Your Full Crypto Tax Guide & Transaction Tracker
In case you're struggling with crypto taxes and tracking your transactions, we've got you covered!
Hey everyone! Good morning!
Instead of answering new questions for this week, I thought I would pull together all questions into one, comprehensive tax guide for you. If you have specific questions moving forward, let me know and I’ll answer them!
Bulletin Board:
If you’re looking for a professional accountant or advisor to help you with taxes or investment planning, we can help! We have a database of over 100 tax and financial pros ready to help you out using Reconcile’s software.
Struggling to keep track of your crypto transactions? We’ve built to help you log all of your taxable trades in a simple spreadsheet.
Your Full Crypto Tax Guide:
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How are NFTs taxed?
Investing in NFTs may have up to 3 taxable events.
→ 1st event: If an NFT is purchased using crypto such as ETH,, which is currently classified as property per the IRS ruling from 2014*, this transaction would trigger a capital gain/loss taxable event. A new holding period would begin for the NFT, which the IRS will likely rule as a “collectible” once they issue guidance on the asset class. Some may argue that NFTs will be classified as a digital asset instead**.
→ 2nd event: If an NFT is sold for crypto such as ETH, or swapped for another NFT, this would trigger a new capital gain/loss taxable event.
→ 3rd event: In the above scenario, if the NFT is sold for ETH, a new capital gains holding period would begin for the ETH the investor received. In the event this ETH was converted to USD, a third taxable event would occur in this transaction.
→ In summary, the investor would be taxed on the price appreciation of ETH or other crypto from the time they bought and converted into the NFT or USD.
*Note: While crypto is taxed as property, it still acts and looks like a security. Under the IRS definitions in §165, 475, 1091, there are no cryptos that meet the definition of a security. 99% of the rules are similar, but also the reason wash sales are currently allowed is because crypto != security at this time. Changes to the wash sale rule for crypto could be coming soon if the Build Back Better act is passed. Additionally, SEC chair Gensler has said almost all cryptos ARE securities, but the SEC decision doesn't have authority over the IRS. CFTC has said most are likely commodities and not securities.
**Note: Collectibles are governed by §408(m), which says "any work of art." However, it can clearly be argued that not all NFTS fall into this category (ENS domains, event tix, etc), so it's not an all or nothing categorization. On the actual art, there's a good divide in the tax pro community. Are you buying the art or are you buying computer code that's a digital roadmap to the art.
Creators of NFTs are taxed in a different way compared to NFT investors. While creating the NFT does not trigger a taxable event, selling an NFT in exchange for crypto or other compensation would. For example, if an NFT creator sells a digital collectible for ETH on OpenSea, the creator would be taxed as ordinary income on the compensation received. In this example, if the creator does not convert the ETH to USD immediately, a new capital gains holding period begins for the ETH they received in the sale.
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I got paid in crypto for consulting work. How will I get taxed?
In most cases, income received in the form of crypto will be taxed as ordinary income. This would be determined by the fair market value on the date the crypto was received. As with other forms of income, this income is taxed based on an individual’s tax bracket.
Two important things to note if you’re being paid in crypto as a 1099 contractor or otherwise.
→ 1: This form of income likely won’t have taxes withheld, so you’ll need to keep track of this income and be aware of any estimated taxes that need to be paid.
→ 2: As mentioned above, it will be important to record the fair market value of the crypto at the time of receipt. This value will be needed to figure out capital gains/losses and duration held when disposing of the crypto for USD or using it to purchase a good or service - like an NFT!
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How are yield farming and staking taxed?
As it stands today, interest earned through yield farming strategies would be taxed as income. However, liquidity pool transactions will likely be taxed according to capital gains. As discussed prior, the IRS has not issued clear guidance on this area. Tax professionals and investors alike should take a conservative approach when calculating taxes on yield farming. Staking rewards should be taxed as ordinary income at the fair market value of the staking reward at the time of receipt, according to the recent guidance issued by the IRS.
→ Hence, it’s important to keep track of when you received crypto from yield farming and its value at the time you received it. These two things will help you determine your duration of holding and net gains/loss on the reward.
For additional reading, here’s a strong point for why staking shouldn’t be considered income - perhaps the IRS will change its mind!
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If you’re airdropped something but don’t claim it, is that income?
This is a very gray area with little guidance from the IRS.
