The IRS Crypto Tax: Are You Ready?

The rise of cryptocurrencies like Bitcoin has had a huge impact on our financial landscape. Spurred by concerns over the decreasing worth of the U.S. dollar, as well as stories of memes creating overnight millionaires, more people are getting into crypto. This is all well and good, but having so many people take USD out of the general economy is a problem for the federal government. The IRS has been tracking the rise of cryptocurrencies in the past few years. A IRS Crypto Tax seems inevitable.

How Cryptocurrency Works

Cryptocurrencies are virtual currencies which take the form of tokens or coins. Each cryptocurrency is based on blockchain technology, and issued independently of any centralized body. This makes crypto free from government interference.

Blockchain technology is powered by an anonymous network of computers. Each crypto transaction is recorded into this blockchain, which acts as a public ledger. Your personal information is not shared on this ledger.



The IRS plans to tax all virtual currencies, be they digital currencies like NFTs or cryptocurrencies like Bitcoin. To the IRS, if a particular asset has the characteristics of virtual currency, it will be treated as one.

How the IRS Crypto Tax Works

As of May 2021, the IRS sees virtual currencies as property. That means that general tax principles which apply to regular property transactions also apply to cryptocurrency transactions.

When you sell your crypto, you must recognize any capital gain or loss from its sale. In addition, that sale is subject to any limitations on the deductibility of capital losses. These will be the primary considerations of a IRS Crypto Tax.

Holding on to your cryptocurrency will determine whether your capital gain or loss is short term or long term. If you only held onto your crypto for a year or less before selling it, then the IRS sees it as a short term capital gain or loss. The same applies for if you only exchanged your currency for another in that period of time. The length of time in which you hold a cryptocurrency is considered a “holding period.” This period begins the day after you acquire the currency, and it ends on the day you sell that currency.

IRS Crypto Tax FAQ

Because the IRS is creating these new taxation laws so quickly, a lot of things can change in a few months. For that reason, it will always be a safe move to consult with a tax professional before making any major moves with your cryptocurrency. YokeTax professionals keep up to date on all IRS changes in order to save you the most money.

What if I get paid in crypto?

The growing adoption of crypto has also led to more people using it as an alternative to USD. This has several interesting questions for individuals who use cryptocurrencies in their day to day lives.

You might find yourself getting paid in crypto one day. In such a situation, the IRS considers that crypto to be taxable income. When you receive property in exchange for performing a service or providing a good, then that property is recognized as ordinary income. This applies whether you perform the service as an employee or not.

If you get paid in crypto and it rises in value by the time tax day comes, don’t worry. The IRS will determine its taxability based on its fair market value at the date of receipt. For example, if you got paid $500 USD worth of Bitcoin today, and its value rose to $1,000 USD by April 15, then the IRS could only tax you for that initial $500 USD.

This also applies if you paid someone for their goods or services.

Does the IRS Crypto Tax apply to hard forks?

A “hard fork” in the crypto world describes a protocol change in a given cryptocurrency. This results in a permanent diversion from the currency’s legacy distributed ledger. There is a chance that a hard fork will result in the creation of a completely new cryptocurrency on a new distributed ledger.

If you hold a cryptocurrency which has gone through a hard fork, there are two implications for your taxes:

1. You have taxable income. This occurs if you received new crypto through an airdrop. An airdrop is a distribution of crypto to multiple holders’ addresses.
2. Your income is not taxable. Your cryptocurrency went through a hard fork and you didn’t receive any new crypto through an airdrop.

Do I pay taxes on crypto gifts?

If you receive cryptocurrency as a bona fide gift, then it will not be recognized as income. If you dispose of that currency through sale, exchange, or other means, then the resulting income will be taxed.

The taxation differs depending on if you have a gain or loss when you sell or dispose of it. Be sure to connect with a taxation professional before reporting anything to avoid taxation penalties and fees.

Does the IRS even KNOW that you own crypto?

Many people think that crypto is anonymous. After all, there’s no centralized body. How could the IRS possibly issue a crypto tax if they don’t know I have crypto?

The answers lie in Forms 1099-K and 1099-B. The information on these forms are reported to the IRS by cryptocurrency exchanges, such as Coinbase. These forms describe who bought crypto, and how much, throughout each month of the tax year. The IRS then compares the information on this form with any taxes which you file. If there’s a mismatch, then the IRS will find it!

In March 2021, the IRS announced Operation Hidden Treasure to find taxpayers with unreported income from currency transactions. The operation is a collaboration of IRS Criminal Investigation and its Fraud Enforcement Office.

Because of exchanges reporting their finances, the IRS is well aware that people are making money. The lack of reporting on the part of individuals, however, is suspicious.

The IRS Crypto Tax is here to stay. In fact, the agency is already identifying how to get taxpayers to pay back taxes, interest and penalties.

Save yourself the stress of angering this beast. The IRS will tax your crypto, but a smart tax pro can lower how much it takes from you.