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How is crypto taxed in the U.S.? Your guide to this tax season

U.S. taxpayers are required to report crypto sales, conversions, payments, and income to the IRS, and state tax authorities where applicable, and each of these transactions has different tax implications. In this article, you'll learn when your crypto is taxed and how your activity might affect your taxes.

Do I owe crypto taxes?

In the U.S., crypto is considered a digital asset, and the IRS treats it like stocks, bonds, and other capital assets. Transactions that result in a tax are called taxable events. Those that don’t are non-taxable events.

Not taxable

-Buying crypto with cash and holding it

-Donating crypto to a qualified tax-exempt charity

-Receiving a gift

-Giving a gift up to IRS limits

-Transferring crypto to yourself

Taxable as capital gains

-Selling crypto for cash

-Converting one crypto to another

-Spending crypto on goods and services

Taxable as income

-Getting paid in crypto

-Getting crypto for goods or services

-Mining crypto

-Earning staking rewards

-Earning rewards from holding crypto

-Getting crypto from a hard fork or airdrop

-Receiving other incentives or rewards

How much do I owe in crypto taxes?

You can estimate how much you’ll owe in taxes by calculating your income, gains, and losses.

Calculating crypto income

Crypto received as income (e.g., mining, staking) is taxed based on its fair market value at the time it was received.

Calculating capital gains and losses

Your cost basis is the original value of the crypto. Gains and losses are calculated by comparing this basis to the sale price.

Short-term vs. long-term gains

Crypto held for more than a year is taxed at a lower long-term capital gains rate. Otherwise, it is taxed at your ordinary income rate.

Understanding capital losses

Capital losses can offset gains. You can deduct up to $3,000 in net losses per year against other income. Excess losses carry forward.

Additional Tips

Always consult a tax professional for advice tailored to your specific situation.

A wallet address is a unique identifier that allows for the sending and receiving of cryptocurrencies.

Wallet addresses are generated from public keys and are essential for interacting with blockchain networks.

Different cryptocurrencies have different wallet address formats, and it's crucial to use the correct address for the intended cryptocurrency.

Understanding Wallet Addresses

A wallet address, a unique identifier in the blockchain, is a randomly generated series of alphanumeric characters that corresponds to a specific cryptocurrency stored in a blockchain wallet. It functions similarly to an email address, providing just enough information to direct funds into a holder's account without compromising the wallet's security.

Each cryptocurrency has its own unique wallet address format. For instance, Bitcoin wallet addresses typically start with "1", "3", or "bc1", while Ethereum addresses usually start with "0x". It's crucial to use the correct wallet address for the intended cryptocurrency, as sending funds to an incorrect address could result in the loss of those funds.

The Role of Wallet Addresses in Cryptocurrency Transactions

Wallet addresses play a vital role in cryptocurrency transactions. They allow users to send and receive digital assets across blockchain networks. When you want to receive cryptocurrency, you provide your wallet address to the sender. Conversely, to send cryptocurrency, the recipient's wallet address is required.

To send cryptocurrency to another user's wallet, you'll have to enter their wallet address, either by copy-pasting it into your wallet app's "send" field or by scanning a QR code the recipient provides. Given that wallet addresses can be up to 40 alphanumeric characters long, they can be quite cumbersome to enter manually.

Safety Tips for Handling Wallet Addresses

While wallet addresses are designed to be secure, it's essential to follow certain safety tips when handling them. Always double-check the wallet address before sending or receiving funds to ensure it's correct. Remember, cryptocurrency transactions are irreversible, so a mistake could result in permanent loss of funds.

While it's safe to share your wallet address, which is public information, your private keys should be kept confidential. Never share your private keys with anyone, as doing so could lead to theft of your funds.

The Future of Wallet Addresses: Wallet Name Services

As the world of cryptocurrency evolves, so too do the technologies associated with it. One such development is the introduction of Wallet Name Services, which strive to replace complex wallet addresses with simple, human-readable names. This could make sending and receiving cryptocurrencies as easy as sending an email, further enhancing the user-friendliness of blockchain technology.

Wallet Addresses and Blockchain Transparency

A notable feature of blockchain technology is its transparency. All transactions are recorded on the blockchain and are publicly accessible. This means that anyone can track the transaction history of a public wallet address. However, while the transactions are transparent, they are also pseudonymous. The wallet addresses are not directly linked to the identities of the users, providing a level of privacy for users.