→ Based on precedent, airdrops will be taxed as ordinary income (i.e. short-term capital gains rates), generally, when the assets are recorded on ledger and/or enter your wallet. So if you don’t claim, you won’t have control of the asset and shouldn’t get taxed.* When you sell the airdrop, it’ll be subject to capital gains tax rates.
→ Also, not related to tax, but be careful claiming unknown airdrops as some of those smart contracts hide malicious code that may drain your wallet.
Note: This isn’t definitive guidance but merely how I and other folks construe the law. For a counter point, §1.451-2(a) says " Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given.” With this doctrine, you could be taxed on the value when you COULD have claimed it, not when you do. However, many airdrops have no liquidity or FMV, which complicates this even further.
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What should I do with worthless NFTs?
First, try selling them for 0 ETH on Opensea or Harvest.art.
If this doesn’t work and if your NFT clearly has no value, there is a chance that you could deem it worthless. BUT, if you deem a NFT worthless and then it has value, be prepared to pay taxes if the NFT/crypto is sold. Before doing this, we recommend that you contact your tax advisor as this information is based on current law with regards to similar securities/assets.
Deeming a security or property worthless is described in the links below.
https://www.law.cornell.edu/cfr/text/26/1.165-2
Note: What we don't know is what constitutes abandonment for a non-physical item. Also abandonment creates an ordinary loss and not a capital loss, so, in general, the IRS gives that some extra scrutiny. There's no case law about abandoning but the historical success rate of abandoning intangible objects is limited.
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What’s better for taxes - filing personally or as a business?
In general, a single member LLC is a disregarded entity and offers zero TAX benefit over being a sole prop.
Depending on the type of incorporation (e.g. LLC vs. C-corp), you may be able to write-off expenses related to trading crypto (or mining it) and any capital losses incurred. So if you’re a miner and you’re scammed out of coins, you can deduct that loss on your business return.
Also, trading crypto inside of a C-corp will most likely result in you paying a ton more in tax.
Filing as a business will introduce additional complexity but may be worth it for active investors with large, diversified portfolios. We highly recommend chatting with your tax advisor about this before making a final decision as there are a lot of moving pieces to this.
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Can I deduct my gas fees?
Just like with commission fees when buying stocks, your crypto gas fees get added to the cost of your transaction (e.g. trade, swap, etc.).*
Example:
You bought an NFT for 1 ETH and paid .05 in gas fees. Your transaction cost, or cost basis, is now 1.05.
When you sell the NFT, you would consider the purchase price of it to be 1.05 ETH instead of 1.
*Note: while the IRS hasn’t explicitly mentioned how crypto gas fees are taxed, we can assume they’ll be included in the cost basis per Publication 551.
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What are the tax implications of interest earned on staked currency?
As of IRS Notice 2014-21, interest earned from staking currency is treated as ordinary income (taxed at the same rate as your work wages).*
However, when you sell the interest, it gets taxed as a capital gain. Depending on how long you held the interest for, you’ll pay short-term or long-term tax rates.
Keep in mind, this regulation may get updated since this Notice was originally outlined for bitcoin proof of work mining and not proof of staking rewards.
*Note: See Publication 525, Taxable and Nontaxable Income, for more information.
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I invest in crypto and NFTs for my young daughter. How will she get taxed?
This will be a nuanced answer so please check with your tax advisor before engaging in any transactions.
Your daughter will be subject to the Kiddie Tax - Topic 553, which will impact her unearned income (i.e. investment income). Children as old as 19 (and up to 24 years old for fulltime students) are eligible for the Kiddie Tax as long as they’re dependents.
This means that the first $1,100 of your daughter’s investment earnings is untaxed. The following $1,100 of unearned income is subject to her tax rate. Any amount above $2,200 is taxed at the your marginal rate, as the parent. The rule only applies to unearned income. Any income your child earns through a job is taxed at his or her rate.
Note: If your daughter’s only income is interest and dividend income (including capital gain distributions) and totals less than $11,000, you may be able to elect to include that income on your return rather than file a return for your child. See Form 8814, Parents' Election To Report Child's Interest and Dividends.
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I put a mix of token X and Y into a liquidity pool. I take out 50% of my position on Date A and then the rest on Date B. What gains/losses get realized and when?
Your interest earned, assuming the value of the tokens have gone up, will be taxed as capital gains. So the rate you’re taxed at will be determined by the holding periods of your tokens.
