2020 tax guide: crypto and Bitcoin in the U.S.
Did you buy, sell, use, or trade crypto? If so, you may owe taxes if you’re a US taxpayer. Here’s a look at what that could mean, the steps you may have to take, forms you’ll need, and how gains and losses may affect your taxes.
First, let's get this out of the way...
Coinbase doesn’t provide tax advice. We put this guide together for informational purposes only and it shouldn’t be considered tax advice or an individualized recommendation. Please consult a tax professional regarding your personal tax circumstances.
1.1 Do I have to pay crypto taxes?
At Coinbase, we see crypto as the foundation for tomorrow’s open financial system — but it’s also a part of today’s traditional one. To answer the many questions on crypto and taxes, the IRS has issued crypto tax guidance.
In previous tax seasons, we received a lot of questions from crypto newbies and experienced customers alike. We get it — paying taxes on bitcoin and other crypto can be confusing. While we can’t give tax advice, we want to make crypto easier to buy, sell, and use. This guide is our way of helping you better understand your crypto tax obligations for the 2020 tax season and detail Coinbase resources available to you that makes the process easier.
There’s a lot of conflicting content out there, but make no mistake: you are required to report gains and losses on each transaction or when you earn cryptocurrency, even if the gain or loss is not material. The IRS holds you responsible for reporting all income and transactions whether you receive a tax form from a crypto exchange or not. Exchanges like Coinbase make transaction history available for this purpose.
One quick note if you’re a non-US investor: taxes on crypto are treated differently country-to-country. This guide only covers the US requirements. Unless you happen to have some US tax obligations (this is rare) be sure to consult your local country tax advisor to confirm your tax reporting obligations at your home jurisdiction.
Buying and selling crypto is taxable because the IRS identifies crypto as property, not currency. As a result, tax rules that apply to property (but not real estate tax rules) transactions, like selling collectible coins or vintage cars that can appreciate in value, also apply to bitcoin, ethereum, and other cryptocurrencies.
The IRS isn’t kidding around. Failure to report income, including income from the sale of crypto, could result in IRS levying penalties. Starting with 2019 tax returns, the IRS requires you to answer “yes ” or “no” to a question about whether you had any crypto transactions during the year. Please consult with a tax-planning professional regarding your individual reporting obligations.
With all that in mind, here’s our list of steps you can take to help you understand if you may need to pay crypto taxes, how to determine the amount, and what forms you may need. Let’s dive in.
2.1 Determine if you owe crypto taxes
Even if you’re in the “Just HODL it” camp, it’s worth evaluating your crypto transactions to determine if you may owe taxes.
In short, a lot. Here are some examples of taxable crypto events:
Transactions must be reported at their fair market value as measured in US dollars. So if you bought a pizza with bitcoin, you would have a disposition of the bitcoin equal to the cost of the pizza (the fair market value) in dollars.
Airdrops and tax implications
If you received free crypto through an airdrop, how the crypto is used will have an impact on how it is taxed. Airdrops are like free money received in a giveaway or in a lottery winning so they should generally be taxable as ordinary income valued at the fair market value on the date of receipt.
If it’s sitting in your wallet, but Coinbase or any other exchange has not yet started supporting the protocol such that you can’t do anything with it, it’s not taxable yet. Crypto received in a fork becomes taxable when you have the ability to transfer, sell, exchange or otherwise do something with it. See the IRS FAQs (Q21 - Q24) and Rev Rul 2019-24 for IRS guidance on forks and airdrops
What's not taxable
Some non-taxable events include:
So, you have crypto transactions to report?
First, you’ll need a single view of all your crypto-related transactions, each of which should be reported on your tax return.
Charitable contributions and gifts of crypto and tax implications
Recipient of a gift: If you are lucky enough to receive crypto as a gift you are not likely to have a taxable event until you sell the crypto. When you do, your cost basis will be the same cost as the person who gifted it to you.
