Tax Calculation

Tax Guide US

The federal government and IRS determine tax on cryptocurrency for all states in the US (with some state level guidelines in addition, which you can scroll below to find). These guidelines have been published for what IRS terms as virtual currency transactions, or in your parlance, Bitcoin and other crypto currencies. Tax on cryptocurrency includes both Income and Capital Gains taxes.

As the best crypto tax software you’d ever find, let us demystify this for your easier comprehension. And remember, the last date for taxation (and crypto tax) is the 15th of April 2024.

Lite Coin US Flag

How much is crypto taxed in the USA

There are state specific rules which one needs to look at but on a broad basis, one might have to pay upto 37% tax on short term capital gains (STCG) and upto 20% tax on long term capital gains (LTCG). The tax to be paid, therefore, depends on the income on transactions, the type of transactions (crypto, NFT) and the time the crypto asset has been held for. The taxes will also vary based on the method one would use to calculate (FIFO, HIFO, LIFO, etc.)

Person Calculating Tax

So how do you calculate crypto taxes then?

A taxable event is one where you technically have a gain/loss. If you’ve made a profit, its a capital gain and if you’ve made a loss, its a capital loss. Both events affect your taxable income.

The calculation of your crypto tax starts from the notion of “cost basis”. Your cost basis is the amount you’ve spent to acquire a token. If you’ve received it on-chain, then it will be dependent on the price of the token at that point in time as per market value (in Descrypt’s case, we consider the exchange reported values at all times thereby driving in accuracy in tax calculations)

The simplest way now to determine your tax liability is 

(Value of sale) - (cost basis) = Capital Gains

Example time!

Crypto Currency Ranked

Fantastic, this looks easy

Frankly, it does. But then, it isn’t either. The above example takes in account a single sale and purchase. Let’s assume you purchased ETH in smaller transactions over a period of time (also known in crypto as Dollar Cost Averaging). How would you then calculate taxes?

Let’s say you purchased 1 ETH at $350 in July 2020 and 1 ETH at $2100 in July 2021. You now sold the same ETH in July 2023 at $1800. How would you determine your tax liability in this case? 

Fortunately, US taxation principles solve for this. There was various methods to determine your tax liability

  • First In First Out (FIFO): the first purchase is accounted for your sale.
  • Last In First Out (LIFO): the last purchase is accounted for your sale.
  • Highest In First Out (HIFO): the purchase at the highest asset price is accounted for your sale

Crypto Income Tax USA

So what events constitute an Income tax in crypto?

  • If you are paid in crypto for your job
  • If you mine crypto (and there are statewide tax differences, scroll down to know more)
  • Receiving airdrops
  • Receiving tokens on a hard fork
  • Staking rewards
  • Referral bonuses 

A few more transactions in the case of on-chain that attract tax events are

  • Lending interest on protocols like Curve, Compound, Fraxlend, etc.
  • Governance or reward tokens through participation in Liquidity pools on Uniswap, Pancakeswap, etc.
  • Staking rewards

Basically, any format through which one earns crypto (for instance, P2E on Axie or any platform) leads to the event of crypto tax reporting on Income Tax to be done.

What events then constitute capital gains?

  • Trading crypto (on an exchange or on-chain)
  • Selling crypto (to get fiat)
  • Spending crypto
  • Margin/derivative (FnO) trading

DeFi investments can also categorize in capital gains depending on the scenario. Also LTCG/STCG is applicable depending on the holding periods.

Now let us break down all these scenarios.

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Buying crypto with USD

This is not a taxable event. However, one needs to maintain a record of such transactions for cost basis calculations as mentioned above.

Crypto Currencies Switches

Holding Crypto

Holding of crypto does not constitute a crypto tax event. A taxable event occurs only when you sell, trade or spend crypto

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Trading Crypto

A crypto to crypto swap is a taxable event. The way to calculate tax on this scenario is straight-forward

If you’ve swapped ETH - AVAX, the sale of ETH is considered for taxation purposes. This means your previous cost basis of ETH and the current sale value will be used to calculate your capital gains.

This also makes one more point clear, if you purchase crypto using a stablecoin, it becomes a taxable event. For instance, if you purchase USDT using USD, that would be a non taxable event. However, if you further purchase ETH using the USDT you acquired, it becomes a taxable event. Since USDT doesn’t have a major change in value, the tax to be paid in this case would generally be minimal. However, it is a taxable transaction and has to be reported.

Doge Coins

Selling Crypto

Selling crypto to get fiat is considered a taxable event. Since its treated as an asset sale, your tax liability will depend on the time for which you’ve held the crypto for.

Selling crypto for crypto is the same as the previous section. Its a taxable event irrespective of what you purchase and the capital gains will vary on the amount of time you’ve held your crypto tokens for.

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Transferring Crypto

Transferring crypto between your own exchange/wallets is not a taxable event. So if you move from your Coinbase Pro to Metamask, you need not pay any crypto tax (or what people typically allude to as Coinbase Pro taxes)

Doge Coin on Dollar Note

Transfer fees?

When you transfer crypto from one wallet to another, the chances of you paying gas fees (also called as transfer fees) are fairly high. These fees are also taxable, however, more often than not, this is a loss. Reporting this as part of your transactions to the IRS is quite necessary; these situations make absolute sense for anyone to use a tool like Descrypt to ease your crypto taxes

Crypto Currencies Network

Adding or removing liquidity to a Pool

Adding to a trading pair in an LP (or pulling out) will not be a taxable event. The interest that you’d gain though in the form of LP or governance tokens is considered income and is subjected to capital gains tax. To top it, if the provider actually stakes their tokens and gets rewards, those also get subjected to capital gains tax.

Crypto Currencies Frost

Airdrops and Forks

Tokens received through airdrops or forks are technically rewards and are subjected to Income Tax rules (they are determined as Income Tax). The simplest way to calculate this is by adding up all the airdrops/forks that you’d have received in USD. Be aware that you would not have to pay any income tax in the event of a soft fork, as technically, you are not “earning” any tokens. A hard fork on the other hand leads to the creation of a new permanent chain and hence tokens on that chain, which means you earning crypto tokens and thereby, a tax liability.

Crypto Currency Trading Chart

Selling or trading airdrops

No prizes for guessing this one. But if you are still confused, since its tokens in your wallet which you are now selling (irrespective of it being gained through an airdrop), it will be subjected to a capital gains tax very similar to selling any other tokens.

Explore Tax Guides for other countries