Do I Pay Taxes on Crypto?

All is fine and dandy in the world of tax-prep so long as you are losing money on a business venture or investment. But the moment you start to earn those highly-sought profits, everything quickly changes (the epitome of first-world-problems).

That $5,000 worth of Dogecoin you bought back in 2013 would be worth $3,461,538 in today’s dollars, a hefty sum – but… is it taxable?

The length of time you’ve owned the crypto asset matters

Considering you’ve owned this asset since 2013, (more than 365 calendar days) it would be taxed as a long-term capital gain. Note however, that there are multiple ways to “cash-out” on your crypto investments that might not be intuitive. If you purchase a $3,000 hot-tub with your dogecoins, this would effectively be considered a sale in the IRS’s eyes.

Additionally, if you transfer half of your holdings in doge into Ethereum, USDC, etc., this is also a sale when it comes to the IRS. Any of these actions will likely trigger a 1099-B/Div/Int at the start of the new year, all depending on which exchange you are using.

Of course, you could try your hand at off-shore exchanges, arming yourself with a VPN, however, as the Panama Papers tell us, this may not be an effective (or legal) long-term strategy. Instead, holding the asset is the most effective way to avoid a huge tax-bill.

What do I do if I’ve already sold some coin this year?

Assuming you used a highly-visible exchange (e.g. Coinbase) that collected your social security number somewhere along your road to Valhalla, you can expect to receive a 1099-B/Div/Int at year-end, unless someone’s corporate accountant dropped the ball.

When you receive this form, any assets that were sold within 365 days of purchase will be considered “short-term capital gains” and any that have an original purchase date more a year ago will be “long-term capital gains.”

These sales set you up to experience a variety of tax brackets depending on your other income sources [a real choose-your-own adventure].

Here is what you can expect for short-term gains, which are considered ordinary income:

Gains will be taxed in line with your general income, click here to see the table for single filers

And for long-term gains, which are taxed in line with other capital gains income:

If you earn less than $40k per year (including business profit / loss), your capital gains tax rate is 0%

If you earn between $40k to $445k per year (including business profit / loss), you’ll have a 15% capital gains tax rate

Above $445k per year will put you in the 20% capital gains tax bracket

The “Wash Rule” does not yet apply to crypto investments

Of course, this will likely change in the near-term future, but the principle will still be effective or many years to come so long as you can handle the risk of 30-days volatility in the crypto market (explanation forthcoming).

Considering the IRS frowns upon a business that shows losses for three years out of a five year period (and you risk your “business” being classified as a “hobby” by the IRS), there’s a handy way to package your business-loss years with your crypto-sale years.

For now, this method can include an immediate asset “wash,”  and in the future, will involve a 31-day safe-wash [kind of like using the ‘delicates’ setting on the laundry].

After all, if you wash another load of your girlfriend’s or wife’s lingerie outside a delicates bag or on the standard wash-cycle, you might find yourself in hot water (that pun was completely necessary).

What this means is that the same year that your business turns a LOSS is a great year for your crypto investments to turn a PROFIT.

A ‘real-world’ example we can work with:

You made some huge business investments in 2021. Specifically, you purchased $450,000 worth of equipment for your second CBD processing facility, and hired on several new staff. Your profits, however haven’t quite caught up with these initial expenses (that is to be expected). Next year, you expect to see a huge surge in sales, considering whole-foods has agreed to host its very first CBD product – from your business line!

The Tax Guru has finished your Q3 books and profit / loss statements and you’re already showing a $783,000 loss in 2021 for your single-member LLC.

On the other hand, your $3.4 million of dogecoin is staring at you every morning from your Coinbase account. You take a peek outside your front window at you wife’s 2017 Tesla and realize you’ve already fallen behind your neighbors’ projected level of affluence (oh, the shame!).

And yet, you could certainly use some of that $3.4 million for a good cause, too. After all, all these billionaires are going up to space in the guise of charity!

At this point you understand that you would owe 20% long-term capital gains tax on the sale of your dogecoin, or $680,000 [fun-fact, that’s 10 times more than Elon Musk paid in tax in 2015]

But rather than sell the full $3.4 million, you could make your business-loss work to your advantage by performing a “wash.”

Because you know your income is already marked down to negative $783,000, and the long-term capital gains threshold retains 0% taxability until you surpass $39k, you have $822,000 of hypothetical profits to work with and pay 0% on these gains.

That means if you sell $822,000 or roughly 25% of your current doge-coin holdings, which had an original value of $5,000, what would normally hold a $123,000 tax bill would instead be taxed at 0%.

AND, under current cyrpto rules, you could take that $822k and repurchase the same asset (dogecoin) in the amount of $822k and you would have effectively stepped-up your asset base to where 25% of your holdings were now valued at market-prices.

Taking this one step further, if dogecoin drops 10% next year, you could then sell your asset within 365 days and it would be considered a short-term loss, reducing your overall taxability next year, when you’re expecting that surge in sales.

Assuming the wash-rule does eventually apply to crypto holdings, you’ll want to wait 31 days before reinvesting that $822k back in the crypto market.


If you’re issued an unexpected 1099B/Div/Int or other investment form from your crypto exchange, we might want to take a look at your books for your small-business and find the areas where you could have additional deductions, thus offsetting your crypto tax bill. You can setup a free initial consultation with me here: