Crypto tax glossary
Got Bitcoin? Solana? Ethereum? If this is your first time dealing with cryptocurrency as part of your tax returns, we’re here to help. The glossary below explains key terms and concepts to help you get through this tax season with ease.
First things first...
Coinbase doesn’t provide tax advice. This article represents our stance on IRS guidance received to date, which may continue to evolve and change. None of this should be considered as advice or an individualized recommendation, but it’s important to us that our readers have relevant information available to them in the most accessible way possible. Please consult a tax professional regarding your own tax circumstances.
Cost basis method
What if you bought crypto at different times and different costs? There are several cost basis methods you can use to designate which crypto you sold, traded, or otherwise disposed of first. The method you choose depends on your tax strategy, so it's a good idea to meet with a tax professional before deciding.
Here are the most common:
FIFO (First-in, first-out) assumes that the crypto you sold, traded, or otherwise disposed of is also the crypto you held the longest. If you don’t have detailed records of your crypto transactions, this is the default method used by the IRS.
HIFO (highest-in, first-out) means you sold, traded, or disposed of the crypto with the highest cost basis among all your holdings.
LIFO (last-in, first-out) means the crypto you sold, traded, or disposed of is the crypto you acquired most recently.
Specific Identification means you choose which specific crypto assets that you purchased at a different times or prices to sell.
Deductions are purchases or expenses you can use to offset your annual taxable income. Crypto losses on selling, converting, or other dispositions are considered deductions, and you can offset your capital gains, dollar-for-dollar each tax year. If your losses exceed your capital gains in a given tax year, you can offset up to $3,000 of ordinary income and carry forward any excess losses as deductions in future tax years (this is known as a tax loss carryforward).
Also known as the U.S. Individual Income Tax Return. This form is used to determine your total taxable income.
Did you stake any crypto or earn crypto rewards this year using Coinbase? If you earned $600 or more in crypto, we’re required to report your transactions to the IRS as “miscellaneous income,” using Form 1099-MISC — and so are you. Even if you earned staking or rewards income below the $600 threshold, you’ll still have to report the amount on your tax return. At this time, the only form Coinbase reports to the IRS is Form 1099-MISC, but since crypto tax rules are still so new — and sometimes still evolving — you may find other IRS forms on other crypto exchanges.
Form 8949 is an IRS worksheet relevant to your capital gains or losses from selling, converting, or otherwise disposing of your crypto. The 8949 is used to calculate your capital gains or losses, and transfer this information to your tax return.
In the past, there have been a few high-profile hard forks, like when Bitcoin Cash was created in 2017. In this case, anyone who owned Bitcoin on the network at the time was able to receive an equal amount of Bitcoin Cash after a new, separate blockchain was created from the original. In a 2021 memorandum, the IRS clarifies that any earnings received from a hard fork are indeed treated as income.
Internal Revenue Service
The Internal Revenue Service (IRS) is the U.S. federal government agency responsible for administering and enforcing tax laws, which includes the collection of taxes.
Tax-loss harvesting means selling crypto when its value drops below the amount you paid for it. These losses can be used to offset any capital gains you realized in the same year. And if you haven’t realized capital gains from selling crypto, you can offset ordinary income with $3,000 of ordinary income when you file income taxes. It’s important to note that losses have to be used to offset capital gains first. And when you’re using capital losses to offset capital gains, you have to offset gains of the same type first:
Long-term losses offset long-term gains
Short-term losses offset short-term gains
So if you have more short-term losses than short term gains, you can use the excess short-term losses to offset your long-term capital gains. If your losses exceed all of your gains for the year, you can use up to $3,000 to offset capital losses, this year or in future years.
If you earn money from mining or staking crypto, crypto rewards, promotional incentives from a crypto broker or exchange, or related crypto activity, the IRS considers this miscellaneous income.
If you earned $600 or more in rewards or fees, you may receive a Form 1099-MISC from whatever entity issued the payment to you. But even if you don’t receive this form, you’re still required to report your earnings to the IRS.
