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Cryptocurrency is no longer the new investment asset on the block, and that means income derived from crypto is getting plenty of attention from the IRS in 2023. Unfortunately, the crypto tax rules remain a bit complicated. The IRS clearly states that crypto may be subject to either income taxes or capital gains taxes, depending on how you use it. How Is Cryptocurrency Taxed?First off, you don’t owe taxes on crypto if you’re merely “hodling,” as aficionados would say. But if you’ve gained any income from crypto this year—either from staking, lending or selling—you may owe taxes on the proceeds. The IRS treats all cryptocurrencies as capital assets, and that means you owe capital gains taxes when they’re sold at a profit. This is exactly what happens when you sell more traditional securities, like stocks or funds, for a gain. Let’s say you bought $1,000 in Ethereum and then sold the coins later for $1,600. You’ll need to report that $600 capital gain on your taxes. The taxes you owe depend on the length of time you held your coins. If you held your ETH for one year or less, the $600 profit would be taxed as a short-term capital gain. Short-term capital gains are taxed the same as regular income—and that means your adjusted gross income (AGI) determines the tax rate you pay. Federal income tax brackets top out at a rate of 37%. To be in the top bracket for 2023, you would need to make $578,126 or more as a single filer. 2023 Federal Income Tax BracketsIf you held your ETH for one year or more before you sold them for a profit, you would qualify for the long-term capital gains rate. For many filers, this rate is lower than regular income taxes, although it depends on your AGI. 2023 Long-Term Capital Gains Tax RatesTaxes on Crypto Payments, Staking and MiningIf you earn cryptocurrency from mining, receive it as a promotion or get it as payment for goods or services, it counts as regular taxable income. You owe tax on the entire value of the crypto on the day you receive it, at your marginal income tax rate. Any cryptocurrency earned through yield-earning products like staking is also considered to be regular taxable income. If you hold cryptocurrency from any of these activities, and either spend or sell it later for more than its value when you first received it, you owe short- or long-term capital gains taxes on the profits, based on how long you’ve held it. Money Lost on Crypto May Count as a Capital LossWhen you sell an investment asset for a loss, you can deduct some of your loss from your taxes. If you sold crypto for less than you paid for it, you can also claim a capital loss, and use it to offset other income taxes. Compare the best tax software of 2022How to File Your Crypto Taxes in 2023It’s never too early to get organized with your crypto taxes. The standard Form 1040 tax return now asks whether you engaged in any virtual currency transactions during the year. The IRS also made changes to Form 1040 and began including the question: “At any time during 2022, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” While buying cryptocurrency alone isn’t a taxable event, the sale of a cryptocurrency qualifies as a taxable transaction. Keep RecordsYou must keep track of all your cryptocurrency transactions, including how much you paid for crypto, how long you held it, and how much you sold it for, as well as receipts for each transaction. You’ll also need to note the fair market value of the cryptocurrency when it was used or sold. While your crypto exchange may provide a 1099-B reporting your crypto transactions to both the IRS and you, it may not record the cost basis or the original amount you paid for your crypto if you transfer coins between offline cold wallets and your account. Tools like Koinly and Cointracker connect to exchanges and crypto wallets to track your crypto transactions and complete the forms you need to file your cryptocurrency taxes. Fill Out Tax FormsOnce you have a record of your crypto transactions, you’ll need to fill out certain tax forms depending on how you used your crypto. Here are some examples of forms that you may need to complete.
File Your TaxesIf you keep records in software like Koinly or CoinTracker, you can connect them with your online tax software of choice. Then use the online tax software to file your overall state and federal tax returns. For those looking for one-stop services, TokenTax provides a full suite of accounting services to track and prepare both your crypto and regular taxes. Consider Hiring a ProfessionalPreparing for cryptocurrency taxes can be complicated, especially since the laws surrounding them are constantly evolving. If you’ve made a substantial income from cryptocurrency, it may be worth hiring a certified public accountant (CPA) who specializes in this type of tax work, so you don’t have the IRS chasing you down later. How To Minimize Crypto Taxes
What Happens If You Don’t Report Cryptocurrency on Taxes?If you don’t report a crypto-taxable event, you could incur interest, penalties, or even criminal charges if the IRS audits you. You may also even receive a letter from the IRS if you failed to report income and pay taxes on crypto, or do not report your transactions properly. Cryptocurrency Taxes FAQsWhere do I report cryptocurrency on my taxes?The IRS treats crypto as “property,” which means you’ll need to report certain crypto transactions on your taxes. You’ll even be asked on the main form, Form 1040, whether you received, sold, sent, exchanged, or otherwise acquired “any financial interest in any virtual currency.” Overall, the type of crypto-taxable event determines any additional form that you may need to complete and how you’ll report that crypto activity. How can I report crypto staking rewards on my taxes?You can report staking rewards as “other income” on Form 1040. If you own your own crypto business, then you’ll need to fill out Schedule C. What tax forms do you need for crypto?The type of activity will determine which form you may or may not need. Forms that are often used in crypto-tax filings may include: Form 1040, Form 8949, Schedule C, Schedule D, and Schedule SE. Do I have to report crypto losses on my taxes?You don’t pay capital gains on crypto losses. But you shouldn’t just chalk it down to a bad investment, as you can offset your losses against your gain on your tax bill. |