Buy, hold, and breathe easy. You don't have to report crypto on your taxes if you only bought and held it without selling.
If you buy some Bitcoin and just, you know, keep it (because you're "HODLing" or you forgot about it or you lost your keys or whatever), the IRS doesn't really care. It's like Schrödinger's capital gain — maybe it exists, maybe it doesn't, but until you open the box (sell the crypto), the tax cat remains undisturbed.
But — and you knew there was a "but" coming — the moment you do anything else with your crypto, the IRS suddenly becomes very interested. Did you mine some coins? Taxable. Did someone pay you in Dogecoin for that NFT you made of your cat? Taxable. Did you stake your Ethereum and earn some rewards? Oh, you better believe that's taxable. (And don't even get me started on airdrops. Free money from the crypto gods? The IRS says, "Thanks for the tax revenue!")
So while "buying and forgetting" might keep you off the IRS's radar, pretty much everything else in crypto is a tax event waiting to happen. Let’s go over a few scenarios to make this clearer.
Bought and HODL’d
The tax situation is straightforward if you bought crypto and decided to HODL. The IRS does not require you to report your crypto purchases on your tax return if you haven't sold or otherwise disposed of them. HODL and you're off the hook. The tax event only occurs when you sell.
Earned crypto as payment
If you receive crypto as payment for goods or services, it's a different story. The IRS requires you to report this as income, and the taxable amount is the value of the crypto at the time you received it. So, if you're a freelance graphic designer and a client pays you in Bitcoin, you need to report the value of that Bitcoin as income.
Received crypto from mining and airdrops
The IRS will consider mined crypto as taxable income based on its value in the market when you receive it. Similarly, receiving cryptocurrency from an airdrop also counts as income and must be reported.
Received crypto from trading and swapping
If you exchange one type of cryptocurrency for another - say, Bitcoin for Ethereum - the IRS views this as a taxable event. Here, the difference in price between the two at the time of the trade would need to be reported as a capital gain or loss.
Some additional nuance - technically what’s happening under the hood is the sale side of the transaction results in a taxable gain/loss. This is dependent upon your picking strategy (i.e. LIFO, FIFO, HIFO, Spec ID). It's the difference between your purchase / lot price and the value of what you're receiving. So if you bought one bitcoin for $10K, then swap that one BTC for 10 ETH when BTC is at $40K and ETH is at $4K, your "proceeds" are [$40K] - [cost basis of $10K] = $30K gain. The ETH cost basis is then $40K.
Earned interest on crypto
If you earn interest on your crypto by lending it out, this is considered taxable income. The amount you report should be the amount of interest earned when it was received. Often crypto lending platforms will have a tax portal where you can find the numbers.
Hard forks
If you receive new coins from a hard fork, this is a taxable event. The new coins are considered income, with the amount to report being the value of the new coins at the time they are received.
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FAQs about reporting crypto on US taxes
Can you avoid taxes with crypto?
No, you can't legally avoid taxes with crypto. The IRS knows about Bitcoin. The tax code treats crypto as property, so you owe taxes on gains when you sell, trade, or use it.
How to sell crypto without paying taxes?
You can't sell crypto without paying taxes, unless you enjoy the prospect of an all-expenses-paid vacation to Club Fed.
However, you can minimize your tax burden through strategies like holding for over a year to qualify for long-term capital gains rates, or using tax-loss harvesting. Another nifty trick is the HIFO method - Highest In, First Out. It's like playing financial Tetris, where you sell your most expensive purchases first, potentially reducing your taxable gains.
What crypto exchange does not report to the IRS?
Looking for a crypto exchange that doesn't report to the IRS is like asking which casino doesn't have cameras - they all do, and the ones that don't are probably illegal. Major US exchanges all report to the IRS. Even if you use a foreign exchange, you're still obligated to report your crypto activities to the IRS.
When do I have to report crypto on taxes? Do you pay taxes on crypto before withdrawal?
There's no special "crypto tax day" - it's all due on the same old April 15th (or whatever extension the IRS grants that year). So when you're fumbling with your W-2s and 1099s, don't forget to dig up those crypto transaction records too. Soon exchanges will be sending you a new form called 1099-DA as well. Basically, if your crypto did anything more exciting than sit in your digital wallet, it probably needs to be reported alongside your regular income. And yes, you’ll owe taxes on crypto even if you haven't withdrawn it out of your exchange into your bank account.
Do you have to report losses on crypto?
Yes, you should report crypto losses. The IRS might actually give you some money back. Crypto losses can be used to offset capital gains, and up to $3,000 can be deducted against your ordinary income.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
