Introduction
As cryptocurrency trading gains momentum in the U.S., understanding IRS tax obligations is essential for traders to stay compliant. Whether you're an occasional investor or a full-time day trader, your crypto gains, losses, and transactions must be reported properly to avoid penalties and audits.
This guide explains how crypto trading is taxed in the U.S., whether your gains qualify as capital gains or business income, and how to file your taxes accurately.
How Cryptocurrency is Taxed in the U.S.
The IRS classifies cryptocurrency as property, meaning that all trades, sales, and disposals are taxable events. Crypto transactions are subject to capital gains tax or business income tax, depending on the nature of your trading activities.
Capital Gains vs. Business Income
The IRS determines tax classification based on trading frequency, intent, and the role of trading in your financial activities.
Capital Gains Tax (Casual Investors & Long-Term Holders)
- If you trade occasionally or hold crypto for long-term investment, your profits are taxed as capital gains.
- The tax rate depends on how long you held the crypto before selling:
- Short-term capital gains (held for less than a year) are taxed as ordinary income.
- Long-term capital gains (held for more than a year) qualify for reduced tax rates of 0%, 15%, or 20%.
Business Income Tax (Frequent or Professional Traders)
- If you trade actively and frequently with the goal of making a profit, the IRS may classify your gains as business income.
- 100% of your profits are taxable at your ordinary income tax rate.
- Unlike capital gains, business losses can be deducted against other types of income.
- Professional traders may also qualify for trader tax status (TTS), which allows them to deduct business expenses.
Understanding whether your trading activity is considered an investment or a business is crucial for determining your total tax liability.
Tracking Crypto Transactions
The IRS requires traders to keep detailed records of all transactions for accurate tax reporting.
For each transaction, document:
- Date and time of the trade
- Type of cryptocurrency involved
- Amount and fair market value (FMV) in USD at the time of transaction
- Trading fees and costs
- Purpose of the transaction (buy, sell, trade, staking, etc.)
Using crypto tax software like CoinLedger, CoinTracker, or Koinly can help automate record-keeping and tax calculations.
Calculating Capital Gains or Business Income
Determine Adjusted Cost Basis (ACB)
- The ACB includes the original purchase price plus transaction costs.
- If you bought the same cryptocurrency at different times, use the FIFO (First-In-First-Out) or specific identification method to determine cost basis.
Calculate Proceeds of Disposition
- This is the amount received when selling or trading crypto, minus any trading fees.
Determine Capital Gains or Losses
- Capital Gain = Sale Price – Adjusted Cost Basis
- Short-term gains are taxed as ordinary income.
- Long-term gains qualify for lower tax rates.
- If your gains are business income, 100% is taxable as ordinary income.
Report Gains or Losses on the Correct Tax Form
- Capital Gains: Report on Form 8949 and Schedule D.
- Business Income: Report on Schedule C (Profit or Loss from Business).
Accurate reporting prevents IRS audits and tax reassessments.
Self-Employment Tax for Crypto Traders
If the IRS classifies your trading activity as business income, you may be subject to self-employment tax (15.3%) in addition to income tax.
- Casual investors are not subject to self-employment tax.
- Professional traders with trader tax status (TTS) may qualify for deductions on trading-related expenses.
Understanding whether you qualify for trader tax status can help reduce your tax burden.
Foreign Crypto Exchanges and Offshore Holdings
If you trade on foreign cryptocurrency exchanges or hold crypto assets outside the U.S., you may be required to report them to the IRS.
FBAR and FATCA Reporting Requirements
- If you hold over $10,000 USD in foreign crypto exchanges, you must file FBAR (Report of Foreign Bank and Financial Accounts, FinCEN Form 114).
- If your foreign crypto holdings exceed $50,000 USD, you may need to file FATCA (Form 8938, Statement of Specified Foreign Financial Assets).
Failing to report foreign crypto holdings can result in severe penalties and IRS audits.
Filing Your Crypto Taxes
When filing your tax return, ensure all crypto-related income is accurately reported.
Tax Forms for Crypto Traders
- Form 8949 & Schedule D: For capital gains/losses.
- Schedule C: For business income.
- FBAR (FinCEN Form 114): For foreign crypto accounts over $10,000 USD.
- Form 8938 (FATCA): For offshore crypto holdings exceeding $50,000 USD.
Since crypto taxation is complex, consider consulting a tax professional with crypto expertise.
IRS Penalties for Non-Compliance
The IRS has increased enforcement of crypto taxation, and failure to report crypto transactions can lead to penalties, audits, and tax fraud investigations.
Potential Penalties
- Failure-to-File Penalty: 5% of unpaid tax per month (up to 25%).
- Negligence Penalty: 20% of underpaid tax if misreporting is found.
- Tax Fraud Penalty: Up to 75% of unpaid taxes for deliberate tax evasion.
Since the IRS receives data from crypto exchanges and financial institutions, avoiding taxes is no longer an option.
Voluntary Disclosure Program: Correcting Past Crypto Filings
If you failed to report crypto income in past years, the IRS Voluntary Disclosure Program (VDP) allows taxpayers to correct tax filings before an audit begins.
Benefits of the IRS VDP
- Reduces penalties for unreported crypto income.
- Helps avoid IRS fraud investigations.
- Allows taxpayers to correct tax returns without facing legal action.
Since the IRS continuously monitors crypto activity, voluntary disclosure is strongly recommended for unreported transactions.
FAQs on Filing Crypto Taxes in the U.S.
Do I have to report every crypto trade?
Yes. The IRS requires detailed reporting of all trades, swaps, and disposals.
What happens if I only trade on foreign exchanges?
The IRS taxes worldwide income, and foreign crypto holdings may require FBAR and FATCA reporting.
Can I deduct trading fees and expenses?
- For capital gains: No, trading fees are included in cost basis.
- For business income: Yes, expenses like software, internet, and commissions may be deductible.
What if I forgot to report crypto income from past years?
You can correct past filings through the IRS Voluntary Disclosure Program (VDP).
Conclusion
Filing taxes as a crypto trader in the U.S. requires proper record-keeping and compliance with IRS regulations. Understanding whether your gains qualify as capital gains or business income is crucial for minimizing tax liabilities.
Staying informed about IRS crypto tax rules and keeping detailed records will help prevent penalties and audits.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses