I Sold Bitcoin and Owed This Much in Taxes — Here’s How To Calculate Yours
Written by
G. Brian Davis
Edited by
Zuri Anderson
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
When Sukesh Tedla started buying and trading Bitcoin in the late 2010s, he didn’t realize he owed taxes on the gains.
“When I discovered I owed taxes, it was a nightmare. After compiling reams of transaction data, I ended up paying around $30,000 in taxes plus late penalties,” he said.
Some good came out of that mistake however: He realized just how much help cryptocurrency investors need to tax tracking, so he launched a platform called Kryptos to automate it.
So what do crypto investors need to know about taxes?
Calculating Your Bitcoin Tax Bill
Uncle Sam charges you capital gains taxes when you earn a profit selling cryptocurrencies, just like any other asset.
“You deduct the adjusted cost of your crypto, which includes adjustments from broker commissions and fees, from the sales proceeds to calculate the capital gain or loss,” explains accountant Lisa Greene-Lewis with TurboTax.
Tedla adds that too many crypto investors misunderstand the rules.
“Even crypto-to-crypto conversions trigger capital gains tax. Don’t count on blockchain privacy hiding your transactions from the IRS, either,” he explained. “The moment you sign KYC forms on Coinbase, Robinhood, Kraken or other platforms, all your crypto activity is linked to your identity, even when you withdraw to a self-custody wallet. With the new 1099-DA forms, exchanges now report user activity directly to the IRS.”
Which raises another point: The IRS now requires brokers and platforms to report crypto transactions on a new form called 1099-DA. Expect to receive a Form 1099-DA reporting your sales, and file it with your tax return.
How To Slash Your Crypto Tax Bill
If you hold the cryptocurrency for less than a year, you’ll owe short-term capital gains tax on it — taxed at your regular income tax rate. But if you hold it for longer than one year, you’ll pay the lower long-term capital gains tax rate (0% to 15% for most taxpayers).
Remember, you can offset your gains with losses just like tax loss harvesting with stocks.
“If you have a net loss you can offset that loss up to $3,000 against ordinary income like wages, and carry forward any additional loss into the next year,” Greene-Lewis said.
To that end, Tedla notes that the IRS allows cryptocurrency wash sales.
“This allows investors to sell at a loss during a price dip, immediately buy back the same asset and claim the loss on their tax return,” he explained.
Investors can also get strategic with their accounting methods, such as HIFO (highest-in, first out) or Spec-ID (specific identification) to lower their tax bill.
Finally, some IRA custodians offer crypto IRAs to invest with tax-sheltered accounts. Like other IRAs, you can open either traditional or Roth IRAs to minimize taxes either now or in retirement.
Whatever you do, don’t get caught off-guard by a giant tax bill. A little tax planning can go a long way in lowering your crypto tax bill.
More From GoBankingRates
