Cryptocurrency tax is deducted by calculating capital gains or losses from taxable events such as selling, trading, or spending crypto. You report these events on IRS forms, and any losses can offset gains up to $3,000 annually.
How Is Crypto Tax Calculated and Deducted?
| Step | Action | Description |
| 1. Identify Taxable Events | List all crypto activities | Include selling, trading, spending, or receiving crypto as income |
| 2. Determine Cost Basis and FMV | Calculate purchase price + fees (Cost Basis) | Find the Fair Market Value (FMV) in USD at the time of disposal |
| 3. Calculate Gain or Loss | Subtract Cost Basis from FMV at disposal | Calculate the capital gain or loss |
| 4. Apply Tax Rates | Use appropriate tax rates | Based on holding period: short-term (ordinary income rates) or long-term (reduced rates) |
| 5. Report on IRS Forms | File Form 8949 and Schedule D | Form 8949 to list each transaction; Schedule D to summarize gains and losses |
| 6. Deduct Capital Losses | Offset gains with losses | Deduct up to $3,000 in net losses against other income annually |
Frequently Asked Questions
Do I Owe Taxes for Crypto-to-Crypto Trades?
Yes, trading one cryptocurrency for another is taxable and must be reported.
How Are Airdrops and Hard Forks Taxed?
Airdrops are taxed as ordinary income; hard forks are taxable if you control the new coins.
Can I Choose Any Method for Calculating Cost Basis?
The IRS allows Specific Identification or First-In, First-Out (FIFO) methods, but not Last-In, First-Out (LIFO).
What If I Don’t Report My Crypto Transactions?
Failure to report may lead to penalties, interest, or audits by the IRS.
Are Crypto Losses Deductible?
Yes, you can deduct up to $3,000 in net capital losses against other income annually.
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