Crypto and Taxes in the United States

Trading

In order to find out if you made or lost money on a trade, you need to know your cost basis. The cost basis of your cryptocurrency is the price you
paid to acquire your crypto when you bought it. If you received your cryptocurrency as a gift from someone, you need to know the donor’s cost basis
in the cryptocurrency, as in most cases that will be your basis as well.

If you have been trading on multiple exchanges, it’s almost impossible for you to calculate your gains and losses manually. The easiest way to do the
calculation is with CoinTracking.info. We store historical prices for
over 7,000 different cryptocurrencies on our own servers. That helps our software deliver quick, accurate calculations. We also support API and CSV import for almost all exchanges and wallets. Furthermore, we support crypto margin trades, a feature very few crypto tax calculators are offering at this point.

CoinTracking supports 12 different cost basis methods, including FIFO (First In, First Out), LIFO (Last In, Last First Out) and many others. Under the
current IRS guidance, there are only two cost basis allocation methods allowed for tax return reporting: First In First Out (FIFO) and Specific
Identification method. Once you pick a method, you must apply it consistently. If you have already established a method and you want to change it,
you need to apply for an accounting method change first.

In the U.S., you can deduct cryptocurrency losses from your yearly income. The IRS lets cryptocurrency traders write off up to $3,000 in crypto losses
from their ordinary income each year. If you lost more than $3,000 in a year, your losses can even be carried forward into future tax years to offset part
or all of your capital gains and possibly also some of your ordinary income for up to $3,000. There is no time limit for capital loss to carry forward.

Capital gains and losses from cryptocurrency trades need to be reported on Form 8949 and Form 1040 Schedule D. CoinTracking provides Form 8949 in both CSV
and PDF format as part of the tax reports you can generate in your CoinTracking account. Other formats (like TaxAct, TurboTax and Drake, for example) are
also available.

Mining

Any cryptocurrency received from mining is considered taxable income. The classification of the income varies depending on the nature of the taxpayer’s
activities. Individuals that run cryptocurrency mining businesses are treated differently compared to mining hobbyists and investors.

If you are operating a mining business, you need to report your mining income, measured in USD based on the FMV (Fair Market Value) at the time of receipt
of the mined coin, on Form 1040 Schedule C as business income. If you had formed a business entity to do mining, your mining income needs to be reported on
your business tax return. Costs related to mining (such as mining equipment and electricity, etc.) are deductible and can be used to offset your mining income.

If you are doing mining as a hobby, such as using your home computer to mine cryptocurrency in the background, any cryptocurrency received from the mining
should be reported as hobby income. You may be able to deduct your mining expenses up to the amount of your hobby income.

If you are investing in a mining contract with a third party mining company, the mining income you received should be treated as investment income.
Depending on how the mining contract is written, your mining income may be considered interest income or ordinary income. You may be able to treat
part of the receipt as a nontaxable return of capital. Alternatively, you can treat the amount you invested in the mining contract as an investment
expense. However, under the new tax law, individual taxpayers can no longer deduct any investment expenses.

Airdrops and hard forks

An airdrop occurs when a cryptocurrency is automatically sent out to numerous wallet addresses. A new cryptocurrency is formed when a hard fork occurs,
and usually all of the holders of the older coin receive the new coin via airdrops.

According to Rev. Rul. 2019-24, any new cryptocurrency
received by airdrop following a hard fork should be treated as ordinary income and reported at tax time. If there was a hard fork but the taxpayer did not
receive the new coin, no income needs to be recognized. In other words, a hard fork event itself is not taxable. The receipt of a new coin due to hard fork,
however, is a taxable event. Some people believe that if they don’t trade or cash out the hard fork coin that landed in their wallet or exchange account,
they don’t need to report anything. That’s not true. Anytime you receive a new coin due to a hard fork, you need to report it as income.

Many crypto holders receive airdrop coins that are not related to a hard fork. However, the IRS FAQs and Rev. Rul. 2019-24 did not provide specific guidance
about how to treat this type of income. In such a situation, we believe you can either report your airdrop coins as ordinary income in the same way that you
would account for hard fork coins, or you can take a zero basis approach and record your airdrop coins as a purchase for zero dollars.

Spending cryptocurrency

If you spent cryptocurrency to pay for goods or services, under the current IRS guidance, you need to report those transactions on your tax return.
Each spending transaction is treated as if you had sold your cryptocurrency for FMV in USD, then used the USD to pay for the product or service. All
gains or losses will need to be recognized and reported.

On January 15, 2020, the Virtual
Currency Tax Fairness Act of 2020 was introduced with bipartisan sponsors in Congress. The Act recommends that any disposal of cryptocurrency in a personal
transaction that generates no more than $200 worth of gains should not trigger recognition of taxable income. However, even if the Act is passed and signed into
law, taxpayers will still need to calculate the gain or loss of each spending transaction in order to determine if the transaction can be exempted from income taxation.
They’ll also need to know how much they can deduct as well as how the transaction impacts the remaining cost basis of their crypto holdings.