How Much Is Crypto Taxed in California?

The taxation of cryptocurrency involves both federal and state regulations. Understanding these rules is important for California residents engaged in cryptocurrency activities. The Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) have established guidelines for how digital assets are treated for tax purposes.

Federal Tax Treatment of Cryptocurrency

The IRS classifies cryptocurrency as property for federal tax purposes, not as currency. This means general tax principles applicable to property transactions apply to cryptocurrency. Taxable events involving cryptocurrency fall into two main categories: capital gains or losses, and ordinary income.

Capital gains or losses arise when cryptocurrency is sold for fiat currency, exchanged for other cryptocurrency, or used to purchase goods or services. The tax treatment depends on the holding period. Short-term capital gains apply to cryptocurrency held for one year or less and are taxed at ordinary income rates. Long-term capital gains apply to cryptocurrency held for more than one year and are subject to preferential tax rates at the federal level.

Ordinary income from cryptocurrency can stem from various activities, including receiving crypto as payment for goods or services, or through mining, staking, or airdrops. The fair market value of the cryptocurrency at the time it is received is considered ordinary income and is taxable. This income is taxed at an individual’s regular income tax rates.

California’s Approach to Crypto Taxation

California largely conforms to federal tax law, treating digital assets as property. When a federal taxable event involving cryptocurrency occurs, it typically triggers a corresponding taxable event for California state income tax purposes.

California’s progressive income tax rates apply to both ordinary income from cryptocurrency activities and capital gains. Unlike federal law, which offers lower tax rates for long-term capital gains, California taxes all capital gains from cryptocurrency transactions, whether short-term or long-term, as ordinary income. This means profits from selling or exchanging cryptocurrency are subject to the same state income tax rates as wages or other earned income, ranging from approximately 1% to 13.3%.

The amount of state tax owed on cryptocurrency gains or income in California depends on an individual’s overall income level and their applicable tax bracket. California allows capital losses to offset capital gains, which can reduce the overall tax liability. The state does not have a separate, lower tax rate for long-term capital gains from cryptocurrency, making its treatment different from the federal approach.

Determining Taxable Events and Calculating Gains and Losses

A disposition of cryptocurrency triggers a taxable event, which includes selling crypto for traditional currency, trading one type of cryptocurrency for another, or using crypto to purchase goods or services. To determine the taxable gain or loss, the cost basis is subtracted from the fair market value (FMV) at the time of disposition. The fair market value is typically determined using reputable exchanges at the date and time of the transaction.

The cost basis represents the original value of the cryptocurrency, including the purchase price and any transaction fees incurred during acquisition. For instance, if cryptocurrency was acquired for $1,000 and incurred $20 in fees, the cost basis would be $1,020. When multiple units of the same cryptocurrency are acquired at different times and prices, determining the cost basis can be more complex.

Taxpayers can use various methods to calculate the cost basis, such as Specific Identification or First-In, First-Out (FIFO). Specific Identification allows taxpayers to choose which specific units of cryptocurrency are sold, potentially optimizing tax outcomes by selecting units with a higher cost basis to minimize gains or realize losses. If specific identification is not used, the IRS defaults to the FIFO method, which assumes the first cryptocurrency units acquired are the first ones sold. The holding period, which is the length of time the cryptocurrency was held, is also important for determining if a gain or loss is short-term or long-term.

Common Cryptocurrency Transactions and Their Tax Implications

When individuals receive cryptocurrency from mining, the fair market value of the earned crypto at the time of receipt is considered ordinary income. This income is taxable and, for those mining as a business, may also be subject to self-employment taxes. Staking rewards are treated as ordinary income based on their fair market value when received.

Airdrops are also taxed as ordinary income at their fair market value upon receipt. If a hard fork occurs, creating a new cryptocurrency, the newly received coins are taxed as ordinary income at their fair market value when received. The cost basis for these new assets becomes the amount recognized as income.

Gifting cryptocurrency is generally not a taxable event for the giver, unless the value exceeds annual exclusion limits. The recipient takes on the donor’s cost basis. Donating cryptocurrency to a qualified charity can be tax-deductible, and no capital gains tax is recognized on the appreciation if the crypto was held for over a year. Non-Fungible Tokens (NFTs) are treated as property, so their sale triggers capital gains or losses, and minting may involve gas fees that contribute to the cost basis. Losses from theft or scams on personal assets are generally not deductible, though business losses may be treated differently.

Record Keeping and Reporting Requirements

Record keeping is essential for accurate tax reporting. Individuals should maintain detailed records including the date of each transaction, the fair market value of the cryptocurrency at that time, the cost basis, and the nature of the transaction. These records should encompass all cryptocurrency activities, such as purchases, sales, exchanges, mining rewards, staking income, and airdrops. Utilizing spreadsheets or specialized cryptocurrency tax software can assist in tracking these transactions.

For federal tax reporting, capital gains and losses from cryptocurrency transactions are reported on Form 8949, Sales and Other Dispositions of Capital Assets, with the totals then transferred to Schedule D, Capital Gains and Losses. Income from activities like mining, staking, or airdrops is reported on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, or on Schedule C, Profit or Loss from Business, if the activities constitute a business. California income tax returns, such as Form 540, typically incorporate the federal Adjusted Gross Income (AGI), which includes cryptocurrency income and gains. Maintaining comprehensive records facilitates the accurate completion of both federal and state tax obligations.