The Most Trusted Crypto Tax Guide
Produced by Cryptocurrency Tax Attorneys and Blockchain CPAs
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Overview
TaxBit has helped thousands of taxpayers automate and file their cryptocurrency taxes.
The IRS released its first cryptocurrency guidance in 2014 and specified this asset class is taxed as property. Since that time, the
crypto community has seen increased enforcement, audits, and pending regulations.
Notably, the IRS released a question on 2019 tax forms that asked every taxpayer “[A]t any time during 2019, did you sell, send,
exchange, or otherwise acquire any financial interest in any virtual currency?” This question has been present for all subsequent years.
Whether you only need to file crypto taxes for this upcoming year, or if you need to amend previous tax years, TaxBit provides all
historical cryptocurrency tax forms for its users included in its Plus+ and Pro plans. TaxBit’s team of tax experts and software
developers are here to make the process simple and easy for you to file.
How does the IRS classify crypto?
Cryptocurrency fits within what the IRS calls virtual currency. Virtual currency is treated as property for tax purposes. The
IRS defines cryptocurrency as the following:
“Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value
other than a representation of the United States dollar or a foreign currency.”
This definition includes most cryptocurrency but notably doesn’t include non-fungible tokens (NFTs). NFTs generally don’t function as
money or a store of value like other cryptocurrency. Although NFTs aren’t virtual currency, they’re likely to be treated as property for tax
purposes even though the IRS hasn’t explicitly said so.
When you sell, trade, or use crypto as a form of payment, you dispose of cryptocurrency; that disposal could result in gain or loss
depending on your cost basis in the units disposed of and the value of the cryptocurrency at the time of disposal. Regardless of
whether you had a gain or loss, these transactions need to be reported on your tax return on Form 8949.
When you receive cryptocurrency from mining, staking, airdrops, or a payment for goods or services, you have income that needs to be
reported on your tax return. The amount of income you report establishes your cost basis.
How do I determine my crypto gains or losses?
Whether you have a gain or loss on the disposal of cryptocurrency depends on the value of the cryptocurrency at the time of disposal
measured against the cost basis of that cryptocurrency.
Cost basis is the acquisition cost of your cryptocurrency; this includes your purchase price, the value of other crypto given up in
exchange for this crypto, or amount reported as income if the crypto was earned.
In late 2019, the IRS issued guidance on acceptable cost-basis methods for calculating gains and losses on cryptocurrency.
Prior to IRS guidance, there was nothing indicating what rules applied to assigning cost basis to particular cryptocurrency units that
were disposed of. However, the IRS guidance specifically allows for only two cost-basis assignment methods:
First in First Out (FIFO)
Specific Identification
What is FIFO?
Under FIFO, the first unit of a cryptocurrency you purchased will be the first unit disposed of. In the example below, using FIFO for the
disposition of 2 bitcoin (BTC) would result in taxable gains of $7,000.
The IRS guidance doesn’t address whether FIFO should be applied universally across all accounts and wallets controlled by an
In the example above, the taxpayer is able to identify they’re disposing of assets acquired on July 1 and September 1. Using Specific
Identification would result in a $2,000 net capital loss as opposed to a $7,000 net capital gain under FIFO as shown above. Here, it’s
preferable to use Specific Identification to dispose of assets with the highest cost basis first, an approach known as highest in first out
(HIFO).
What are the requirements for Specific Identification?
The IRS, however, has imposed requirements upon taxpayers that want to use Specific Identification.
First, a taxpayer must, “show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the
time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (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.”
In simpler terms, the IRS requires a complete set of transaction records when a taxpayer wants to use Specific Identification.
Second, the IRS guidance requires that Specific Identification be done on a per account and per wallet basis. Specific Identification
shouldn’t be used when universally pooling assets.
TaxBit provides support for Specific Identification on a per account or wallet basis in order to legally minimize users' taxes and
reconcile to any Forms 1099 issued by exchanges. TaxBit automates the process by specifically identifying, by exchange, the assets
with the highest cost basis for disposition to reduce taxable gains.
TaxBit also is able to provide the complete records necessary to support your use of Specific Identification. TaxBit supports a massive
amount of cryptocurrencies so all of your information can be housed in a single, easy to navigate location.
Although HIFO by exchange is the most common approach for optimizing taxes under the Specific Identification method, HIFO isn’t the
only option. Taxpayers could choose to assign their cost basis under a different method such as Last In, First Out (LIFO), but this
1099-DA
Digital asset brokers, as outlined in the Infrastructure Investment and Jobs Act (IIJA) will be required to significantly expand tax
information reporting. Digital asset brokers will be required to report customers’ transfers and original cost basis – for both broker to
broker and broker to non-broker (or external wallet address) transfers – in a new form called the 1099-DA (digital assets) to both
individuals and the IRS. The final format of the 1099-DA is not yet released but is expected to be clarified soon.