Definition

Technically, “token” is just another word for “cryptocurrency” or “cryptoasset.” But increasingly it has taken on a couple of more specific meanings depending on context. The first is to describe all cryptocurrencies besides Bitcoin and Ethereum (even though they are technically also tokens). The second is to describe certain digital assets that run on top of another cryptocurrencies’ blockchain, as many decentralized finance (or DeFi) tokens do. Tokens have a huge range of potential functions.

“Token” is a word that you hear a lot in cryptocurrency. In fact, you might hear Bitcoin described as a “crypto token” or something similar, because — technically — all cryptoassets can also be described as tokens. But the word has increasingly taken on two specific meanings that are common enough that there’s a good chance you’ll encounter them.

A “token” often refers to any cryptocurrency besides Bitcoin and Ethereum (even though they are also technically tokens). Because Bitcoin and Ethereum are by far the biggest two cryptocurrencies, it’s useful to have a word to describe the universe of other coins. (Another word you might hear with virtually the same meaning is “altcoin.”)

The other increasingly common meaning for “token” has an even more specific connotation, which is to describe cryptoassets that run on top of another cryptocurrency’s blockchain. You’ll encounter this usage if you become interested in decentralized finance (or DeFi). While a cryptocurrency like Bitcoin has its own dedicated blockchain, DeFi tokens like Chainlink and Aave run on top of, or leverage, an existing blockchain, most commonly Ethereum’s.

Tokens in this second category help decentralized applications to do everything from automate interest rates to sell virtual real estate. But they can also be held or traded like any other cryptocurrency.

Why are tokens important?

Given that you’ll come across the word a lot while researching cryptocurrencies, it’s useful to understand some common connotations. But besides the big-picture definitions in the section above, there are also some categories of cryptoassets that actually have “token” in their name. Here are a few examples of those:

• DeFi tokens: A new world of cryptocurrency-based protocols that aim to reproduce traditional financial-system functions (lending and saving, insurance, trading) has emerged in recent years. These protocols issue tokens that perform a wide variety of functions but can also be traded or held like any other cryptocurrency.
   
• Governance tokens: These are specialized DeFi tokens that give holders a say in the future of a protocol or app, which (being decentralized) don’t have boards of directors or any other central authority. The popular savings protocol Compound, for example, issues all users a token called COMP. This token gives holders a vote in how Compound is upgraded. The more COMP tokens you have, the more votes you get.
   
• Non-Fungible Tokens (NFTs): NFTs represent ownership rights to a unique digital or real-world asset. They can be used to make it more difficult for digital creations to be copied and shared. They’ve also been used to issue a limited number of digital artworks or sell unique virtual assets like rare items in a video game.
   
• Security tokens: Security tokens are a new class of assets that aim to be the crypto equivalent of traditional securities like stocks and bonds. Their main use case is to sell shares in a company or other enterprises without the need for a broker. Major companies and startups have been reported to be investigating security tokens as a potential alternative to other methods of fundraising.

Stablecoins are a type of cryptocurrency whose value is pegged to another asset, such as a fiat currency or gold, to maintain a stable price.

They strive to provide an alternative to the high volatility of popular cryptocurrencies, making them potentially more suitable for common transactions.

Stablecoins can be utilized in various blockchain-based financial services and can even be used to pay for goods and services.

Although the term “stablecoin” is commonly used, there is no guarantee that the asset will maintain a stable value in relation to the value of the reference asset when traded on secondary markets or that the reserve of assets, if there is one, will be adequate to satisfy all redemptions.

How do Stablecoins Maintain Their Value?

Stablecoins are a type of cryptocurrency that seeks to maintain a stable value by pegging their market value to an external reference. This reference could be a fiat currency like the U.S. dollar, a commodity such as gold, or another financial instrument. The primary goal of stablecoins is to provide an alternative to the high volatility of popular cryptocurrencies like Bitcoin (BTC), which can make these digital assets less suitable for common transactions.

Why are Stablecoins Important?

