Do You Have to Report Cryptocurrency Purchases on Taxes?
The IRS is Watching
In 2014, the IRS issued guidance that categorized cryptocurrency as property, not currency. What this means is that any transaction involving cryptocurrency—whether buying, selling, or trading—is taxable and must be reported on your tax return. Yes, even if you’re just buying it and holding on to it for a long-term gain, the moment you sell, trade, or use your crypto, the IRS expects you to report it.
Let’s start at the end and work our way backward:
Scenario #1: You Buy Crypto and Never Sell
Here’s the best-case scenario: You bought some Bitcoin back in 2018, and you haven’t touched it since. Are you required to report this on your taxes? No. Buying and holding cryptocurrency isn’t a taxable event. There’s no capital gain or loss to report, so you’re in the clear—for now. However, once you sell that Bitcoin, the IRS will want to know about it, and you’ll need to report any gains or losses on your tax return.
| Year | Crypto Purchase Price | Sale Price (if sold) | Gain/Loss |
|---|---|---|---|
| 2018 | $10,000 | N/A | N/A |
Scenario #2: You Use Crypto to Buy Goods or Services
Now let’s say you decide to use your Bitcoin to buy a cup of coffee. That’s a taxable event. Here’s how it works: When you buy that coffee, the IRS considers it a sale of your Bitcoin at its current market value. If the price of Bitcoin has gone up since you bought it, you’ll need to report the difference as a capital gain. If it’s gone down, you can report a capital loss.
| Date | Purchase Price of Bitcoin | Value at Time of Purchase (Coffee) | Capital Gain/Loss |
|---|---|---|---|
| 01/01/20 | $5,000 | $6,000 | +$1,000 |
Scenario #3: You Trade Crypto for Another Crypto
This is where things get tricky. Trading one cryptocurrency for another is also considered a taxable event. Let’s say you trade Bitcoin for Ethereum. The IRS will require you to calculate your gain or loss based on the fair market value of the Bitcoin at the time of the trade. The difference between the value of the Bitcoin when you acquired it and when you traded it for Ethereum is your capital gain or loss.
| Date | Crypto Purchased | Purchase Price | Date of Trade | Value at Trade | Gain/Loss |
|---|---|---|---|---|---|
| 01/01/18 | Bitcoin | $10,000 | 03/01/20 | $12,000 | +$2,000 |
| 03/01/20 | Ethereum | $12,000 | N/A | N/A | N/A |
Capital Gains and Tax Rates
Now that you understand which transactions are taxable, the next step is determining how much tax you owe. Cryptocurrency transactions fall under capital gains tax rules, which means the length of time you held the crypto before selling or trading it affects the tax rate you’ll pay.
- Short-term gains: If you hold crypto for less than a year before selling, the gain is taxed at ordinary income tax rates, which can be as high as 37%.
- Long-term gains: If you hold it for more than a year, you benefit from the lower long-term capital gains tax rate, which ranges from 0% to 20%, depending on your income.
| Holding Period | Tax Rate (Short-Term) | Tax Rate (Long-Term) |
|---|---|---|
| <1 year | Up to 37% | N/A |
| >1 year | N/A | 0%-20% |
Scenario #4: You Receive Crypto as Income
If you’re lucky enough to be paid in cryptocurrency, whether it’s for freelancing, a salary, or as a gift, it’s treated as income. The amount of income to report is based on the fair market value of the cryptocurrency at the time you received it. So if you were paid in Bitcoin, you’d need to report the dollar value of the Bitcoin when you received it. That amount is added to your gross income and taxed according to your income tax bracket.
| Date | Crypto Received | Value at Receipt | Income Type | Taxed As |
|---|---|---|---|---|
| 07/01/22 | Bitcoin | $4,000 | Freelance | Income |
The Hidden Danger: Failing to Report
By now, it’s clear that the IRS considers cryptocurrency transactions to be taxable events. But what happens if you don’t report them? In 2019, the IRS began sending warning letters to taxpayers suspected of having cryptocurrency holdings but failing to report them. If you’re caught underreporting or failing to report, you could face penalties, interest, and even criminal prosecution.
The IRS has stepped up its efforts to track cryptocurrency transactions, including partnerships with blockchain companies and exchanges to identify individuals who may be hiding their crypto activities.
Offsetting Gains with Losses
One silver lining for crypto traders is the ability to offset capital gains with capital losses. If you lost money on one cryptocurrency transaction but gained on another, you can use the loss to offset the gain and reduce your overall tax liability. You can even carry losses forward to future years.
| Year | Gain/Loss on Bitcoin | Gain/Loss on Ethereum | Total Gain/Loss |
|---|---|---|---|
| 2022 | +$2,000 | -$1,000 | +$1,000 |
Reporting Your Crypto on Taxes
So how do you actually report cryptocurrency on your tax return? You’ll use Form 8949 to report each transaction, whether it’s a sale, trade, or purchase of goods. The form requires you to list the date you acquired the crypto, the date you sold or disposed of it, your cost basis, and your gain or loss. From there, the information flows onto Schedule D, which summarizes your total capital gains and losses.
| Form | Description |
|---|---|
| 8949 | Report individual crypto trades |
| Schedule D | Summarizes total gains/losses |
The IRS also now requires taxpayers to answer “Yes” or “No” to a question at the top of Form 1040 asking whether they engaged in any virtual currency transactions during the year. If you check “Yes,” be sure to report everything accurately, because failure to do so could raise red flags with the IRS.
Conclusion: The Future of Crypto Taxation
Cryptocurrency taxation is still an evolving area, but one thing is certain: the IRS takes it seriously. Whether you’re a casual investor or a frequent trader, reporting your crypto transactions is non-negotiable. With more government oversight and better tracking tools, it’s never been more important to stay compliant.
The consequences of ignoring your crypto tax obligations are steep, but the good news is that with proper reporting and the ability to offset losses, you can minimize your tax burden and stay on the right side of the law.
In the future, we can expect even more clarity from tax authorities regarding cryptocurrency, but for now, the rules are straightforward: If you’re engaging in any type of cryptocurrency transaction, it’s your responsibility to report it on your taxes.
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