Cryptocurrency Taxes in 2023
Income generated from crypto is getting plenty of attention from the IRS in 2023.
The crypto tax rules remain somewhat complicated. The IRS states that crypto may be subject to income or capital gains taxes, depending on how you use it.
If there is a gain or loss from the sale, trade, or disposal of cryptocurrency, taxes must be paid. You pay taxes on the payment like other assets if you sell or trade the cryptocurrency for a profit. The same holds for non-fungible tokens; any capital gain or loss must be reported for tax purposes.
1. How much do you have to Pay?
Short-term capital gains and crypto income are taxed at up to 37%, while long-term capital gains are taxed at 0% to 20%, with NFTs deemed collectibles taxed at 28%. The tax you’ll pay on cryptocurrency in the United States is determined by how much you earn, the specific transaction, and the length of time you’ve held the asset.
Earning cryptocurrency through mining, as a bonus, or as payment for goods or services is taxable as regular income. You must pay tax on the entire value of the cryptocurrency on the day it is received at your marginal income tax rate.
Any cryptocurrency earned through yield-generating products such as staking is also considered a type of income taxable.
If you hold cryptocurrency and later spend or sell it for more than its original value, you must pay short- or long-term capital gains taxes on the profits, depending on how long you’ve held it.
Purchasing cryptocurrency on its own is not a taxable event. Even if the value of cryptocurrency rises, you can buy and hold it tax-free. First, there must be a taxable event, such as selling cryptocurrency.
The IRS has been working to ensure that cryptocurrency investors pay their taxes. Taxpayers must respond to a question on Form 1040 asking if they had any transaction involving a digital asset during the year. For clients with more than 200 transactions and more than $20,000 in trading during the year, cryptocurrency exchanges must file a 1099-K.
2. How to Calculate Crypto Capital Gains and Losses
Your gains and losses when purchasing and disposing of capital assets are categorized as long-term or short-term. The IRS treats these two classes very differently regarding the tax consequences you’ll face.
Short-term capital gains and losses resulting from the sale of property held for less than a year. In 2022, these gains will be taxed as ordinary income at a rate ranging from 10% to 37%.
The standard long-term capital gains tax rate is 0%, 15%, or 20%, with preferential long-term capital gains rates available for both gains and losses.
To determine your gain or loss, first, determine your cost basis on the property. Generally, this is the price you paid, adjusted (increased) by any fees or commissions you paid to participate in the transaction. This final cost is referred to as your adjusted cost basis.
After subtracting any fees or commissions you had to pay to complete the transaction, you calculate the sale price.
Finally, subtract your adjusted cost basis from the adjusted sale amount to compute the difference. If the amount is more than your adjusted cost basis, you will have a capital gain; otherwise, you will have a capital loss.
3. Tax-free cryptocurrency transactions
- Buying cryptocurrency (including NFTs) with fiat money.
- Cryptocurrency deposits as collateral for DeFi loans.
- Transferring digital assets (including NFTs) from one of your crypto wallets to another.
- Gifting cryptocurrency is subject to the $16,000 per person gift limit for 2022 filings and $17,000 for 2023 filings.
- Donating cryptocurrency to charitable organizations.
4. The IRS has the necessary paperwork.
You’ll need records of your cryptocurrency’s fair market value when it was mined or purchased, as well as records of its fair market value when it was used or sold.
If you make over $20,000 in payments and have 200 transactions in a year, a Form 1099-K may be issued. However, both conditions must be met, and many people are unlikely to use Bitcoin or other cryptocurrencies 200 times per year. However, whether you cross these thresholds or not, you still owe tax on any gains.