Stablecoins play a crucial role in the cryptocurrency ecosystem due to their stability. Cryptocurrencies like Bitcoin and Ether offer numerous benefits, such as not requiring trust in an intermediary institution to send payments anywhere and to anyone. However, their prices are unpredictable and can fluctuate wildly, making them challenging for everyday use. Stablecoins aim to tackle these price fluctuations by tying the value of cryptocurrencies to more stable assets, usually fiat currencies. This stability aims to maintain their value over time and encourages their adoption in regular transactions.

Types of Stablecoins

There are primarily three types of stablecoins: fiat-collateralized, crypto-collateralized, and non-collateralized (algorithmic). Fiat-collateralized stablecoins are pegged to a specific asset, such as a fiat currency. The entity behind the stablecoin maintains a reserve of the asset or assets backing the stablecoin, supporting the value of the digital currency. On the other hand, non-collateralized (algorithmic) stablecoins use software algorithms to automatically adjust the supply of the stablecoin based on demand, aiming to maintain a stable price.

Stablecoin Regulation

Stablecoins continue to come under scrutiny by regulators due to their rapid growth and potential to affect the broader financial system. As the market for stablecoins expands, regulatory bodies worldwide are taking a closer look at these digital assets to ensure they comply with financial laws and regulations. This scrutiny aims to protect investors and maintain the stability of the financial system.

The Role of Stablecoins in the Cryptocurrency Ecosystem

Stablecoins play a vital role in the cryptocurrency ecosystem. They aim to provide the speed and security features of a blockchain while eliminating the volatility that most cryptocurrencies endure. Initially used primarily to buy cryptocurrencies on trading platforms that did not offer fiat currency trading pairs, stablecoins have seen their adoption grow. They are now used in several blockchain-based financial services, such as lending platforms, and can even be used to pay for goods and services.

Ethereum is the second-biggest cryptocurrency by market cap after Bitcoin. It is also a decentralized computing platform that can run a wide variety of applications — including the entire universe of DeFi.

Ethereum, which launched in 2015, was designed to be more than digital money. Its founders aimed to create a decentralized computing platform for secure applications built on blockchain technology.

Developers use Ethereum to create applications such as financial tools, games, and databases using smart contracts — self-executing agreements that run when certain conditions are met.

Ethereum’s open-source architecture and decentralization mean that anyone can interact with the network or build applications on top of it. Popular innovations include stablecoins, DeFi apps, and dapps.

Ether (ETH)

Ether (ETH) is Ethereum’s native token, used to pay for transactions and smart contract execution. These transaction fees are known as “gas.”

Security

Ethereum uses a Proof of Stake consensus mechanism for network security. Validators stake ETH to help maintain the blockchain, receiving rewards for their participation.

Ethereum 2.0

Ethereum 2.0, implemented in 2022, upgraded the network from Proof of Work to Proof of Stake to improve scalability, efficiency, and reduce energy consumption.

Smart Contracts

Smart contracts are digital agreements that self-execute once predefined conditions are met. They eliminate the need for intermediaries in many types of transactions.

Buying and Storing Ethereum

To own ETH, users need a digital wallet with a public and private key. The public key receives ETH; the private key must be securely stored to maintain access to funds.

Value Proposition

Ethereum derives value from its flexible blockchain platform, large user base, and the variety of applications it supports. Its price is influenced by supply, demand, and technological utility.

Cryptocurrency refers to a type of digital asset that operates without centralized control and is designed for use over the internet. Bitcoin, introduced in 2008, was the first and remains the most widely known and valuable cryptocurrency. Since then, many others have emerged, including Ethereum, each offering unique features and capabilities.

The main appeal of cryptocurrencies lies in their ability to transfer value quickly, globally, and at low cost — all without relying on banks or financial institutions. These systems run on decentralized computer networks powered by open-source software, allowing anyone to participate.

How Does Cryptocurrency Work?

Cryptocurrencies rely on a foundational technology called blockchain — a secure, distributed digital ledger that records every transaction. Each cryptocurrency has its own blockchain, continuously updated and verified by a network of computers. Unlike traditional ledgers maintained by banks, blockchains are decentralized and transparent.

Why Is Crypto Considered Secure?

Security comes from the design of the blockchain itself. Transactions are recorded permanently and cannot be altered once verified. This approach eliminates the need for a central authority and reduces the risks of fraud or unauthorized changes.

