Skip to main content

Cryptocurrency Taxation: How does the U.S. tax cryptocurrency? - Textbook Tax

crypto, BTC, ETH, DOGE, bitcoin, doge coin, crypto taxes, US taxes on crypto, virtual currency, taxable crypto transactions
The cryptocurrency market continues to rise in popularity in the U.S. and throughout the world. The decentralized finance ("Defi") sector has seen massive growth. Additionally, ease of access has increased as new and established companies offer crypto services and exchanges. As more and more individuals and institutions adopt cryptocurrency, it becomes more important for people to understand the tax laws and regulations governing the cryptocurrency industry.

It is important to note that each country views and regulates virtual currency differently. The scope of this article covers the crypto tax laws in the United States. The IRS defines virtual currencies as digital representations of value that function as mediums of exchange, units of account, and/or stores of value. Further, the U.S. views crypto as property subject to capital gains and losses for US federal tax purposes. Based on its designation as property, in general, there are four taxable events when dealing and transacting with cryptocurrency.

Related Posts

How does the U.S. tax cryptocurrency?

The following four cryptocurrency events trigger a taxable occurrence under current U.S. tax guidance for individuals holding crypto as a capital asset.

1. Selling crypto for fiat (i.e. exchanging crypto for USD)

When you sell crypto for USD, you must recognize a capital gain or loss on the sale. This is a more obvious taxable event as it follows the same tax principles applicable to other property transactions like stocks. To determine your capital gain or loss on the sale of crypto, you should calculate the difference between the basis in the crypto sold and the amount received as a result of the sale. 

In general, the cost basis is the amount you spent to purchase the virtual currency, which includes any applicable fees, commissions, and acquisition costs. Each separate transaction to purchase crypto will have its own cost basis.

Lastly, the length of time you held the applicable cryptocurrency determines the capital gain tax treatment. Again, this length of time relates to each individual crypto transaction. For example, let us assume you purchased 1 BTC on January 1, 2021 and another 1 BTC on June 1, 2021. If you sell 2 BTC on January 2, 2022, the capital gain or loss relating to the BTC purchased on January 1, 2021 is long term while the capital gain or loss relating to the BTC purchased on June 1, 2021 is short term. Additionally, the gain or loss for each coin will be different based on the applicable cost basis at the time of purchase. These rules of cost basis and long term versus short term are applicable to all the taxable transactions stated in this article.

2. Receiving crypto in exchange for services or goods

When you receive property in exchange for a good or a service, you should recognize ordinary income. This applies to employees, independent contractors, business owners, etc. The amount you recognize as ordinary income is the fair market value of the cryptocurrency when received. This amount recognized as ordinary income becomes your cost basis for the cryptocurrency.

3. Trading one type of cryptocurrency for another type of cryptocurrency

If you exchange cryptocurrency for other property, you should recognize a capital gain or loss. As implied, other property includes other virtual currencies, and so, an exchange of one cryptocurrency for another cryptocurrency is a taxable event. This is important for those that exchange one crypto for another before transferring balances between wallets or exchanges. 

The capital gain or loss recognized from an exchange of crypto for other property is the difference between the fair market value of the property received and the cost basis of the virtual currency exchanged. 

4. Paying for good/services with crypto

If you pay for a good or service using cryptocurrency, you should recognize a capital gain or loss. As stated, the capital gain or loss is the difference between the fair market value of the goods or services you received and the cost basis in the virtual currency exchanged. This is an unfortunate regulatory downside of using crypto as a medium of exchange. 

5. (BONUS) Receiving staking crypto rewards

The regulatory environment surrounding staking or proof-of-stake rewards remains unclear. As of now, the IRS has not issued specific guidance relating to the tax treatment of proof-of-stake rewards; therefore, the best practice is to follow the tax guidance set forth for cryptocurrency miners. By following this guidance, any amount of crypto received as staking rewards should be taxed as ordinary income upon receipt. The amount recognized as ordinary income is the fair market value when received. 

An issue arises when a proof-of-stake reward remains locked-up for a period of time.  Cryptocurrency is considered received when you receive the cryptocurrency in your designated wallet and possess control over said cryptocurrency. However, in the event of a lock up period, you do not have control of the crypto rewards received until the end of the period; therefore, should you recognize a taxable event when rewarded or at the end of the period when received and controlled? The answer is unclear but the general belief is that the act of staking is similar to a loan in which you as the recipient must recognize taxable income on an annually basis even if the rewards are paid at maturity.

In conclusion

If you hold, exchange, and transact with virtual currency, it important for you to have a strong understanding about the U.S. tax laws and guidance governing cryptocurrency. The regulatory environment surrounding the cryptocurrency industry continues  to evolve, and so, you must remain up to date on cryptocurrency tax law. Please share with others to help them learn more about U.S crypto tax rules. 

