The History of Crypto Taxes in the US
From zero tax rules to strict regulations, the history of crypto taxes in the U.S. explains a lot about where we are now and where things might be headed. Back in 2014-2015, over 5 million people traded crypto, but less than 1,000 reported their earnings on tax returns each year. Fast forward to today, and nearly half of U.S. crypto investors report their income. So, what changed? And why?
If you’re wondering about these shifts and want all the answers in one place, this article has you covered. We’ll walk you through the history of crypto taxes in the U.S., covering the key developments and current rules to help clear up your questions and curiosities once and for all.
The Early Days (2009-2013)
When Bitcoin launched in 2009, it kicked off the cryptocurrency era with a new kind of digital asset that didn’t fit into traditional financial systems. Back then, the rules were fuzzy, and there wasn’t much guidance on how to handle these virtual assets for tax purposes. Crypto transactions were in a gray area, leaving people unsure about how to report them.
From 2009 to 2013, the IRS didn’t provide any clear rules on reporting crypto income or gains. This left early users wondering if activities like mining, trading, or using crypto for purchases would be taxed. People took different approaches—some reported their gains just to be safe, while others didn’t disclose anything, taking advantage of the lack of regulations.
The first major move toward regulation came in 2013 when the Financial Crimes Enforcement Network (FinCEN) issued guidelines for businesses dealing with virtual currencies. Although these guidelines were about anti-money laundering rather than taxes, they showed that the government was starting to pay attention to the crypto space, paving the way for future tax rules.
The IRS Steps In (2014)
In March 2014, the IRS changed the game for crypto taxes in the U.S. by issuing its first official guidance, Notice 2014-21. This notice classified cryptocurrency as property, not currency, setting the rules for how digital assets would be taxed. Basically, this meant that the same tax rules for property, like capital gains tax, now applied to crypto.
For crypto users, this decision had a big impact. Under the new rules, selling, trading, or even using crypto to make purchases became taxable events. Any gains or losses had to be calculated based on the fair market value at the time of the transaction. Long-term or short-term capital gains rates would apply, depending on how long the asset was held before being sold. Plus, users could offset their losses against other gains to reduce their overall tax bill.
Check out our in-depth US crypto tax guide to learn more.
The IRS also said that mined cryptocurrency had to be reported as income at its fair market value when received. Later, they added other income-generating activities, like staking rewards, to the list. While this guidance cleared up some confusion, it also made things tricky. Now, crypto users had to track the cost basis and fair market value for each transaction to report taxes accurately.
This is where crypto tax tools stepped in. These tools helped automate the process by collecting transaction data from different crypto exchanges and wallets to calculate gains, losses, and taxes. Bitcoin.Tax was one of the first tools to simplify crypto tax filing for users.
The Cryptocurrency Boom (2017-2018)
In 2017, crypto blew up in popularity as Bitcoin hit all-time highs, attracting a wave of new investors. With this growth, the IRS noticed many people weren’t reporting their crypto gains, raising concerns about tax compliance.
To tackle potential tax evasion, the IRS stepped up enforcement. One big move was issuing a summons to Coinbase, a major U.S. crypto exchange, to get records of over 14,000 users with large transactions. The goal was to find those who hadn’t reported their crypto income, signaling the IRS’s intent to crack down on non-compliance.
Even with these efforts, many crypto users didn’t know they had tax obligations or found the rules confusing. Some thought crypto transactions were tax-free, while others struggled to understand how to report them. This marked the start of stricter oversight, leading to more detailed guidelines and enforcement.
In 2018, as the market witnessed its first crypto winter, the IRS launched the Virtual Currency Compliance campaign. This initiative aimed to close the tax gap by raising awareness and improving compliance through education, audits, and potential criminal investigations. They also sent over 10,000 warning letters to crypto investors, reminding them to report their crypto transactions accurately. Read more about the IRS letters here.
The IRS further updated its cryptocurrency FAQs to clarify how to handle different events like hard forks and airdrops for taxes. While this guidance helped, it also showed how tricky it could be to track crypto transactions. These moves laid the groundwork for a more organized approach to crypto taxes, with more regulations on the horizon.
Crypto Becomes a Mainstream Tax Topic (2019-2021)
From 2019 to 2021, the IRS kept refining its crypto tax rules, rolling out new regulations to boost compliance. In 2019, they released Revenue Ruling 2019-24, finally giving clear guidance on how to handle crypto events like hard forks and airdrops, similar to the rules for mining and staking rewards. This helped clear up confusion and set better expectations for taxpayers.