So your gains and losses will get realized when you sell those tokens after received. The selling method (FIFO, HIFO, etc.) you choose to calculate your taxes will impact your net gains differently. You’ll want to work with an accountant to perform this scenario analysis for you.
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Can you realize a loss on NFTs that can’t be sold like in the case of a rug pull?
As rug pulls aren’t technically considered thefts or scams, there’s no direct IRS rule that helps NFT owners.
Most likely, you won’t be able to claim a loss on these NFTs without a legitimate sale. Last week, we covered the abandonment rule, which MAY allow you to disown your NFTs forever in the interest of taking a capital loss. That may be the most relevant guidance to support a loss in the event that you own a worthless asset with no liquidity.
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What do I do if I haven't paid taxes on my crypto from 2020?
If you failed to pay your taxes last year or prior years, you should immediately file an amended return using Form 1040X.
When filing the amended return, you’ll need to first calculate the total tax owed on your crypto transactions and then send the IRS your Form 1040X, tax payment (if any), and supporting documentation. I recommend you work with an accountant here instead of doing this yourself!
→ The IRS usually allows you to amend your returns up to three years from the date you originally filed.
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How is bridging tokens to another chain treated? Is this considered a crypto to crypto trade?
There isn’t definite guidance to answer this question. Taking a conservative position, you can treat the wrapped or bridged token as two separate assets. With this position, it is indeed a taxable transaction, subject to capital gains taxes, as you’re disposing of one token for another.
So even going from BTC to wBTC (wrapped BTC on the ETH chain) is considered a taxable transaction and you’ll owe taxes on any net gain between the swap.
Here are two examples of taxable transactions:
→ If you’ve recently bought BTC and immediately swap to wBTC, you’ll most likely incur a minuscule gain, if any, since BTC is usually worth 0.9980 to 1.002 wBTC on most exchanges.
→ If you’ve held BTC for a while with a low cost basis and then swap to wBTC when the price is substantially higher, you’ll have a large taxable gain.
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I’ve gotten involved with a DAO and as part of that I vest tokens. How will I get taxed?
Being involved in DAOs that earn or distribute income may come with a surprising tax bill. Here are the key things to know when it comes to the taxation of DAOs:
→ DAOs are most likely taxed as partnerships under IRC 7701(a)(2). This means that the DAO itself will not pay any income tax, but rather the tax liability gets ‘passed through’ to its partners (i.e. all members of the DAO)*. So you are then responsible for reporting your share of the DAO’s income or loss on your personal tax return. If the DAO is properly managing its admin and tax responsibilities, it will also send you copies of Schedule K-1 (Form 1065).
→ If you received payment from the DAO for goods or services rendered (e.g. a consulting gig), then you’ll report that as ordinary income.
→ If you received governance tokens from the DAO (e.g. the ENS airdrop), then you’ll also report this as ordinary income.
→ However, when you sell those governance tokens, the net gain will fall under capital gains tax.
Note: Because all members have equal control over the direction of the DAO, they would likely be considered General Partners and create physical nexus in every state in which a member resides. This can be a huge problem for compliance and require the filing of returns in almost every state. There are even bigger potential problems in regards to international tax issues.
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Does the 1031 rule still apply to crypto?
Mostly no, but there have been exceptions! As of the The Tax Cuts and Jobs Act (TCJA) in 2018, the IRS officially limited the 1031 rule (like-kind exchange treatment) to only real estate. Prior to this, the IRS had mentioned crypto-to-crypto transactions were taxable and not protected by the 1031 rule.*
→ Even though the guidance specifically outlined Bitcoin, Ether, and Litecoin exchanges and not the other tokens, it’s still safe to assume that no crypto-to-crypto transactions will qualify as a like-kind exchange. That being said, there have been instances where the IRS accepted a 1031 position and there are pending suits in tax court using the 1031 as their defense.
*Note: See IRS notices from 2014 and 2019 that reinforce their position. Also, the IRS issued a memo in 2021 that stated “if completed prior to January 1, 2018, an exchange of (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin, or (iii) Ether for Litecoin does not qualify as a like-kind exchange under § 1031 of the Code.
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What is the benefit of Puerto Rico’s capital gains tax rule?
P.R. Laws tit. 13, §10852;§10853(b) Act 60 established the Puerto Rico Incentives Code. The Code enables individual investors to receive the following tax breaks, after becoming a bona fide resident of Puerto Rico before Jan 1, 2036. Note that this incentive only applies to new Puerto Rico residents, not existing.
