How crypto is taxed: the basics

You can owe tax on crypto without ever turning it back into dollars. This lesson explains the basic rules, which actions trigger tax and which do not.

First, a warning about scope

Tax rules differ from country to country, and they change. This module uses the United States as its worked example, with notes on the United Kingdom. It is education, not tax advice. Check your own country's rules or ask a qualified adviser before you file.

Property, not currency

The US tax authority, the IRS, says: "For U.S. tax purposes, digital assets are considered property, not currency." Digital assets include cryptocurrencies, stablecoins and NFTs.

That one sentence explains most of what follows. Spending a dollar is not a taxable event. Disposing of property is. So each time crypto leaves your hands, the tax system asks whether you made a gain or a loss on it.

Two kinds of tax

• Capital gains tax. When you dispose of crypto, you compare what you got for it with what you paid. The difference is a gain or a loss. Lesson 57 covers the sums.
• Income tax. When you receive crypto as payment or as a reward, its value on that day is income. Lesson 58 covers this.

What counts as a disposal

The IRS treats all of these as disposals:

• Selling crypto for dollars.
• Exchanging one crypto for another. Swapping bitcoin for ether is a sale of the bitcoin.
• Exchanging a stablecoin. Stablecoins are digital assets too.
• Paying for goods or services with crypto.
• Paying a transaction fee in crypto. The coins used for the fee are disposed of.

What does not

• Buying crypto with dollars and holding it.
• Moving crypto between wallets and accounts you own. The transfer itself is not taxable. A fee paid in crypto to make the transfer is the exception.

An example

You buy 0.1 BTC for $5,000. A year later it is worth $8,000 and you swap it for ether.

You have received no dollars. You still have a $3,000 gain to report, because you disposed of the bitcoin for something worth $8,000. Your ether now has a starting cost of $8,000.

This is the rule new investors miss most often. A year of active swapping can produce a tax bill even if you never withdrew a cent, and even if prices later fell.

The question on the tax return

The US tax return asks every taxpayer a yes-or-no question about digital assets. It covers receiving them as a reward, award or payment, and selling, exchanging or otherwise disposing of them.

According to the IRS, you answer No if you only held digital assets, bought them with ordinary money, or moved them between your own wallets. Otherwise you answer Yes.

No form does not mean no tax

The IRS says you must report all income, gains and losses from digital assets whether or not you receive a tax form from an exchange. Lesson 59 covers the forms.

The United Kingdom

The UK works in a similar way. The government's guidance says you may need to pay Capital Gains Tax when you sell crypto, exchange it for a different type of crypto, use it to pay for goods or services, or give it away to another person. It also says you must keep your own records.

What to do now

Start keeping a record of every purchase, sale and swap, with the date and the value in your own currency. Lesson 59 shows how. Records are easy to keep as you go and painful to rebuild later.