taxable event whenever you spend it. Most people aren’t using crypto to buy things just yet, but some merchants accept it – including household names like AT&T Inc. and Starbucks Corp. If the crypto you’re spending is worth more than when you bought it, you owe tax on the gain. I’m sure you’re thinking that this is getting a little ridiculous for you to keep track of the taxes on your latte, and you’re right.
Eventually, Congress will likely enact a de minimis exemption for crypto (creating an exemption for purchases below a certain amount, such as $200). But until Congress gets around to that, spending crypto is a taxable event.
Of course, not everything you do with crypto is a taxable event…
Non-Taxable Events
1. Buying and Holding
If you bought any crypto and simply held it through December 31, 2021, you did nothing taxable.
2. Donating to Charity
Good news. Not only are crypto donations to charity not taxable events, they qualify as charitable deductions – though the deductible amount depends on whether you’ve held the crypto for at least one year. Giving back just got even better.
3. Gifting
Giving your crypto to a friend or relative is not a taxable event. So, instead of putting money in a card, you can just ask them for their wallet address and save the postage.
4. Transferring Crypto from One Wallet to Another
The IRS does not care if you simply move your crypto between wallets you own. For example, you might move crypto purchased on Coinbase to another exchange like Kraken or to a private wallet like Exodus. If you’re just transferring your crypto, it’s not a taxable event.
Before we move on, there’s one more thing I need to mention: stolen crypto. The general lack of regulation of crypto means it’s easier for hackers to scam or steal from people. Chainalysis has reported that $14 billion worth of crypto was stolen in 2021.
Unfortunately, stolen crypto is not tax-deductible. This includes coins stolen from an exchange, hacked wallets, and scams (where you are fooled into sending coins to the thief’s wallet). In addition, any crypto loss that results from your own negligence – such as forgetting the private key to a wallet or accidentally sending coins to a wrong address – is also not deductible.
That’s a lot to absorb. Now, we’ll move on to the need to track your crypto activities – probably the most critical aspect of crypto investing…
Tracking Your Crypto Activities
I’ll start by saying that when it comes to tracking your crypto activities, you’ll be doing most of the heavy lifting.
While some tools do exist to help you (more on that shortly), much of the burden of crypto record-keeping falls on your shoulders. This is another stark contrast with the traditional investing world, where every year you’re sent your tax documents by your investing company.
If you trade stocks in a brokerage account, you know to expect tax documents (such as a 1099-B) in January that give you a detailed account of your gains and losses for the previous year.
Life for crypto traders is nowhere near as easy as this. Even the leading exchanges don’t offer much help. Of the three I checked – Coinbase, Gemini, and Kraken – none will provide the 1099-B you get from traditional brokerages.
Coinbase provides a 1099-MISC form if you earned staking and rewards income, but this form doesn’t include gains or losses from trading crypto, which is most likely a huge part of your yearly crypto taxes. Kraken also provides only tax documents on gains from staking rewards and interest payments, and only then if you have at least $600 in gains.
But you don’t have the luxury of giving up figuring this out. The IRS wants to know if you had any gains so they can get their cut.
So, you have to download your transaction history from any crypto exchange you used through the course of the year and calculate your gains and losses. From what I’ve seen, almost every crypto site has an option for downloading this history as a CSV file, which you can open in a spreadsheet app like Microsoft Excel.
Such policies are common at crypto investing sites, including lending sites that focus on interest payments, such as Nexo and Celsius. In fact, Nexo provides no tax documents whatsoever, just CSV records.
You’ll also need to keep track of staking rewards earned outside of the major exchanges. This can be a pretty painstaking and long process, especially if you don’t list the exact number of coins you have and then notice how much was given to you in rewards.
You might have 2,500 AGIX coins in your wallet and then the next day have 2,800 from an airdrop and not even notice it. This might be only a few dollars in gains, but the IRS still wants to know.
Not only must you track each crypto reward and the date on which you receive it, you must convert the value to U.S. dollars so you have a taxable gain to report to the IRS. And you must use the price of the crypto asset at the time you received it.
Since staking rewards are received quite frequently – every three days is common – you’ll be using a lot of rows on your spreadsheet.
One more thing. Even though you won’t need the data for this tax year, you should make sure that you carefully track all your crypto purchases – the date, the amount, and the price paid converted to U.S. dollars. This info represents the cost basis for the purchased crypto, which you will need when you sell, trade, or swap it in a future tax year.
Tips for Tracking Your Crypto Taxes
So, the big question we’re left with here is what is the best way to keep track of your crypto activities?
To some extent, the answer varies on a person-by-person basis. If you’re willing to put in the time and have decent Excel skills, you can keep track of all your crypto activities yourself.
But that means rounding up all the data on your transactions and doing all the necessary conversions to U.S. dollars. It’s definitely possible – I’ve been doing it myself – but it’s tedious and time-consuming.
An option many may prefer is to sign up with one of the online crypto tax services. These sites let you connect your wallets and exchange accounts to their service. Most can also track sources of income such as staking, airdrops, and other rewards.
The services compile your activities into a unified tax report. Most of them also integrate with TurboTax. It’s very convenient considering the alternative.
A few things to know…
Crypto Tax Services Will Cost You
Some offer very limited services for free, but they’re really “try-before-you-buy” options. You’ll have to pay to get the sort of tax reports you really need.
Most of the services have tiered pricing systems based on a maximum number of transactions. The more transactions you have, the more you pay, but a typical crypto investor should be well-covered by the entry-level tier at most of these sites.
Still, you should shop around for the service that has the best tier/price for your needs, as no two investors are the same.
The Sites Do Not Include Every Possible Platform and Wallet
Some offer more than others, but each is good about offering the top exchanges and wallets to work with. If you used a less popular exchange or DeFi platform, check to make sure it’s offered before you take the time to sign up.
Given the growing need, quite a few crypto tax services have sprung up in recent years, such as:
- Accointing
- Bear.Tax
- BitcoinTaxes
- CoinTracking
- CryptoTrader.Tax
- CryptoTax Calculator
- Koinly
- TaxBit
- Tokentax
- ZenLedger
Finally, I’d like to note a recent promising development. One of these companies, TaxBit, is trying to forge deals with industry leaders to make comprehensive tax forms free to customers of any participating exchange.
However, users would have to pay to include data from out-of-network platforms or wallets. For many active crypto investors, this is a small price to pay for convenience.
The future of crypto is happening right now, and it couldn’t be looking any better.
Take care,
David Zeiler
Advisory Board Member, American Institute for Crypto Investors
Follow me on Twitter @DavidGZeiler.