100% tax exemption from Puerto Rico income taxes on all dividends
100% tax exemption from Puerto Rico income taxes on all interest
100% tax exemption from Puerto Rico income taxes on all short-term and long-term capital gains
100% tax exemption from Puerto Rico income taxes on all cryptocurrencies and other crypto assets
To quality for a bona fide resident of Puerto Rico, you must pass all three of these IRS tests:
Presence test: The individual is present for at least 183 days during the taxable year in Puerto Rico (there are other ways to satisfy this requirement). This is known as the “where are you” test.
Tax home test: The individual does not have a tax home outside of Puerto Rico during the taxable year. This is known as “the office test.”
Closer connection test: The individual does not have a closer connection to the United States or a foreign country than to Puerto Rico. This is known as the “in your heart test.”
→ Additionally, you are required to purchase property in Puerto Rico within two years of obtaining the decree, and the property must remain your primary residence throughout the validity of the decree. You also need to apply for an exemption decree (around $6000) and make a $10,000 donation to a local (and on the approved list) charity every year.
→ Also, keep in mind, only assets acquired AFTER residency can access the special Act 60 rates.
This is just a snapshot of Act 60. We recommend you speak with your tax advisor to learn more about this rule in depth and see if it makes sense for you.
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If I move ETH from one wallet to another and incur a gas fee, is that considered a transaction and can the gas fee be deducted as a loss?
There’s no clear guidance from the IRS regarding gas fees so the best we can do is assume a similar tax treatment of securities. IRS Publication 551 states that financial assets can have their cost basis increased by costs associated with the purchase.
→ With this in mind, the following crypto transactions seem likely to fall under Publication 551 jurisdiction - buying, selling, swapping, yield farming, staking, airdrop claiming.
→ However, transferring crypto between personal wallets doesn’t involve the acquisition or disposition of an asset. So the answer lies in how conservative or aggressive of a position you want to take. You’ll want to work with a tax professional to get better guidance as the crypto tax law continues to evolve.
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What happens if I don’t pay my crypto taxes?
Not properly filing or paying taxes on your crypto transactions put you at increased risk of an IRS audit, penalty, or criminal prosecution.
→ There is no statute of limitations for fraud or tax evasion, so the IRS can come after you at any time. In the case of back taxes, the IRS can even seize your crypto to cover unpaid balances.
→ The financial penalties include a failure-to-pay penalty of 0.5% per month, starting after the month in which it was due, an additional 5% one-time fee, and the interest on your outstanding balance.
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What does a tax audit look like?
Most often, audits ask for additional clarification or supporting documents to fix a discrepancy between what you reported versus what they expected from your W-2s, 1099s, etc. If you’re faced with an audit, we recommend you work with a tax professional trained in IRS audits to help you put together documentation and supporting arguments.
→ If the audit is more serious, the IRS may look through your bank and credit card statements, trading behavior across platforms, and anything else related to your finances.
→ Unless you’re overtly committing tax fraud or evasion, you shouldn’t need to worry. In fact, of the 150 million federal tax returns filed each year, less than 1% of filers get audited.
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Do I have to pay taxes if I’m gifted crypto or an NFT?
Most likely not! Receiving a gift is not a taxable event. However, the donor will likely owe a ‘gift tax’ if the value is above $16,000 and file IRS Form 709.
→ However, keep in mind that when you sell your gifted crypto, you’ll owe capital gains tax (if sold at a profit) and your cost basis will be the price at which the original buyer bought it at.
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Should I take my salary in crypto instead of USD?
This is a tricky and complex situation. You should definitely work with a tax professional and financial planner before making a final decision.
→ The downside risks of accepting salary in crypto include:
Crypto is very volatile so you may take away a lot less than if you had been paid in USD instead.
There currently aren’t any crypto payroll companies that provide automated withholding, which means you’ll have to most likely make estimated quarterly tax payments. Most people getting paid in crypto forget about this.
The volatility in crypto may lead to you paying more in taxes than you eventually end up selling.
As a disclaimer, please note that the IRS still hasn’t issued crystal clear guidance when it comes to crypto, specifically DeFi and NFTs. Guidance to some of the questions will come from case law and rules for similar assets/investments. Please speak with your tax professional before engaging in any transaction as this is not formal tax advice.
Special thanks to @fintaxdude and @EmDeeEm for helping put this together!