Crypto Taxes: The Basics of Cryptocurrency Taxation


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Cryptocurrency has gained lots of attention and recognition over the past decade. Along with its steady rise in popularity, a few governments have adopted the use of cryptocurrency in their markets. Along with the government’s involvement, the concept of crypto taxes has come to light. Governments and centralized banking systems constantly monitor the movement of cash and aim to have transparency. However, due to the nature of cryptocurrency, this makes it hard for them to keep an eye on the market. Crypto tax is still relatively new, with no standardized taxation rules, but there are other regulations that traders follow like FIFO and LIFO, as well as IRS tax regulations.

Basics of Crypto Taxes

As per the IRS’s(Internal Revenue Service) regulations, cryptocurrency is to be treated as property, making them applicable for taxation. Just like the stock market, you will need to report the capital gains and losses you have incurred in your crypto trading account. Due to the untraceable concept of cryptocurrency, traders have not been filing for crypto taxes. However, there are many traders who proactively file for their crypto taxes in order to avoid getting flagged by the IRS. This could lead to a hefty fine, or potentially even jail time.

IRS Regulations on Crypto Taxes

The Internal Revenue Service(IRS) has issued guidelines for crypto taxes. The new taxation scheme shines a light on some of the queries that cryptocurrency traders have been confused with in the past.

Here are some of the guidelines put into effect by the IRS

Hard Fork

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A hard fork is an enormous change to the protocol of a network that makes previously invalid blocks and transactions in a blockchain valid, or vice-versa. A hard fork is essential like a massive version update of the blockchain which requires all the cryptocurrency nodes and users to upgrade to the latest version protocol software.

If the cryptocurrency that you possess goes through a hard fork. The new cryptocurrency you receive after the fork is taxed as income, and if you haven’t received any new income, then you will not be applicable for income tax.

Soft Forks

A soft fork affects the blockchain by changing the software protocol in a manner where the blocks or transactions before the soft fork has occurred has been made invalid. Since the old cryptocurrency nodes will recognize the new blocks as valid, a soft fork is considered as backward-compatible.

According to the IRS, soft forks do not result in any taxable events. This is because a crypto trader who has undergone a soft fork will not receive new coins. Coins received represent income, and since there is no income, there is no crypto tax to be applied for.

Cost Basis

Before the new guidelines were put into effect, crypto traders were not sure how to determine the cost basis for their cryptocurrency assets.

IRS has mentioned that the taxpayers can select which units or lots of cryptocurrencies they are planning to sell within a given timeframe, as long as they can accurately identify and support the cost basis of those units.

When precisely determining the cost basis of a unit in cryptocurrency, you must mention the following information.

  • Date and time of the procurement of every unit.
  • Date and time of every unit that has been sold, exchanged, or disposed of.
  • Fair market value of each unit upon procurement.
  • Fair market value of each unit upon sale, exchange, or disposal and the value of currency received for each unit.

Calculating Capital Gains and Losses

Calculating your capital gains and losses for your cryptocurrency transactions is fairly straightforward. However, you do need to be sound on your understanding of taxable and non-taxable events.

Taxable Events in Cryptocurrency

A taxable event in an action that that triggers a reporting liability. When one of these events occurs, it results in a capital gain or a capital loss that needs to be reported as part of your crypto tax return statement.

Instances of Taxable Events

  • Trading cryptocurrency for conventional fiat currency such as the US dollar is a taxable event.
  • Trading cryptocurrency for another form of cryptocurrency is a taxable event. The fair market value in US dollars must be noted at the time the trade took place.
  • Payments of goods and service with cryptocurrency is a taxable event.
  • Earning income through cryptocurrency trade and mining is a taxable event.

Instances of Non-Taxable Events

  • Gifting cryptocurrency is not a taxable event.
  • Transfering different forms of cryptocurrencies between different exchange wallets is not a taxable event.
  • Buying cryptocurrency with US dollars is not a taxable event.

A point to keep in mind is that you are not subjected to capital gains or losses unless you use, trade, or sell your cryptocurrency.

Filing Crypto Taxes

In order to file and report your crypto tax and transactions, you need IRS Form 8949 and 1040 Schedule D Form.

Ensure that you declare your cryptocurrency trades and sales in form 8949 with the date on which you acquired the cryptocurrency, the date on which you sold or traded your cryptocurrency, your Fair Market Values, your cost basis, and ultimately, your gains and losses.

Once they have been listed, calculate the total amount and transfer it to the 1040 Schedule D. You will need to fill out both IRS Form 8949 and 1040 Schedule D Form in order to apply for your annual crypto tax returns.

Crypto Tax Calculator

Calculating crypto taxes manually is an extremely arduous process.

crypto tax calculator or a crypto tax estimator is a tool that crypto traders use to aid in the calculation of your cryptocurrency tax. How it works is it retrieves data from your cryptocurrency trading account or accounts and then it automatically processes the data and estimates your capital gains and losses along with report creation for tax purposes.


ZenLedger is one of the newer crypto tax calculators to enter the market, but it is every bit as good as the other premium subscription-based tax calculators, offering an array of functions to help you with your tax filing.

ZenLedger is also known for its excellent customer service, so you will have no hiccups while navigating through their software.

If you need an estimation on your crypto taxes for the year, give ZenLedger a try.

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Mohit is a passionate blogger, gamer, movies, tv shows & comic book lover, He is a tech freak guy who spends most of his time exploring new things in the world of technology. He writes blogs about the information on tech, product reviews, how tech works and daily news about how giant tech companies like Apple, Google, Microsoft, Facebook changing our world and love to share everything here at Gizmo Story.