Disclaimer: As stated in my disclaimer page, this post and all posts on Textbook Tax are informational only and are not intended as tax advice. For tax advice, please consult a tax professional.


  1. With the recent decline in the btc and alt coins market some investors are thinking twice of selling what they have. I say these are some strategies that governments and some big shot investors are improvising this fear mongering will benefit them all in the end. Some other investors are now thinking to move playing egames online and see where they can go from there

  2. You have a genuine capacity to compose a substance that is useful for us. You have shared an amazing post about Buy bitcoin in Canada.Much obliged to you for your endeavors in sharing such information with us.

  3. Thank you for taking the time to post this blog. I am pleased with your work after reading this post. This is very useful for us. Keep sharing such blogs. Passive Income From Crypto

  4. The article you've shared here is fantastic because it provides some excellent information that will be incredibly beneficial to me. Thank you for sharing about Instant Cryptocurrency Exchange Platform. Keep up the good work.

  5. Good information, You have provided important and valuable data for us. It is good and essential for everyone. Keep posting always. I am very thankful to you. best cryptocurrency exchange in india

  6. This is my first visit to your web journal! We are a group of volunteers and new activities in the same specialty. Website gave us helpful data to work. Nashville tax accountant

  7. I think this is an informative post and it is very useful and knowledgeable. therefore, I would like to thank you for the efforts you have made in writing this article. play to earn crypto metaverse games

  8. Very well written article. It was an awesome article to read. about Bitcoin Price Eur Complete rich content and fully informative. I totally Loved it.

  9. This is a genuine cash flow challenge because you have not received the money for the work you have done already. In this scenario, you are even out of the cost incurred in the job, not even the profit so it is important to cater to this problem.

  10. I generally want quality and I found that in your post. The blog you have shared about Crypto Miner For Sale is beneficial and significant for us. Keep sharing these kinds of blogs here. Thank you.

  11. Organizations have the right to use more data than ever before, but lots don't know how to take full benefit.

  12. Want to earn discounts on shopping, visit us at: The named collective coupons

  13. Visit this website to Watch Online Naagin 6 Desi Hinsi Serial Full Video In High Quality

  14. Cryptocurrency market is rising in all over the world. NFTs or cryptocurrency collectibles are a hot topic right now. Try to learn everything you can about the collectable you want to buy before you commit.

  15. Excellent post. I really enjoy reading and also appreciate your work. This concept is a good way to enhance knowledge "Write for us Crypto

  16. avg168 สล็อต ไม่ต้องลงทุน pg slot เว็บไซต์ ตรง เป็นเกมที่คนไทยเป็นที่นิยม ที่พึงพอใจเล่นกันเป็นจำเป็นต้องเวลาเป็นเวลานานมาก เหตุเพราะเป็น เกมสล็อต ออนไลน์ ได้เงินจริง


Post a Comment

Popular posts from this blog

Gambling Winnings & Losses: How to report gambling income and losses

People love to gamble.  During the past NFL Super Bowl (2019),  gamblers wagered approximately $146 million in Nevada’s sports books, which fell short of the record set the year before of $159 million. The gambling industry continues to grow as U.S. legislation becomes less restrictive relating to the gambling industry.  Because of the size of the gambling market, the IRS set forth guidance to control the tax treatment of gambling winnings and losses. I will discuss income and losses, record keeping, reporting forms, and special rules. If you participate in gambling activities, it is important to know the unique personal tax rules. The term 'gambling' applies to a wide range of activities, including: sports betting, casino games, lotteries, etc. You will need to follow the established gambling tax rules when reporting winnings and losses from gambling activities. Related Posts IRA Income: Must know tax rules relating to your IRA Are your income items taxable? Gamblin

Tax Tips for Remote Workers: Can you claim the home office deduction on your tax return if you worked from home?

You may claim the home office deduction on your tax return if you used part of your home for business. U.S. tax law allows you to deduct expenses related to the business use of your home on your tax return. The tax deduction applies to both homeowners and renters as well as all types of homes. You determine the amount of expense related to business use based on a standard rate provided by the IRS or a calculated rate established by the percentage of your home utilized specifically for business. The two requirements to claim the home office tax deduction include: (1) regular and exclusive use and (2) principal place of your business. Because the COVID-19 pandemic required millions of people to work from home during 2020, many people are wondering if they can claim the home office tax deduction on their 2020 tax return. Below, I will explain in detail the home office deduction requirements to help you determine if you can deduct home office expenses on your tax return. Fair warning,