Core Features of Cryptocurrency

• Transferability: Easily send value worldwide in seconds, similar to handing over cash in person.
• Privacy: No personal data is required to complete a transaction, protecting users from third-party tracking.
• Security: Networks like Bitcoin and Ethereum are backed by strong cryptography and vast computing power.
• Portability: Funds are accessible anywhere via internet-connected devices — without banking restrictions.
• Transparency: Public blockchains make every transaction traceable and verifiable.
• Irreversibility: Once completed, transactions cannot be undone, reducing chargeback fraud.
• Openness: Most cryptocurrencies are built on public, open-source platforms open to review and contribution.

The Case for Cryptocurrency

Digital assets represent a major shift in financial infrastructure. Unlike traditional currency, they are not issued by governments or controlled by central banks. This gives users full ownership and control of their funds.

In areas where inflation undermines local currency, crypto offers a potentially more stable alternative. And since cryptocurrencies don’t discriminate based on geography, they provide access to financial tools in regions underserved by banks.

Investment and Utility

Cryptocurrencies can be held as part of a long-term investment strategy or used for everyday payments. Some investors choose to hold assets like Bitcoin, while others trade to take advantage of price fluctuations.

Stablecoins, like USD Coin (USDC), combine the benefits of crypto with price stability, making them useful for savings, payments, and cross-border transfers.

How to Buy Cryptocurrency

Platforms like Coinbase allow users to create accounts, verify their identity, and purchase cryptocurrency using a debit card or bank transfer. You can buy full coins or fractional amounts — for example, $25 worth of Bitcoin.

Where Do Cryptocurrencies Get Their Value?

Just like traditional assets, the value of cryptocurrency is based on supply and demand. Some users value them for their utility and use them in everyday transactions, while others appreciate their role in a new financial ecosystem.

What Is Crypto Mining?

Mining is the process by which new transactions are added to a cryptocurrency’s blockchain. It involves solving complex mathematical problems and is primarily done by specialized companies or large mining collectives. Successful miners receive new coins as a reward for their efforts.

Using and Storing Cryptocurrency

Crypto can be used for online shopping, donating to causes, tipping creators, or interacting with decentralized applications. It’s also used in blockchain-based games and virtual environments like Decentraland.

To store crypto securely, users can use digital wallets — either software-based or hardware-based. Platforms like Coinbase offer integrated wallets with account-level protection, making it easy to manage and access your assets.

What Is a Stablecoin?

Stablecoins are a type of cryptocurrency designed to maintain a consistent value by pegging to external references like the U.S. dollar. USDC is one example. These assets reduce price volatility and are ideal for payments and saving.

The Future of Cryptocurrency

Many believe cryptocurrencies are the next evolution in finance. They offer alternatives to legacy systems, reduce barriers to entry, and support global economic freedom. Beyond money, blockchain tech is also transforming sectors like supply chains, data security, and internet infrastructure.

Whether used for long-term investing, real-world payments, or enabling decentralized apps, crypto is positioned to reshape how we think about money and digital ownership.

The blockchain is the foundational technology behind cryptocurrencies like Bitcoin and Ethereum. At its core, a blockchain is a publicly accessible ledger that records transactions in a way that anyone can view and verify. For example, the Bitcoin blockchain keeps a history of every transaction ever made with bitcoin.

This technology allows for value to be exchanged digitally without the need for traditional intermediaries such as banks or payment providers. Imagine a financial system accessible to anyone with a smartphone and internet connection—blockchain makes that possible.

Why Is Blockchain Important?

Because it keeps a secure, decentralized record of all transactions, blockchain makes it possible for people to transact directly with each other without knowing or trusting one another. And beyond finance, the technology is being applied in areas like medical research, logistics, identity verification, and data integrity.

Advantages of Blockchain

• Global Reach: Transactions can be made across borders without delay.
• Transparency: All transactions are publicly recorded, leaving no room for manipulation or hidden changes.
• Open Source: The software powering most blockchains is open-source and freely available for anyone to review.

Common Questions

What makes blockchain better than the traditional financial system?

Today, most of your financial activities—shopping, investing, or paying bills—require an intermediary. Blockchain removes this middle layer, reducing costs and complexity.

Is Bitcoin the same as a blockchain?

No. Bitcoin is a digital currency. Blockchain is the underlying technology that enables it to work.

Are there different kinds of blockchains?

