A Basic Guide to Crypto Taxes

What gets taxed and by how much

Reading time: 5 min

We’re going to talk about an important financial topic today.


You’re probably rolling your eyes right now and are about to close this email—but trust me, this is something you don’t want to put off until the last minute.

If you’re in the U.S. then you need to submit your taxes by April 15.

That day will be here before you know it and it can be a pain in the ass to get all the information you need.

Thankfully, some exchanges now prepare a tax form for you and there are also crypto tax apps out there that you can use (I’ll link some at the bottom).

While technology can do all the heavy lifting for you, it’s still good to have a general idea of how crypto taxes work and what you get taxed on. Knowing the potential tax implications of your investing moves should be a critical part of your strategy.

So, here’s a basic guide to crypto taxes: what gets taxed, how much it gets taxed, and how to report your taxes.

Note: I’m not a tax expert, just a dude on the internet who likes to talk about investing and finance. Please consult a tax advisor if you need advice.

Aight, let’s get into it.

What Are Taxable Crypto Transactions?

Not every transaction is taxable, but a lot are. You’ll need to pay taxes if you:

  • Sold crypto for USD

  • Traded one crypto for another

  • Used crypto as payment

  • Received an airdrop

  • Got paid in crypto

  • Received interest or staking rewards

The amount you need to pay for each transaction depends on your cost basis.

What’s Cost Basis?

Cost basis is the original price you bought or received an asset. This number is important because it’s used to calculate how much taxes you owe.

For example:

  • If you buy 1 BTC @ $40,000 then your cost basis is $40,000.

  • If you buy 0.5 BTC @ $40,000 then your cost basis is $20,000.

  • If you got an airdrop of 0.25 BTC @ $40,000 then your cost basis is $10,000.

Cost Basis Methods

Calculating cost basis is pretty straightforward, but if you have multiple transactions for the same asset then it can get a little tricky.

When you have multiple transactions then the IRS lets you choose from various cost basis methods:

  • First In First Out (FIFO): The first asset you bought is sold first.

  • Last In First Out (LIFO): The last asset you bought is sold first.

  • Highest In First Out (HIFO): The most expensive asset you bought is sold first.

  • Specific Identification (Spec ID): Pick the specific asset you sold but you need to be able to identify it with records.

There’s no right method as each has its advantages and disadvantages. To keep things simple, I use FIFO.

Here’s an example of how FIFO works:

  • You buy 1 BTC on January 1 for $40,000.

  • You buy another 1 BTC on February 1 for $45,000.

  • You sell 1 BTC for $50,000.

  • You would use the first BTC you bought at $40,000 as your cost basis for the transaction.

  • You would then report a profit of $10,000 and need to pay taxes on that.

How Much Are You Taxed?

Whenever you profit from a trade, you need to pay capital gains tax and the percentage you’re taxed at depends on how long you’ve held the asset.

  • Short-term capital gains: If you hold an asset for 1 year or less then you’ll be taxed at your income tax rate.

  • Long-term capital gains: If you hold an asset for longer than 1 year then you’ll be taxed between 0-20% depending on your income and filing status.

For airdrops or staking rewards, you’ll need to pay income tax on the amount you get.

For example:

  • If you get a $100 airdrop then you’ll need to pay income taxes on that $100.

  • If you stake your crypto and get $10 in rewards then you’ll need to pay income taxes on that $10.

When you sell your airdrops or staking rewards then you’ll have to pay capital gains tax on top of the income tax. Oof, right?

Whenever I sell crypto, I always make sure to set aside at least 25% of the profits so I don’t get hit with a surprise tax bill that I can’t pay for.

What About Losses?

Thankfully, you don't owe taxes on crypto losses. What a nightmare that would be.

If you sell crypto for a loss then you can use these losses to lower your taxes. Tax-loss harvesting is a strategy where you strategically sell your dud investments to lower your tax bill for the year.

For example:

  • You had a great year of gains and have a profit of $50,000 that you need to pay capital gains tax on.

  • You also invested $5,000 in a couple of tokens that are down -90%. If you don’t care to hold them anymore, you can sell them at a loss and reduce your capital gains tax by $4,500.

How to Report Your Crypto Taxes

Now comes the fun part of having to report all your transactions.

Here’s what you need to do:

  1. Make a list of all your taxable crypto transactions from the last year and identify which tax applies (income tax, short-term capital gain, long-term capital gain).

  2. Calculate your cost basis and profits or losses for each transaction.

  3. File your taxes using an app like TurboTax.

You can download your transaction history from your exchange or blockchain explorer sites like Etherscan.

Or to make things easier, you can use crypto tax software like Koinly or CoinLedger. Connect your accounts and the app will pull and organize all your transactions for you into a nice form.

I like Koinly and it’s saved me so much time and stress.

I hope this guide helps you get started. For a deep dive into crypto taxes, check out Koinly’s crypto tax guide.


Fifty Sat

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