Crypto Taxation for Self-Employed Individuals and Freelancers

May 22, 2025
Crypto Taxation for Self-Employed Individuals and Freelancers

Introduction

With the rise of cryptocurrencies, many freelancers and self-employed individuals receive payments in Bitcoin, Ethereum, and other digital assets. However, the IRS treats cryptocurrency as property, meaning that transactions are subject to income tax and capital gains tax.

 

Understanding how crypto earnings are taxed is crucial for avoiding IRS penalties and optimizing tax liabilities. This article explains how self-employed individuals should report crypto income, track expenses, and minimize tax burdens.

 

1. How the IRS Taxes Cryptocurrency for Self-Employed Individuals

The IRS classifies cryptocurrency not as currency, but as property, meaning that tax rules similar to stocks and real estate apply.

A. Crypto Income is Taxed as Self-Employment Income

  • Payments received in cryptocurrency for freelance work or business services are taxable as ordinary income.
  • The fair market value (FMV) at the time of receipt determines the income amount.
  • The income is subject to:
    • Federal and state income tax (based on tax bracket).
    • Self-employment tax (15.3%) for Social Security & Medicare contributions.

B. Capital Gains Tax Applies When Selling or Exchanging Crypto

  • If crypto is held and later sold, any price change results in capital gains or losses.
  • Short-term gains (held <1 year): Taxed at ordinary income tax rates (up to 37%).
  • Long-term gains (held >1 year): Taxed at lower capital gains rates (0%, 15%, or 20%).

C. Crypto-to-Crypto Trades Are Taxable

  • Swapping Bitcoin for Ethereum (or other cryptocurrencies) triggers capital gains tax based on the price difference at purchase vs. exchange.
     

2. Reporting Crypto Income on Taxes

Self-employed individuals must report crypto income on Form 1040, Schedule C, just like fiat income.

A. Key IRS Forms for Crypto Taxes

  • Form 1040 (Schedule C): Reports crypto payments as self-employment income.
  • Form 8949 & Schedule D: Reports capital gains or losses from selling or trading crypto
  • Form 1099-NEC/1099-K: Some platforms (Coinbase, PayPal, etc.) may issue 1099s for crypto earnings.

B. Keeping Accurate Crypto Records

  • Track all transactions, including timestamps, amounts, and market value at receipt.
  • Use crypto tax software (CoinTracker, Koinly, or TaxBit) to automate calculations.
     

3. Deducting Business Expenses Paid with Crypto

Self-employed individuals can deduct business expenses paid in crypto, reducing taxable income.

A. Common Deductible Expenses

  • Work-related software & subscriptions.
  • Business travel & meals (50% deductible).
  • Office equipment (computers, printers, etc.).
  • Transaction fees on crypto payments.

B. Converting Crypto Business Expenses for Tax Purposes

  • The USD value at the time of the transaction is used to determine deductible expenses.
  • Receipts and records of payments must be kept for IRS audit purposes.

 

4. How to Minimize Crypto Tax Liability

Freelancers and self-employed individuals can use several strategies to reduce their crypto tax burden.

A. Hold Crypto for More Than One Year

  • Selling crypto after one year qualifies for lower long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates (up to 37%).

B. Use the Foreign Earned Income Exclusion (FEIE) (For Expats)

  • U.S. freelancers abroad can exclude up to $126,500 (2025) in foreign income, but crypto must be earned from a non-U.S. source.

C. Offset Capital Gains with Crypto Losses

  • If crypto investments lose value, losses can be deducted against capital gains to reduce taxable income (tax-loss harvesting).

D. Contribute to a Retirement Plan

  • Contributing to a SEP IRA, Solo 401(k), or Traditional IRA can reduce taxable income while saving for retirement.
     

5. Avoiding IRS Penalties and Compliance Issues

Failing to report crypto income can lead to IRS audits, penalties, and interest charges.

A. Answering the IRS Crypto Question on Form 1040

  • Since 2020, the IRS requires all taxpayers to answer:
    • “Did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency?”
  • Answering "No" incorrectly when crypto transactions occurred can trigger IRS scrutiny.

B. Filing Late or Incorrectly May Lead to IRS Penalties

  • Failing to report crypto income can result in substantial penalties (up to 25% of unpaid taxes).
  • The IRS is increasing enforcement using blockchain tracking tools (Chainalysis, etc.).
     

Conclusion

Self-employed individuals and freelancers earning in crypto must report their income, track expenses, and pay both income and self-employment tax. Proper record-keeping and strategic tax planning, such as holding assets long-term and leveraging tax deductions, can significantly reduce tax burdens.

Tax Partners can assist freelancers and self-employed individuals in navigating complex crypto tax rules, ensuring IRS compliance, and implementing tax-efficient strategies.

 

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