Net Investment Income Tax (NIIT)
The net investment income tax (NIIT) is a 3.8% tax on investment income like capital gains, dividends, and rental property income. The tax only applies to high-income taxpayers — single filers who make more than $200,000 and married couples who make more than $250,000. Certain estates and trusts are also subject to the NIIT.
Your net return on a crypto sale, trade, or other transaction is the total amount you received minus any costs incurred. A variety of factors may influence your net return, like market fluctuations; the fees you paid for the original purchase, for the sale, or for anything in the time between buying and selling ; and any taxes or other costs associated with the cryptocurrency. It’s a good idea to calculate your net return for your own knowledge, but there’s no need to share this number on your tax forms.
Non-fungible token (NFT)
NFTs (or “non-fungible tokens”) are a kind of digital asset where each token is unique and can’t be duplicated — as opposed to “fungible” assets like dollar bills, which are all interchangeable and worth exactly the same amount.
There are many ways to interact with NFTs, whether you bought a piece of art for your crypto wallet, or created your own animal-themed collection. The tax implications, however, depend on a few factors: Whether you’re an investor or a creator — and what you did with the NFTs you own. It’s also important to note that the IRS hasn't yet issued any NFT-specific guidance, so you may want to speak to a tax professional about any proceeds, royalties, or other income you’ve made from NFTs.
Ordinary income is any income that’s taxed according to your regular tax bracket. When it comes to crypto, this includes any money earned in crypto from your paycheck, staking, promotions and incentives, or short-term capital gains.
It’s important to note: you’re responsible for reporting all crypto you receive or fiat currency you made as income on your tax forms, even if you earn just $1.
Realized (capital) gains and losses
Realized capital gains are the profits you make when selling, trading, or otherwise disposing of your crypto. Realized losses are any losses you’ve incurred during these transactions.
You might see the balance in your crypto account fluctuate, but don’t worry — just holding crypto in a wallet or an account isn’t taxable. The gains or losses on your crypto only become “realized” — and reportable to the IRS — when you dispose of the crypto. If you’ve taken a loss, you may be able to deduct the amount from your overall capital gains and reduce the tax you’ll pay.
Part of your individual tax return, Schedule 1 is called Additional Income and Adjustments to Income. Use this form to report staking, mining or other income from your 1099-MISC.
Taxable just means “subject to tax.” Most crypto activities are taxable, but not all. Buying and holding crypto, or minting and holding an NFT aren’t taxable events. However, selling and converting crypto are taxable. (See unrealized capital gains and losses below for another example.)
Taxable income is the amount of income you can be taxed on each year, including any income received in crypto. If you get paid in crypto or accept crypto as a payment for goods or services, it’s taxable as income and needs to be reported to the IRS. You can see a full list of taxable crypto transactions in our tax guide.
Keep in mind that crypto platforms (including Coinbase) aren’t required to report all taxable income events to the IRS (or to you). As a taxpayer, you’re responsible for reporting taxable events to the IRS as appropriate. If you’re unsure, you may want to consult a professional.
All taxpayers fall into various tax brackets based on their income. This bracket determines the percentage of tax you’ll pay (the U.S. currently has seven tax brackets ranging from 10% to 37%). If you’ve earned a lot from crypto activity, your overall taxable income will increase, potentially pushing you into a higher tax bracket — meaning you may pay a higher tax rate on some of your earnings.
Unrealized (capital) gains and losses
An unrealized gain is an increase in the value of the crypto you hold, and an unrealized loss is a decrease in that value. The gains and losses aren’t “realized” yet because you haven’t sold, traded, or otherwise disposed of your crypto. You don’t need to pay taxes on unrealized gains, and you can’t use unrealized losses to offset realized gains. You also don’t need to report unrealized gains and losses to the IRS.
The wash-sale rule prevents people from selling securities (like stocks or bonds) at a loss simply to claim a tax benefit. A wash sale occurs when you sell a security at a loss and then purchase that same security or “substantially identical” securities within 30 days (before or after the sale date). This rule doesn’t yet apply to crypto, but recent congressional proposals could change this.