Taxes on Crypto: Best Guide for 2023
Did you know that the earnings you’ve made on your cryptocurrency investments and transactions over the past year aren’t exempt from taxes? In the United States, crypto and other forms of virtual currency are considered a type of digital asset, and the Internal Review Service (IRS) treats your crypto gains like any other kind of capital gains, similar to bonds, stocks, and other similar assets. Because of this, you’ll need to know how to correctly file for your crypto earnings this tax season to avoid risking any unforeseen issues or future audits. But how, exactly, do you file for and pay taxes on your crypto?
Thankfully, the process isn’t as complicated as you might think. However, it does usually require that you have a basic understanding of taxable, non-taxable events and more when it comes to your past crypto transactions. But don’t worry! Our trusted team of experts here at unBanked is here to help teach you about what you need to know about taxes on cryptocurrency this year, so you can move forward without having to worry about incurring the bureaucratic wrath of the IRS.
Please continue to learn everything you need to know for your 2022 crypto taxes. Consider exploring our range of other expertly written articles to educate yourself on the wonderful world of cryptocurrency.
Related: Understanding the New Tax Implications of Digital Currency
A Brief History of Crypto’s Relationship with Taxes
In and of itself, cryptocurrency is widely considered by government and financial agencies to be an inherently disruptive technology due to its nature as a decentralized yet secure digital currency solution. While the U.S. government initially possessed- and arguably still does- some severe unease regarding the mainstream acceptance of cryptocurrency, the continued success and perseverance of these digital assets has essentially forced them to tolerate a gradual induction of crypto into conventional financial services. Over time, this has resulted in cryptocurrencies becoming subject to various institutional pressures and regulations, including taxes. However, how cryptocurrency is perceived and handled under tax law may be surprising to you.
Back in 2014, the IRS released Notice 2014-21, which clearly defines virtual currencies not as regular currencies, like the U.S. dollar, but as property. This declaration means that anything purchased using a digital currency is liable to be taxed as either a short-term or long-term capital gain. Though this depends on how long the asset was in someone’s possession. For example, say that you purchase a cup of coffee using Bitcoin that you bought back when it was worth $1,000. You’ll need to account for the price of the Bitcoin when you purchase the coffee. If Bitcoin is trading for $1,200 at the time of your coffee purchase, then you have officially purchased what’s known as a dollar-denominated good with another asset that is now worth more than it used to be. This means that the amount of Bitcoin you used to buy your coffee will be taxed per capital gains rules.
Additional changes to how the IRS handles crypto taxes were announced back on May 20, 2021, when the United States Department of the Treasury announced a proposal that would require all taxpayers to report their crypto transactions of and above $10,000. How the IRS taxes these proceeds- either as ordinary income or capital gains- depends on how long the taxpayer held into the cryptocurrency in question.
Do I Owe Taxes on My Crypto?
In the introduction to this article, we briefly discussed that to understand if you owe taxes on your crypto transactions, it’s essential to examine how exactly you used your crypto and whether those used classify as either non-taxable or taxable events and transactions. Let’s take a few seconds to delve into the difference between these two types of events further to help you better understand whether or not the IRS will be expecting takes from you during the upcoming tax season.
Examples of Non-Taxable Events and Transactions
- Transferring crypto to yourself between wallets or accounts: Moving crypto between your accounts or wallets is not taxable. However, you should still keep careful records of the original cost basis of your crypto the dates you acquired them. This tactic is beneficial because you can more easily calculate your potential tax impacts for when you eventually sell the crypto or use it to purchase something else.
- Buying crypto with cash and holding onto it: Just buying and owning cryptocurrency isn’t taxable on its own. However, taxes are often incurred later when you sell the crypto or use it to buy something, resulting in “realized” gains.
- Giving a gift: Individuals can gift up to $15,000 per recipient per year without having to pay taxes on said gifts- though they can gift even high amounts to spouses. However, if the gift exceeds $15,000 to any single recipient, the gifter will need to file a gift tax return. Thankfully, this doesn’t tend to result in any current tax liabilities. Transferring crypto to a person outside of purchasing a good or service may also be classified as giving a gift, even if it wasn’t intended as one.