How can investors save money on cryptocurrency fees?
Prior to 2018, certain investment-related expenses were eligible for itemized deductions. For tax years 2018 through 2025, these
deductions have been eliminated due to changes made in the Tax Cuts and Jobs Act (TCJA) of 2017.
However, fees incurred when conducting cryptocurrency trades still provide a tax benefit. A fee incurred in conjunction with the
acquisition of cryptocurrency can be added into the cost basis of those units. Conversely, a fee paid upon the disposition of a
cryptocurrency unit can be deducted from the proceeds received.
Example of Fees when Purchasing Cryptocurrency
If you buy $10,000 worth of BTC and pay $500 in fees, then the IRS will allow you to report a cost basis of $10,500.
Adjusting for fees allows a lesser realized taxable gain.
Example of Fees when Selling Cryptocurrency
If you sell BTC for $11,000 and pay $500 in fees, the IRS will allow you to deduct $500 from the proceeds amount and report proceeds
of $10,500.
If you didn’t account for the fees, you’d have a cost basis of $10,000 and proceeds of $11,000—resulting in a $1,000 taxable gain.
However, if you account for the fees, you’d have a cost basis of $10,500 and proceeds of $10,500—no taxable gains.
What is the tax rate for crypto?
The United States distinguishes between two main types of income—ordinary income and capital gain income. Capital gain income
can be long-term or short-term. If you’re receiving crypto as payment for goods or services or through an airdrop, the amount you
received will be taxed at ordinary tax rates.
If you’re disposing of your crypto, the net gain or loss amount will be capital gains.
What are short-term capital gains?
If you hold a particular cryptocurrency for one year or less your transaction will constitute short-term capital gains. Short-term capital
gains are added to your income and taxed at your ordinary income tax rate.
Once you’ve offset losses of the same type, you can then use either long-term or short-term capital losses against short-term
capital gains.
How are crypto taxes enforced?
The IRS doesn’t say how it decides which tax returns to examine, but the assumption is that it will review information provided on a tax
return; such as the answer to the virtual currency question on Form 1040 or the information on a Form 8949.
The IRS appears to pay close attention to individuals that received a Form 1099 from an exchange and will use its computer system to
check the Form 1099 information against what a taxpayer reports on their tax return.
Notably, if a taxpayer answers No to the virtual currency question, or doesn’t include a Form 8949, and is issued a Form 1099 from an
exchange, that taxpayer is more likely to be audited; the IRS now has information that may result in penalties on top of whatever
additional tax may be owed. Honest answers are always recommended.
TaxBit is experienced in resolving cryptocurrency audits. The IRS is actively sending taxpayers CP2000 notices where information
shown on a Form 1099 didn’t match what was reported on a tax return.
Many cryptocurrency tax softwares will provide a taxpayer with tax forms, but offer no additional information about how gains and
losses were calculated. Because of the lack of an audit trail, it can be difficult to adequately address the IRS’s questions without a
trusted provider. Learn more about responding to CP2000 notices in our article.
Foreign Reporting Requirements
There has been much debate whether assets held on a foreign virtual currency exchange are required to be reported on FinCEN Form
114, Report of Foreign Bank and Financial Accounts (FBAR).
The American Institute of Certified Public Accountants (AICPA) Virtual Currency Task Force reached out to Treasury’s Financial Crime
Enforcement Network (FinCEN) to answer whether cryptocurrency on offshore exchanges requires FBAR reporting.
FinCEN responded that virtual currency does fall within the scope of the governing regulation 31 C.F.R. §1010.350(c). Therefore,
cryptocurrency doesn’t need to be reported on an FBAR.
FinCEN, however, has indicated it may expand FBAR reporting to virtual currency held in foreign cryptocurrency accounts in the future.
About TaxBit
TaxBit automates the process of producing the necessary tax forms for cryptocurrency traders. After a taxpayer downloads Forms 8949
from their TaxBit account, they can incorporate the completed forms in their full tax return.
If a taxpayer is filing their own taxes, Forms 8949 easily can be uploaded onto popular tax-filing software such as TurboTax, TaxAct, or
TaxSlayer. Alternatively, if the taxpayer uses an accountant to file their tax return, they can provide their accountant with the completed
tax forms.
Keeping up with all the paperwork and reporting regulations for digital asset transactions can be laborious and time-consuming. The