The Taxman Cometh for Crypto
Gone are the days of the Wild West. The IRS receives data from Coinbase, Kraken, and others. If you trade crypto, you owe taxes.
Short Term vs Long Term
- Short Term (< 1 Year): Taxed as Ordinary Income. This is your worst nightmare. It adds to your salary and is taxed at your top bracket (up to 37%).
- Long Term (> 1 Year): Taxed at Capital Gains rates (0%, 15%, or 20%). This is much cheaper. HODLing pays off.
FIFO vs LIFO
When you sell 1 Bitcoin, WHICH Bitcoin did you sell? The one you bought for $1k in 2017, or the one you bought for $60k in 2021?
- FIFO (First In, First Out): Standard. You sell the oldest coins first. Usually results in HIGHER taxes because gains are larger.
- LIFO (Last In, First Out): You sell the newest coins first. Usually results in LOWER taxes. Used by savvy traders.
- HIFO (Highest In, First Out): You sell the most expensive coins first to minimize gain or maximize loss.
Wash Sale Rule (The Loophole)
In stocks, if you sell at a loss and buy back within 30 days, you cannot claim the loss. This is the "Wash Sale Rule".
Currently, this rule does NOT apply to Crypto. You can sell Bitcoin at a loss on Dec 31 to harvest the tax loss, and buy it back on Jan 1. This is a massive tax advantage legally available right now (Subject to change!).
Tax Loss Harvesting
Since the Wash Sale Rule doesn't apply (yet), you can aggressively harvest losses.
- You bought ETH at $4,000. It drops to $2,000.
- You have an unrealized loss of $2,000.
- You SELL the ETH. You realize the $2,000 loss.
- You immediately BUY the ETH back at $2,000.
- You still own the same amount of ETH, but you now have a $2,000 loss on paper to offset your other gains.
Cost Basis Tracking
If you move crypto between wallets (MetaMask -> Ledger -> Binance), you MUST track cost basis. Moving is not taxable, but selling is. If you lose the record of what you bought it for, the IRS assumes your cost basis is $0, and you pay tax on the ENTIRE amount.
FAQs
- Is crypto-to-crypto taxable?
- Yes! Trading BTC for ETH is a taxable event. You "Sold" BTC for USD, then "Bought" ETH. You owe tax on the BTC gain.
- What about Airdrops?
- Airdrops are taxed as Income at their fair market value on the day you receive them.
- What if I lose my private keys?
- If your crypto is truly lost/inaccessible, you might be able to claim a "Casualty Loss", but the Tax Cuts and Jobs Act of 2017 suspended this for most personal property. Talk to a CPA.