The IRS also made a bold move by adding a virtual currency question to the 2019 Form 1040, asking if people had received, sold, sent, or acquired any crypto. When they moved this question to the front page in 2020, it was a clear sign that the IRS was prioritizing crypto tax compliance and making taxpayers take responsibility for disclosing their crypto activities.
In 2021, new rules came with the Infrastructure Investment and Jobs Act, which added reporting requirements for digital assets. The law made crypto exchanges report customer transactions to the IRS, much like traditional brokerage firms. This sparked some controversy, but the goal was to boost transparency and help the IRS track taxable crypto activities better.
During all these changes, discussions also started about how to tax newer crypto trends like staking rewards, DeFi earnings, and NFTs, showing just how fast crypto tax rules are evolving.
Current Status and the Future (2022 and Beyond)
In 2022, they focused on clarifying regulations and tightening reporting requirements, especially for gray areas like DeFi, NFTs, and staking rewards. There’s been a lot of talk about how to tax DeFi activities and staking rewards, which can be tricky.
Why?
Because the exact mechanisms of these activities can vary a lot, making it hard for taxpayers to figure out the right tax implications. Cases like Jarrett v. United States highlight these challenges, and new rules are expected to help clear things up.
Meanwhile, the SEC has also ramped up its scrutiny of crypto firms, claiming that many cryptocurrencies should be treated as securities, adding another layer of regulatory complexity.
Looking ahead, the IRS will likely keep adjusting its crypto tax policies to keep up with new technologies and market trends. For those dealing with crypto, staying updated on these changes is crucial.
Our suggestion? When in doubt, consult a tax professional. Also, pro tip uses specialized tax software, like Bitcoin.Tax to simplify tax reporting and make tax season less stressful.
FAQ
How is crypto taxed?
Crypto is taxed based on how you use it. When you sell, trade, or use cryptocurrency to buy something, it’s considered a taxable event. The IRS treats crypto as property, so you’ll pay taxes on any gains, just like with stocks or real estate.
If you sell your crypto for more than you paid, you owe capital gains tax. The rate depends on how long you hold the asset: long-term (over a year) usually has lower tax rates, while short-term (less than a year) is taxed as regular income.
Mining, staking, or earning crypto as payment counts as income and is taxed based on the fair market value when you receive it. Moreover, you’ll be subject to capital gains taxes when you sell it in the future.
Is swapping crypto taxable?
Yes, swapping one crypto for another is considered a taxable event. When you trade one cryptocurrency for a different one, the IRS treats it as if you sold the first crypto. You’ll need to calculate any gains or losses based on the difference between what you originally paid for the first crypto (the cost basis) and its value at the time of the swap.
If the value went up since you bought it, you’d owe taxes on the gain. If it went down, you could report a loss, which might help reduce your overall tax bill.
How to calculate crypto taxes?
To calculate crypto taxes, you first need to know your cost basis, which is the original price you paid for the crypto. Then, calculate the gain or loss by finding the difference between the cost basis and the selling or swapping price.
There are different accounting methods for calculating gains and losses:
- First In, First Out (FIFO): The first crypto you bought is the first one you sell. This is the most common method.
- Last In, First Out (LIFO): The most recently bought crypto is sold first, which could lower your taxable gains in a rising market.
- Specific Identification: You choose which specific crypto units to sell based on their purchase price.
There are a few more that we discuss in this in-depth crypto accounting methods guide, along with how to use it to reduce your taxes.
How to avoid crypto tax in the US?
Completely avoiding crypto taxes in the U.S. isn’t legal, but you can use strategies to lower your tax bill:
- Hold for the long term: If you keep your crypto for over a year before selling, you may qualify for lower long-term capital gains tax rates.
- Offset gains with losses: If you have losses from other crypto trades, you can use them to reduce your taxable gains. This is called tax-loss harvesting.
- Use tax-advantaged accounts: Some retirement accounts, like IRAs or charitable remainder trusts, allow crypto investments, which can help defer or reduce taxes.
- Move to a tax-friendly state: Some states don’t have state income tax, which could help lower your overall tax burden. Check out our list of the most crypto-friendly US states.
Check out our complete guide on avoiding crypto taxes in the US for more.