Miles Brooks is a Certified Public Accountant, a Master of Tax graduate, and CoinLedger’s Director of Tax Strategy. Reviewed by:
Jordan Bass is a tax lawyer with a focus on digital assets, a certified public accountant, and the head of tax strategy at CoinLedger.
If you didn’t sell or convert your cryptocurrency to U.S. dollars, you don’t have to pay taxes on it. S. dollars!âÂ.
Unfortunately, itâs not true. In numerous instances, paying taxes on cryptocurrency is necessary, even if you haven’t exchanged your holdings for fiat money. Â.
We’ll go over the various situations in this guide where paying taxes on cryptocurrency will be necessary, regardless of whether you sold it or reinvested the profits. After reading through, you’ll have a better knowledge of the various taxable events that can occur in the cryptocurrency ecosystem. Â.
The world of cryptocurrency taxation can be complex and confusing, especially for those who are new to the space. One of the most common questions that arises is whether or not you need to pay taxes on crypto gains if you haven’t sold your holdings.
Understanding Crypto Taxation
In the United States, the Internal Revenue Service (IRS) treats cryptocurrency as property. This means that you are only taxed on crypto when you either earn it or dispose of it.
Earning Crypto
There are several ways in which you can earn cryptocurrency including:
- Staking: Holding cryptocurrency to earn rewards.
- Mining: Using computational power to validate transactions and earn rewards.
- Airdrops: Receiving free tokens from a project.
- Hard forks: Receiving new tokens as a result of a blockchain split.
When you earn cryptocurrency, you are required to pay ordinary income tax on the fair market value of the crypto at the time of receipt.
Disposing of Crypto
Disposing of cryptocurrency includes selling it for fiat currency, trading it for another cryptocurrency, or using it to make a purchase. When you dispose of cryptocurrency, you may incur a capital gain or capital loss, depending on the difference between the price you paid for the crypto and the price you received when you disposed of it
Do You Pay Taxes on Unrealized Gains?
No, you do not pay taxes on unrealized gains in cryptocurrency. This means that if you hold onto your crypto without selling it, you will not owe any taxes on any potential gains, even if the value of your crypto has increased significantly.
Reporting Crypto on Your Taxes
Even if you haven’t sold your crypto, you may still need to report it on your taxes if you have earned any income from it. This includes income from staking, mining, airdrops, and hard forks.
Avoiding Capital Gains Tax on Crypto
There are a few strategies that you can use to avoid or minimize capital gains tax on your crypto:
- Tax-loss harvesting: Selling losing investments to offset gains from other investments.
- Donating or gifting crypto: Donating crypto to a qualified charity or gifting it to a friend or family member.
- Holding for the long term: Capital gains tax rates are lower for assets held for more than one year.
- Simply not selling: As long as you hold onto your crypto, you will not owe any taxes on unrealized gains.
While you do not need to pay taxes on unrealized gains in cryptocurrency, you may still need to report it on your taxes if you have earned any income from it. There are also a few strategies that you can use to avoid or minimize capital gains tax on your crypto.
Frequently Asked Questions
Do I need to report crypto if I didn’t sell?
Yes, you may still need to report crypto on your taxes if you have earned any income from it, even if you haven’t sold it.
How do I avoid capital gains tax on crypto?
There are a few strategies that you can use to avoid or minimize capital gains tax on your crypto, such as tax-loss harvesting, donating or gifting crypto, holding for the long term, and simply not selling.
Do I have to pay taxes on crypto if I lost money?
No, you do not have to pay taxes on crypto if you lost money. However, you may be able to use your losses to offset gains from other investments.
What happens if I don’t report crypto on my taxes?
If you don’t report crypto on your taxes, you could be subject to penalties and interest charges. In some cases, you could even be charged with tax fraud.
Disclaimer
This article is for informational purposes only and should not be considered tax advice. Please consult with a qualified tax professional for advice on your specific situation.
How do I avoid capital gains tax on crypto?Â
Thereâs no way to legally evade your crypto taxes. However, you can lawfully lower your cryptocurrency tax liability by using techniques like tax-loss harvesting. Â.
See our guide on lawfully avoiding crypto taxes for more details. Â.
Do I have to report crypto on taxes if I made less than $1,000?Â
You should report to the IRS all of your cryptocurrency income and disposal events, no matter how much you made. Intentionally not reporting taxable income is considered tax evasion. Â.