Yes, there are thousands. Some are built for cryptocurrencies like Bitcoin and Tezos, while others serve entirely different purposes in various industries.

Challenges of Blockchain

• Energy Use: Proof-of-work blockchains like Bitcoin consume large amounts of energy, which has environmental implications.
• Scalability: As blockchains grow, they can slow down and become expensive to use.
• Regulatory Uncertainty: Legal frameworks around blockchain and crypto are still developing, which adds risk.

How Does Blockchain Work?

Think of a chain where each link contains data about a set of transactions. The newest data is added to the top, and older records stretch back down to the beginning. This structure ensures that altering one block would disrupt the entire chain and be immediately noticeable to everyone on the network.

Blockchain is also known as a distributed ledger. It functions much like a bank's balance sheet but isn’t controlled by any single institution. Instead, it’s maintained by a global network of computers working together through open-source software.

Where Do New Cryptocurrencies Come From?

In networks like Bitcoin, every ten minutes a new block of transaction data is verified and added to the chain. Those who contribute computing power to this process—known as miners—receive a small reward in the form of cryptocurrency.

Since the blockchain is decentralized, no single entity governs it. Anyone with the necessary tools can participate in maintaining the network’s accuracy and security.

How to Use Blockchain to Send and Receive Money

Each user is assigned a unique address made up of a public key and a private key. The public key functions like an email address—it’s what people use to send you funds. The private key is like a password that lets you approve transactions. Wallet software, available via exchanges like Coinbase, helps you manage these keys securely.

Who Created Blockchain?

The idea of blockchain was first introduced by an individual or group under the name Satoshi Nakamoto in a 2008 whitepaper that described Bitcoin. Nakamoto's goal was to create digital money that didn’t require a middleman for online transactions.

To solve the problem of "double spending"—using the same money twice—Nakamoto introduced the idea of a constantly updated and verified network of computers: the blockchain.

The Role of Miners

All Bitcoin transactions are validated and stored by a decentralized network of computers, independent of any organization or government. New bitcoins are generated through mining, where computing power is used to process and confirm transactions. Every transaction becomes part of a "block," which is permanently added to the blockchain.

The Future of Blockchain

Blockchain’s potential extends far beyond cryptocurrencies. Many experts believe that it could become as revolutionary as the internet itself. Ethereum, for instance, builds on blockchain by enabling developers to create decentralized applications and smart contracts.

Imagine automating donations to thousands of recipients using just a few lines of code, or designing game items that exist independently of the game itself. These are just a few of the possibilities that blockchain platforms like Ethereum are making a reality.

Cryptocurrency refers to a type of digital asset that operates without centralized control and is designed for use over the internet. Bitcoin, introduced in 2008, was the first and remains the most widely known and valuable cryptocurrency. Since then, many others have emerged, including Ethereum, each offering unique features and capabilities.

The main appeal of cryptocurrencies lies in their ability to transfer value quickly, globally, and at low cost — all without relying on banks or financial institutions. These systems run on decentralized computer networks powered by open-source software, allowing anyone to participate.

How Does Cryptocurrency Work?

Cryptocurrencies rely on a foundational technology called blockchain — a secure, distributed digital ledger that records every transaction. Each cryptocurrency has its own blockchain, continuously updated and verified by a network of computers. Unlike traditional ledgers maintained by banks, blockchains are decentralized and transparent.

Why Is Crypto Considered Secure?

Security comes from the design of the blockchain itself. Transactions are recorded permanently and cannot be altered once verified. This approach eliminates the need for a central authority and reduces the risks of fraud or unauthorized changes.

Core Features of Cryptocurrency

• Transferability: Easily send value worldwide in seconds, similar to handing over cash in person.
• Privacy: No personal data is required to complete a transaction, protecting users from third-party tracking.
• Security: Networks like Bitcoin and Ethereum are backed by strong cryptography and vast computing power.
• Portability: Funds are accessible anywhere via internet-connected devices — without banking restrictions.
• Transparency: Public blockchains make every transaction traceable and verifiable.
• Irreversibility: Once completed, transactions cannot be undone, reducing chargeback fraud.
• Openness: Most cryptocurrencies are built on public, open-source platforms open to review and contribution.

