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Crypto Taxes

Crypto Taxes: What to Report, the Deductions, Rules & Rates

Published, 17 September, 2020

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Disclaimer: This post is provided for informational purposes only. It is not intended to substitute for tax, investment, financial, nor legal advice. For financial, tax, or legal advice please consult your own professional.
The IRS has a complicated tax code in the United States. Understandably, it can be easy to ignore the black box of taxes, however understanding these rules can help you minimize the amount you pay in taxes and save you a huge amount of money.

Capital Losses from Crypto Trading

Since the IRS has issued guidance that cryptocurrency is property, when you dispose of a crypto asset (e.g. sell, trade, use for a purchase, etc.), it triggers a capital event. If the proceeds from the disposal are lower than the cost basis of the asset, then you have a capital loss.
For example, you can claim capital losses1 to offset your capital gains (even in a different asset class) to reduce the amount of capital gains taxes you owe. You can also roll over losses to future years without expiration if you do not have sufficient capital gains to offset in the given year. This is why it is incredibly valuable to file your cryptocurrency taxes, even when you have losses in a particular year.

Guidelines for Filing

In the US, the IRS has not specified guidance for how exactly to calculate capital gains on cryptocurrency transactions. To be consistent with IRS guidance for other assets, such as stocks, bonds, and mutual funds, you should apply either the first-in, first-out (FIFO) method or the specific identification method.
Under FIFO, the first coin that you purchase (chronologically) is the first coin counted for a sale. Under specific identification, you select which specific coin is being sold in a transaction. This can be ad-hoc or according to a pattern (e.g., highest-in-first-out [HIFO], last-in-first-out [LIFO], etc.).

Capital Gains Rates

Capital gains may be taxed at two different rates depending on the length of time that the assets have been held. If you have held coins for one year or less, any gains are considered short-term capital gains. In this scenario, the gains are simply added to your income for tax purposes and taxed at your ordinary income tax rate (2018 rates, 2019 rates). This is the higher tax treatment scenario.
If you have held the coins for more than one year, any gains are considered long-term capital gains. In this scenario, the gains are taxed between 0 – 20% depending on your ordinary income tax rate (you can determine yours here). This is the lower tax treatment scenario.

Margin Loans Using Your Cryptocurrency

Services like BlockFi allow you to collateralize your cryptocurrency (e.g. Bitcoin, Ether, or Litecoin) in exchange for a USD loan. Unlike selling, trading, or disposing your cryptocurrency, collateralizing crypto for a fiat loan is not a taxable event. This means that you can utilize a margin loan like this if you do not want to liquidate your cryptocurrency but still want liquidity for other expenses, such as funding a business.

Crypto Tax Filing Software

Calculating cryptocurrency taxes can get confusing. Proper record keeping involves trade-by-trade records that include everything from timestamp to USD cost basis of the digital assets you’re trading. Services like TaxBit can help you calculate your capital gains and prepare your crypto taxes. TaxBit’s management software is designed by experienced CPAs and tax attorneys to manage your portfolio and make tax-optimized trades.
Additional Resources
Acknowledgements
Thanks you to Clinton Donnelly, Enrolled Agent (Donnelly Tax Law), Shehan Chandrasekera, CPA (JAG CPAs) for consulting on this post.

Last updated on June 14th, 2022

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Digital currency is not legal tender, is not backed by the government, and crypto accounts held with BlockFi are not subject to FDIC or SIPC protections. Digital currency values are not static and fluctuate due to market changes. Not all products and services are available in all geographic areas and are subject to applicable terms and conditions. Eligibility for particular products and services is subject to final determination by BlockFi. Rates for BlockFi products are subject to change.
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See blockfi.com/terms for more information.
2022 © All Rights Reserved.
As of February 14, 2022, the BlockFi Interest Account (BIA) is no longer available to new clients who are US persons or persons located in the US and existing US clients with BIA accounts are unable to transfer new assets to their BIAs. Learn More.
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This icon serves as a link to download the eSSENTIAL Accessibility's free assistive technology app for individuals with physical disabilities.
Digital currency is not legal tender, is not backed by the government, and crypto accounts held with BlockFi are not subject to FDIC or SIPC protections. Digital currency values are not static and fluctuate due to market changes. Not all products and services are available in all geographic areas and are subject to applicable terms and conditions. Eligibility for particular products and services is subject to final determination by BlockFi. Rates for BlockFi products are subject to change.
BlockFi Rewards Credit Card: For more information, please see BlockFi’s Terms of Service. BlockFi is not a Bank. Cards are issued by Evolve Bank & Trust, Member FDIC, pursuant to a license from Visa® USA Inc. Rewards are not offered by Evolve Bank & Trust and are instead offered and managed by BlockFi.
BlockFi International Ltd. holds a Class F digital assets business license under the Digital Assets Business Act, 2018 (as amended) and is licensed by the Bermuda Monetary Authority to conduct the following digital assets business activities: (i) issuing, selling or redeeming virtual coins, tokens or any other form of digital assets (ii) operating as a digital asset exchange (iii) providing custodial wallet services (iv) operating as a digital asset derivative exchange provider and (v) operating as a digital assets services vendor.
See blockfi.com/terms for more information.
2022 © All Rights Reserved.