You might be wondering since bitcoins and other coins are decentralized, do you still pay cryptocurrency tax for using these tokens for business purposes? Of course, cryptocurrencies may be a relatively new trend in the market but the IRS is serious about enforcing taxes on crypto transactions.

As a crypto investor/trader, you could owe crypto taxes without knowing and there are strict sanctions. Furthermore, trading deals from one cryptocurrency to another can be taxed too. It takes precise documentation of these transactions to calculate cryptocurrency tax by inputting losses and profits. 

If you want to know why crypto transactions are taxed, cryptocurrency tax rates, and filing procedures alongside other relevant aspects of this topic, then read on. 

Do you have to pay taxes on cryptocurrency?

You’re mandated to pay cryptocurrency tax (whether in form of tax on digital assets, capital assets or foreign currency) if you’re living in any of the following countries;

  • Germany 
  • Italy
  • India
  • United States
  • United Kingdom 

Here’s how cryptocurrencies are taxed

On the date that a taxpayer collects crypto income, it’s taxed as regular income at its fair market price. When you collect payment for service in crypto, that money is considered to be crypto income and it’s taxed. Also, all your earnings and rewards from mining and staking crypto are taxed in the same way. The same goes for the interest acquired from lending and accepting crypto payments. 

Cryptocurrency tax law

In the United States, the IRS taxes cryptocurrency deals in the same way as property-related transactions. The law dictates that in every trade where you buy or sell crypto tokens, you’re required to pay tax as long as you make profits. Your losses, on the other hand, are deductible from your taxes. However, you don’t pay tax when you buy and hold crypto-tokens even if their market price increases.

There’s a mandatory cryptocurrency tax form (Form 1040) provided by the IRS. This form which is filed annually requests that filers indicate if they’ve traded in digital currencies. For customers with over 200 crypto transactions and who have at least $20,000 profit through crypto trading in that year, cryptocurrency exchanges are required to file a 1099-K.

How to calculate your crypto taxes?

Before you calculate your crypto taxes, it’s advised that you understand the cryptocurrency tax law. By doing that, you wouldn’t need the service of a cryptocurrency tax accountant. You can calculate your taxes using the current crypto tax rate. 

Cryptocurrency tax rates are calculated based on your income, tax filing status, and the duration for which you held the token before trading it. Income taxes or short-term gain taxes are paid by those who hold coins for less than a complete year. 

You’re only liable to pay long-term gain taxes when you’ve held particular tokens for longer than 365 days. The tax rates are updated every year after the IRS factors in elements like inflation. You can divide to use a cryptocurrency tax calculator from a reliable service provider if you’re confused about how the rates apply.

Cryptocurrency Tax
Cryptocurrency Tax can be calculated with the help of a professional

How to tell if you owe cryptocurrency tax

If you invest in any cryptocurrency and make a gain, you’ll have to pay tax when you spend that profit. The only three instances where you’re required to pay taxes in crypto dealings are;

  1. When you sell your crypto tokens for fiat currency. 
  2. When you pay for services or goods using cryptocurrency.
  3. When you exchange one crypto coin for another.

The cost basis is the full amount you initially bought your crypto for and it determines whether you owe cryptocurrency tax or not. For instance, if you paid $30,000 for a bitcoin, you would pay tax in any of the following scenarios, 

  • Say you sell that bitcoin for $60,000 in the future, you would pay tax on your reported gains of $30,000.
  • In the case where you use that bitcoin to pay for a $50,000 house later, you’ll be taxed on your profit of $20,000.
  • Say you exchanged that bitcoin for $55,000 worth of another crypto token, your gain of $25,000 would be taxed. 

By law, a cryptocurrency trade is an event that’s taxable and you’re required to input your profits in your tax return.

How do I claim cryptocurrency on my taxes?

You’re required to document your earnings or losses in U.S dollars so that you file them in your annual tax review. Profits and losses from all crypto-related transactions are reported on an IRS-provided form (Form 8949). On that form, you’d be required to provide some details about your cryptocurrency dealings;

  • The date of acquisition and name of the cryptocurrency.
  • The date of selling or unloading the crypto token.
  • Cumulative earnings and losses
  • Price at point of sale
  • Cost basis

Here’s how to write off your crypto losses

You can get a tax deduction on your capital losses in crypto trading in the same way that losses in bonds and stocks are written off. There’s a limit of $3,000 placed on the number of losses that can be written off. The cryptocurrency market is still in a relatively experimental phase so a lot of losses are expected to be reported. As a practice, it’s relevant that you declare your crypto losses in your tax return in an attempt to reduce your tax liability.

What happens if you evade cryptocurrency tax?

Although blockchain projects and cryptocurrencies pride their system on the privacy they offer, Uncle Sam eventually catches up with everyone. The IRS has acquired data on thousands of prominent crypto exchange platforms and their users through several issued warrants submitted to the organizations that run these platforms.

The IRS is not known for taking pity on those who don’t pay their cryptocurrency tax even if the disregard was an honest mistake. Also, you can get into a lot of trouble for underreporting your cryptocurrency gains and losses. The IRS offers repayment plans for those who are financially unable to meet up with the tax payments. However, you should prepare for higher interest rates with such plans since you’d be avoiding costly penalties of evading tax. 

*If you have any further questions about the issues raised in this article or any further concerns, you have, please do not hesitate to contact Tectum at or follow us for more on our social channels.