New Investors Cryptocurrency guide to Tax compliance in United States


For taxes in the United States, they classify cryptocurrency as property instead of currency. As a result, any cryptocurrency transactions are subject to capital gains tax or income tax, depending on the nature of the Transaction.   

Though, investing in cryptocurrency does not automatically trigger a tax liability. 

However, you are required to report capital gains on your taxes when you buy or sell cryptocurrency. 

It means that You only pay taxes on the profit, You make from buying low and selling high.

Conversely, in this article, we will cover those vital things you need to consider as an investor before investing in cryptocurrency.

Then we will discuss the necessary tools you need as an investor to calculate and document your tax payments and the process for reporting tax gains.

Here are some important considerations to keep in mind when reporting cryptocurrency on your taxes:

As a cryptocurrency investor residing in the United States, it is required to report all cryptocurrency transactions on your taxes, including buying, selling, trading, and using it for purchases.

The cost basis of your cryptocurrency is the original value of the asset in U.S. dollars at the time of purchase, which is used to calculate capital gains or losses when selling or trading the cryptocurrency.

Short-term capital gains from assets held less than a year are taxed at your ordinary income tax rate, while long-term capital gains from assets held more than a year are taxed at a lower rate.

You can claim losses on your taxes if you sell or trade your cryptocurrency for less than you paid.

Cryptocurrency received as payment for goods or services are considered income and must be reported.

Income from mining cryptocurrency must also be reported.

Donations of cryptocurrency to charity may be eligible for a tax deduction.

From these considerations, you can quickly see there are complexities you need to navigate for accurate tax reporting. As a cryptocurrency investor, it’s important to understand the complexities of reporting your cryptocurrency taxes, as the type of activities you carry out can affect how you report them.

Some activities require you to report cryptocurrency as income tax, while some activities will incur capital gains tax treatment. 

Perhaps to report your cryptocurrency taxes accurately, it’s important to keep detailed records of all your transactions, including the date, amount, and value in U.S. dollars at the time of the transaction. 

The IRS has a specific form, Form 8949, for reporting transactions involving property, so it’s important to review this form to understand what is required before creating a spreadsheet or selecting cryptocurrency tax compliance software.

Before we discuss the tools, you need for proper cryptocurrency tax reporting.

In a nutshell, here are cryptocurrency activities that are taxable, which will incur capital gains tax treatment.

  • Selling cryptocurrency for fiat currency
  • Giving away cryptocurrency as a gift (over $15,000 for the 2021 tax year)
  • Using cryptocurrency to make purchases, even small ones
  • Trading or swapping one digital asset for another, including buying NFTs using cryptocurrency.

While income tax events involving cryptocurrencies can include:

  • Getting cryptocurrency through an airdrop
  • Earning interest on DeFi lending platforms
  • Income from crypto mining, including block rewards and transaction fees
  • Earnings from liquidity pools or interest-bearing accounts
  • Being paid in cryptocurrency for work.

Tools a cryptocurrency investor needs to keep proper records of his investment for proper Cryptocurrency Tax documentation

As a cryptocurrency investor, it’s crucial to have the tools needed to maintain accurate records for proper tax documentation. 

These tools include:

  1. Cryptocurrency tracking software: 

This software helps investors keep track of their transactions, including buying, selling, trading, and mining, and provides a comprehensive record of all their cryptocurrency holdings.

  1. Cryptocurrency wallets: 

These wallets enable investors to store their cryptocurrency securely and provide a record of their transactions, including the date and value in U.S. dollars.

  1. Tax software: 

Various tax software is available that are specifically designed to aid investors in tracking and reporting their cryptocurrency transactions for tax, though most of them likely will be costly for a new investor. 

  1. Spreadsheets: 

Some investors prefer to keep records manually, using spreadsheets to track their transactions, cost basis, and gains or losses. Anyway, if you want something cost-effective I will recommend you go for an automated spreadsheet cryptocurrency tracker. In case you want us to design a personalised cryptocurrency spreadsheet tracker you can contact us by clicking Here: Cryptocurrency Spreadsheet tracker. 

The spreadsheet will help to keep accurate records of all your cryptocurrency transactions, including the date, amount, and value in U.S. dollars at the time of the transaction. Keeping accurate records will make the tax reporting process more manageable and ensure compliance with tax laws.

  1. Portfolio Tracker: 

Some investors use portfolio trackers to keep track of their entire investments, including stocks, mutual funds, and crypto, in one place.

  1. Record-keeping system: 

It’s crucial to have a system in place to keep all records organized and easily accessible, whether it’s a physical or digital filing system.

Steps and processes involved for a cryptocurrency investor need to take to start paying Income tax on cryptocurrency

Filing your cryptocurrency taxes can be challenging, particularly for first-time filers. The initial step, which is gathering all of your crypto-related information, is crucial and can also be the most time-consuming part of the process.

Here are the steps and processes that a cryptocurrency investor may need to take to start paying income tax on their cryptocurrency:

Gather all necessary records: Collect all records of your cryptocurrency transactions, including the date, amount, and value in U.S. dollars at the time of the transaction. This includes buying, selling, trading, and using cryptocurrency for purchases or as payment for goods and services.

Determine cost basis: Use the records of your transactions to determine the cost basis of your cryptocurrency, which is the original value of the asset in U.S. dollars at the time of purchase.

Calculate capital gains or losses: Use the cost basis and records of your transactions to calculate any capital gains or losses from buying, selling, or trading cryptocurrency.

Report income: Report any income received from mining or using cryptocurrency as payment for goods or services on your tax return.

File taxes: Report your cryptocurrency transactions and any capital gains or losses on your tax return, using IRS Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses).

Pay taxes: Pay any taxes owed on your cryptocurrency transactions and income.

Keep records: Keep accurate records of your cryptocurrency transactions and any tax documents filed for at least three years in case of an audit by the IRS.

It’s important to keep in mind that laws and regulations surrounding cryptocurrency taxes are still developing and may change in the future. It’s advisable to seek the advice of a tax expert or accountant for assistance with reporting cryptocurrency on your taxes.

For further Reference on Cryptocurrency Tax in the United States: 

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