The Case for Cryptocurrency

Digital assets represent a major shift in financial infrastructure. Unlike traditional currency, they are not issued by governments or controlled by central banks. This gives users full ownership and control of their funds.

In areas where inflation undermines local currency, crypto offers a potentially more stable alternative. And since cryptocurrencies don’t discriminate based on geography, they provide access to financial tools in regions underserved by banks.

Investment and Utility

Cryptocurrencies can be held as part of a long-term investment strategy or used for everyday payments. Some investors choose to hold assets like Bitcoin, while others trade to take advantage of price fluctuations.

Stablecoins, like USD Coin (USDC), combine the benefits of crypto with price stability, making them useful for savings, payments, and cross-border transfers.

How to Buy Cryptocurrency

Platforms like Coinbase allow users to create accounts, verify their identity, and purchase cryptocurrency using a debit card or bank transfer. You can buy full coins or fractional amounts — for example, $25 worth of Bitcoin.

Where Do Cryptocurrencies Get Their Value?

Just like traditional assets, the value of cryptocurrency is based on supply and demand. Some users value them for their utility and use them in everyday transactions, while others appreciate their role in a new financial ecosystem.

What Is Crypto Mining?

Mining is the process by which new transactions are added to a cryptocurrency’s blockchain. It involves solving complex mathematical problems and is primarily done by specialized companies or large mining collectives. Successful miners receive new coins as a reward for their efforts.

Using and Storing Cryptocurrency

Crypto can be used for online shopping, donating to causes, tipping creators, or interacting with decentralized applications. It’s also used in blockchain-based games and virtual environments like Decentraland.

To store crypto securely, users can use digital wallets — either software-based or hardware-based. Platforms like Coinbase offer integrated wallets with account-level protection, making it easy to manage and access your assets.

What Is a Stablecoin?

Stablecoins are a type of cryptocurrency designed to maintain a consistent value by pegging to external references like the U.S. dollar. USDC is one example. These assets reduce price volatility and are ideal for payments and saving.

The Future of Cryptocurrency

Many believe cryptocurrencies are the next evolution in finance. They offer alternatives to legacy systems, reduce barriers to entry, and support global economic freedom. Beyond money, blockchain tech is also transforming sectors like supply chains, data security, and internet infrastructure.

Whether used for long-term investing, real-world payments, or enabling decentralized apps, crypto is positioned to reshape how we think about money and digital ownership.

Crypto wallets are designed to store your private key, keeping your crypto accessible at all times. They also allow you to send, receive, and spend cryptocurrencies like Bitcoin and Ethereum.

Crypto wallets keep your private keys – the passwords that give you access to your cryptocurrencies – protected and accessible, allowing you to send and receive cryptocurrencies like Bitcoin and Ethereum.

Why are Crypto Wallets Important?

Unlike a normal wallet, which can hold actual cash, crypto wallets technically don’t store your crypto. Your holdings live on the blockchain, but can only be accessed using a private key. Your keys prove your ownership of your digital money and allow you to make transactions. If you lose your private keys, you lose access to your money. That’s why it’s important to keep your hardware wallet safe.

How Do You Use a Crypto Wallet?

Crypto wallets range from user-friendly apps to more complex security solutions. The main types of wallets you can choose from include:

• Paper wallets: Keys are written on a physical medium like paper and stored in a safe place.
• Hardware wallets: Keys are stored in a thumb-drive device that is kept in a safe place and only connected to a computer when needed.
• Online wallets: Keys are stored in an app or software – look for one that is protected by two-step encryption.

Each type has its tradeoffs. Paper and hardware wallets are harder for malicious users to access because they are stored offline, but they risk being lost or destroyed. Online wallets are more convenient but come with additional risks such as phishing and hacking. Enabling all security features and using hardware wallets for large holdings is recommended.

Using an app like a crypto wallet manager gives you access to your holdings. You can:

• Manage all your digital assets in one place
• Control your own private keys
• Send and receive cryptocurrency globally
• Use usernames instead of hexadecimal addresses
• Browse decentralized apps (dapps)
• Shop at stores that accept cryptocurrency

Different Wallet Platforms

The main wallet platforms include those integrated into crypto exchanges and independent wallet apps. Exchange apps typically manage your private keys for you and are suitable for trading and investing. Independent wallets allow full control over private keys and are better for interacting with decentralized applications.