When it comes to dealing with the ups and downs of crypto markets, enthusiasts have a term for long haul investing. "HODLing" may look like a weird typo, but it actually stands for "holding on for dear life."
That may sound funny if you haven't invested dollars or time into tracking crypto prices, but not so much if you've watched your crypto fortunes boom and bust over time, and if you're just holding on to see what happens next.
If you're currently hanging in there with your crypto assets vs. selling, you may also be wondering how to pay your crypto tax bill — or whether you even owe one. I reached out to some experts to find out when you do (and don't) owe crypto taxes, and here's what they said.
Closeup woman filling form of Individual Income Tax Return,
When You Don’t Owe Any Taxes
First off, it's important to know that HODLing your crypto may not result in any sort of tax bill at all. Nicholas B. Creel, M.A., J.D., LL.M., Ph.D., who serves as Assistant Professor of Business Law & Ethics at Georgia College and State University, says that you really only have to worry about crypto gains when you realize any gain in their value.
You don’t need to worry about taxes if you just buy and hold the asset without any other activity, even if the value thereof increases dramatically, he says. If you were lucky enough to buy a single Bitcoin when one cost $10,000 and the same coin is now worth $37,000, for example, you won't owe taxes on that gain until you actually sell it.
Coinbase also points out some other scenarios where you likely do not owe any taxes on your crypto. This includes when you receive cryptocurrency as a gift, or when you give crypto assets as a gift to someone else (up to annual IRS limits). You also don't owe taxes when you transfer crypto to yourself among different accounts you own.
With all this being said, Coinbase is also adamant on their website that they don't give tax advice, and that you should consult a tax professional regarding your own tax circumstances.
When You Do Owe Crypto Taxes
Either way, there are plenty of situations where you will owe taxes on crypto gains — even some where you may not feel like you're selling. Creel uses the example of crypto traders who reinvest gains from the sale of crypto into another cryptocurrency, which is common.
"Be aware that you are on the hook for the taxes related to the capital gain from your first sale, even if the value of the new cryptocurrency you invested in later tanks in value," he says. "The only way to lower that tax burden is by formally realizing a capital loss to offset the prior gain."
Here's another scenario where you'll have a crypto tax bill — any time you're earning interest on your crypto deposits.
According to David Kemmerer, CEO, and Co-Founder of CoinLedger, many market participants deposit their cryptocurrency into accounts that earn interest (i.e. crypto savings accounts). A good example of this is the BlockFi Interest Account.
"This interest earned from depositing your crypto is a form of taxable income," says Kemmerer, adding that there are millions of cryptocurrency users today who are using crypto to generate income in this manner.
Finally, VP of CoinMarketCap Shaun Heng says it's important to note the distinction between the taxation of capital gains and taxation of income. If you sell Bitcoin at a profit, then that is considered a capital gain, he says, adding that the same goes for converting crypto assets to another type of crypto.
"However, things like staking, airdrops and mining cryptocurrency are considered taxable income, and are taxed at a different rate to capital gains." says Heng.
Also, if you’ve ever bought an NFT, you likely owe taxes on the cryptocurrency you used to buy the NFT with!
Of course, there are other situations where you may owe taxes on crypto gains, and some of them depend on your situation. If you're unsure or even on the fence, it's probably wise to consult with a tax advisor on your personal tax details before you file.
How To Keep Up With Crypto Taxes
Over the last few years, a lot of different software tools have been created to help individuals track crypto taxes. This is important, because in a decentralized ecosystem, you won’t necessarily get tax documents that you can use to file your taxes (but you’re still on the hook for taxes you owe).
According to Kemmerer, CoinLedger’s CryptoTrader.Tax is a cryptocurrency tax-reporting platform that "integrates across the entire Web3-economy and gives crypto investors a holistic view of their digital asset portfolios." It not only helps them easily keep track of their holdings, but it also allows them to confidently and accurately prepare and pay their taxes," he says.
If individuals want to see what their taxable crypto income might look like, they can sign up for CryptoTrader.Tax and connect their cryptocurrency platforms (e.g., Coinbase, Kraken, and Gemini, etc.) directly.
"Whether users are trading cryptocurrencies, buying and selling NFTs, or staking on DeFi protocols, CryptoTrader.Tax makes tracking their portfolio and related taxes as straightforward as possible," says Kemmerer.
Attorney Asher Rubinstein of Gallet Dreyer and Berkey also points out that crypto platforms like Celsius, Coinbase and Gemini issue Forms 1099s, which indicate how much taxable income you need to report on your tax return. However, he also says keeping records of crypto transactions is essential, whether you are buying, selling or HODLing. Why? Because the IRS could ask for them.
He also notes that many foreign crypto exchanges do not provide 1099s, which make tax reporting difficult for Americans who invest in crypto. If crypto is kept in “cold storage” rather than an exchange that provides 1099s, the burden is on the crypto owner to keep good records, he says.
Rubinstein also points out that you can't hide from the taxman just because crypto is considered "anonymous." The IRS has methods of discovering that you have traded crypto for profit and not reported it on your taxes, he says. Remember, it’s a public blockchain - so figuring out who traded what simply amounts to a giant Sudoku puzzle for the IRS.
One method is a “John Doe” summons, which the IRS has successfully used against Swiss banks to effectively end Swiss banking secrecy. Rubinstein also points out that, in March of 2021, the IRS announced “Operation Hidden Treasure,” an enforcement initiative focused on detecting unreported crypto-related income.
With that in mind, there's no reason to think you could get away with avoiding taxes on any gains you have realized through crypto, regardless of how and when you received them.
Your best bet? Count your blessings, pay your taxes, and move on.
