Question 1

How is cryptocurrency taxed in the United States?

Accepted Answer

The IRS treats cryptocurrency as property, not currency. Every time you sell, trade, or dispose of crypto, it is a taxable event. Short-term gains (held less than one year) are taxed as ordinary income at your marginal tax rate. Long-term gains (held one year or more) benefit from lower capital gains rates of 0%, 15%, or 20% depending on your income. Additionally, receiving crypto as payment, mining income, and staking rewards are taxed as ordinary income at the fair market value when received.

Question 2

What is the difference between FIFO and LIFO for crypto taxes?

Accepted Answer

FIFO (First In, First Out) assumes the earliest purchased coins are sold first, which often results in long-term capital gains and lower tax rates if prices have risen over time. LIFO (Last In, First Out) assumes the most recently purchased coins are sold first, which can be beneficial in a rising market to realize higher cost basis and lower short-term gains. The IRS allows both methods, but you must be consistent. FIFO is the default method used by most exchanges and is generally recommended unless you have a specific tax strategy in mind.

Question 3

What is crypto tax-loss harvesting and how does it work?

Accepted Answer

Tax-loss harvesting involves selling cryptocurrency at a loss to offset capital gains from other trades. You can offset gains dollar-for-dollar with losses, and if your losses exceed your gains, you can deduct up to $3,000 against ordinary income per year, carrying forward any remaining losses to future years. Unlike stocks, crypto is currently not subject to the wash sale rule, meaning you can sell at a loss and immediately repurchase the same cryptocurrency. However, proposed legislation may close this loophole, so check current regulations.

Question 4

How do I report crypto taxes to the IRS?

Accepted Answer

You must report cryptocurrency transactions on IRS Form 8949, listing each sale or disposal with dates acquired/sold, proceeds, cost basis, and gain or loss. The totals then flow to Schedule D of your Form 1040. Starting in 2024, exchanges are required to issue Form 1099-DA for crypto transactions. You must answer "yes" to the crypto question on page 1 of Form 1040 if you had any crypto transactions during the tax year. Failure to report can result in penalties, interest, and potential criminal prosecution.

Question 5

Are NFT and DeFi transactions taxable?

Accepted Answer

Yes. Selling an NFT triggers capital gains tax based on the difference between your sale price and purchase price. Creating and selling NFTs may be treated as ordinary income. DeFi transactions such as swapping tokens, providing liquidity, and yield farming are all taxable events. Receiving tokens from airdrops, staking rewards, and liquidity mining is treated as ordinary income at the fair market value when received. The complexity of DeFi means careful record-keeping is essential for accurate tax reporting.

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