Person who gives the gift: You can gift crypto up to $15,000 per recipient per year without paying taxes. If your gift exceeds $15,000 per recipient, you are required to file a gift tax return.
Charitable donations: If you give crypto directly to a 501 (3) charitable organization, you can claim a charitable deduction equal to the fair market value of the donated cryptocurrency.
Coinbase customers can generate reports with all buys, sells, sends, and receives of all crypto associated with their Coinbase and Coinbase Pro accounts. Please remember: these reports only detail transactions associated with your Coinbase account, and will not be correct if you moved crypto from other wallets or exchanges as Coinbase doesn’t have information about your holdings on other exchanges and platforms. If you use other exchanges, you’ll need to download separate reports from them and reconcile.
For all transactions, you need the cost basis of each transaction — the amount in dollars that you spent originally to buy it — and the amount in dollars it was worth when you sold it. This will be used to calculate your gains and losses.
2.2 Calculate gains and losses
Now that you have a comprehensive view of your activity, you’ll need to figure out whether you incurred gains or losses on each transaction. This means you’ll need to review each transaction and determine the cost basis to see if it’s a loss or a gain.
Losses may be used to offset capital gains in a given tax year, plus $3,000 — this means that any losses incurred on bitcoin and other crypto may be deductible, unlike losses on your car.
Applying a method to get a certain tax treatment for crypto transactions (e.g. SpecID, LIFO)
If you bought extensive amounts of cryptocurrency at different times and sold only a portion of it, you may be wondering if the ones you sold should use the costs of the first crypto purchased, the last ones purchased, or if you should use the Specific Identification method. Customers have the choice of lot selection methods and should consult with their tax advisors on which method best suits their individual tax situation. The IRS considers cryptocurrency to be property, like stock, and says general principles that apply to capital assets, should apply to crypto transactions.
See IRS FAQ Q36-Q38 for their guidance on methods of reporting
2.3 consult a tax professional
We’re go-getters and DIYers, and a lot of our customers are the same, but paying taxes on bitcoin and other crypto is complex. So when in doubt, consult a qualified tax professional. In plain English, Coinbase doesn’t provide tax advice, even though we want every member of the crypto community to avoid the confusion we’ve seen in the past few years. This educational guide was prepared for general informational purposes only, and we hope it helps, but we just can’t replace the attention a tax professional will give your unique situation.
Implications of hard forks on tax obligations
If you received free crypto as a result of a fork, your free crypto will be treated like free money received in a giveaway so it would be taxable as ordinary income valued at the fair market value on the day it is received. The fair market value is the amount someone would pay for the cryptocurrency on the date of receipt.
If it’s sitting in your wallet, but Coinbase or any other exchange has not yet started supporting the protocol and so you can’t do anything with it, it’s not taxable yet. Crypto received in a fork becomes taxable when you have the ability to transfer, sell, exchange or otherwise do something with it. See IRS FAQ Q21 - Q24 and Rev Rul 2019-24 for IRS guidance on forks and airdrops.
2.4 Prepare your forms
Here are some forms you may want to get familiar with. Some we provide, and some you put together yourself.
Forms you may need
Form 8949 Have transactions that qualify as a capital gain or loss? Those go here and can be filled out using your transaction reports from various exchanges.
Form 1040 (Schedule D, Capital Gains and Losses) Commonly referred to as just Schedule D, this is the summary of your capital gains and losses.
Form 1099-MISC (Miscellaneous Income) This Form is used to report rewards/ fees income from staking, Earn and other such programs if a customer has earned $600 or more in a tax year.
American taxpayer living abroad?
If you live outside the US, you’ll want to check to see if you’ve received all the forms you need to file your tax return. Just in case, make sure you have detailed transaction history reports that reflect all your purchases and sales across all exchanges you used. If necessary, you may have to contact your exchanges directly.
2.5 File your taxes
You’ve got your transactions, you know your gains and losses, you’ve consulted a tax-planning professional, and you have your forms ready. Pat yourself on the back: you’re probably ready to file your taxes (though it doesn’t hurt to check with the experts one last time).
Congratulations, and we hope this guide helped you out!
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4.0 Resources and extra info
If you hold a stablecoin such as USD Coin that is valued at $1, and you bought it for exactly $1, you have no gains or losses when you sell out of that stablecoin. So while technically stablecoin transactions are taxable and still reportable, there’s no gain or loss to claim.
4.3 Important terms
While you’re in the process of preparing your tax forms, you’ll probably run into some (a lot) of technical terms. Here are some of the more common ones:
A capital asset is property of any kind that you own, including stocks and bonds, a home, and crypto.
Cost basis methods
Your basis is the cost, in dollars, that you actually paid for crypto when you purchased it, adjusted for any related costs.
There is no standard guidance from the IRS on how to apply your cost basis to individual sales or exchanges of bitcoin, ethereum, and other cryptocurrencies. We’ve seen these common approaches, in addition to the many others out there:
First In, First Out (FIFO) — This method assumes that the first assets you purchased are also the first assets you sold or exchanged. Your gain/loss is calculated based on the price you paid for the oldest assets in your portfolio, and the asset price at the time of sale or exchange. This is the most common approach for traditional investments.
Specific Identification (SpecID) or Last In, First Out (LIFO) — SpecID relies on investors to specifically identify to their tax professional the assets they sold or exchanged. LIFO is one programmatic strategy that assumes the last assets you purchased are the first assets you sold or exchanged. For any of these approaches, you ’ll want to consult a tax professional.
Fair market value
For tax purposes, the fair market value of crypto is the dollar value of the crypto at the time of a transaction.
Gains are the profits you make on property. These gains are “unrealized” if they’re on paper — for example, if your bitcoin has increased in value but remains in your possession. When you sell your property and receive the cash value of that gain, the gains become “realized”, and you have a taxable event.
Like-kind property and crypto
There are plenty of questions about whether or not investors can claim a direct crypto conversion (e.g. bitcoin to ethereum) as "like-kind", avoiding taxes on those transactions. The tax laws changed beginning in 2018, and like-kind exchanges are only applicable to real estate transactions.
Long-term vs short-term gains
If you’ve sold a capital asset, you need to determine whether the asset was long-term or short-term. Long-term means that you held the asset for over a year before selling or disposing of it, while short term applies to assets you’ve held for less than a year. Long-term capital gains are often taxed at more favorable rates than short-term capital gains.
Losses occur when you dispose of your property for less than your cost basis. If your crypto is a capital asset under the definition above, you can use a capital loss on that asset to offset capital gains from other assets for that tax year (plus $3,000).
Ordinary assets include things like inventory and stock-in-trade (i.e. the goods and services that a business sells day in and day out to its customers), and property acquired in a trade or business. If you think you own crypto as an ordinary asset, consult a tax professional.
Generally, proceeds are the money you received when you sell your property. If you sold your crypto for dollars, the amount of money received is obvious. If you sold your crypto for a different crypto (i.e. you “converted” one crypto into another), then you must determine proceeds by reference to the dollar value of the crypto you received at the time of receipt. Gains are computed as proceeds minus your cost basis (what you paid for the original crypto).
4.4 Relevant tax forms
A majority of investors own crypto as capital assets, and use “Sales and Other Dispositions of Capital Assets, Form 8949” to report all their individual crypto transactions. Here, an investor describes assets transacted, including the dates they acquired and sold it, how much they made, the cost of doing the transaction, their net gain or loss, and if it was short or long term.
Form 1040 (Schedule D, Capital Gains and Losses)
This form summarizes your total short-term and long-term capital gains and losses from your Form 8949, Sales and Other Dispositions of Capital Assets.
Form 1099-MISC (Miscellaneous Income)
This Form is used to report rewards/ fees income from staking, Earn and other such programs if a customer has earned $600 or more in a tax year.