- Receiving a gift: If you’re fortunate enough to receive cryptocurrency as a gift, you’re not likely to incur any tax obligations until you choose to sell the crypto or participate in another taxable activity, like crypto staking.
- Donating your crypto to a qualified tax-exempt charity or non-profit organization: Donating your crypto directly to a qualified charitable organization can typically allow you to claim the transaction as a charitable deduction on your taxes.
Related: Best Crypto Tax Tools You Need to Know
Examples of Events and Transactions Taxable as Income
- Mining cryptocurrency: If you mine crypto, you’ll likely owe taxes on your various earnings based on the overall market value of the coins at the time they were mined. Mined cryptocurrency is taxed as self-employment income since crypto mining is treated like a business.
- Getting paid in cryptocurrency: If you were paid in crypto by an employer, your crypto would be naturally taxed as a form of compensation according to your income tax bracket.
- Getting cryptocurrency in exchange for goods or services: Accepting crypto as payment for services and goods means you are responsible for reporting it as income to the IRS.
- Receiving cryptocurrency incentives or rewards: This is a comprehensive list since there is a wide array of reasons a person may receive free crypto incentives or rewards. For example, certain crypto exchanges like Coinbase offer rewards and incentives for referring friends to the exchange. These rewards and incentives will need to be reported as income on your taxes.
- Earning crypto staking rewards: Crypto staking rewards are treated much like crypto mining proceeds; taxes are dependent on the fair market value of the crypto rewards on the day you receive them.
Cryptocurrency can be a fantastic way to help you take control of your financial future, but you still have to pay taxes on the gains you earn from operating in the crypto realm. Learn the basics of crypto taxes with the help of the quality educational articles provided by our experts here at unBanked today.
Examples of Events and Transactions Taxable as Capital Gains
- Spending your cryptocurrency on goods and services: If you use crypto to purchase any goods or services, you’ll owe taxes on the transaction since the IRS considers spending crypto is similar to selling it. Since selling it makes your crypto subject to capital gains tax, so does spending.
- Selling cryptocurrency for cash: You’ll owe taxes if you sell your cryptocurrency for U.S. dollars, specifically if you sell the asset for more than you paid for them. However, if you sell them for less than you initially paid, you may be able to deduct that loss from your taxes.
- Converting one form of cryptocurrency into another: When you use one type of crypto to buy another (like using Bitcoin to buy Ether), you technically have to sell the original crypto before purchasing the new kind. Because of this sale, the IRS considers this a taxable transaction.
How Much do I Owe in Taxes for My Crypto?
If you’ve worked for any period of time in the realm of cryptocurrency and crypto transactions, then you’ll more than likely have engaged in some taxable activities. Thankfully, it’s relatively easy to get a decent estimate of how much taxes you’ll owe because of these transactions. All you’ll need to do is calculate your income, gains, and losses.
Calculating Your Cryptocurrency Income
As a United States taxpayer, you’re likely used to seeing your state and federal income taxes deducted from your regular paystubs. The cryptocurrency you receive as income (through practices like mining, staking, and through rewards or incentives) is also subject to the same types of income taxes. However, these won’t typically be deducted or withheld, like taxes are from your regular paychecks. Instead, you’ll be required to report your earnings, and you’ll typically owe a tax percentage of said earnings based on your appropriate tax bracket.
However, it’s essential to remember that if you earn significant amounts of cryptocurrency, it may impact the specific tax bracket you’re in, which could cause you to pay higher tax rates on some of your earnings.
Calculating Your Cryptocurrency Gains and Losses
To calculate the amount you have either gained or lost, you’ll first need to consider how much cryptocurrency you started with. This factor is known as your cost basis. Once you sell or spend your crypto, you can subtract your cost basis from the sales price to determine whether you’ve made a capital gain or a capital loss. If the proceeds you receive end up exceeding your initial cost basis, you have a capital gain; otherwise, you have a capital loss.
An Aditional Note on Capital Losses
If you experience a capital loss when selling an asset for less them you pay for it, you may be in a position for a tax advantage. Individuals can use their losses to offset other capital gains, including non-cryptocurrency assets, like stocks and bonds. This can offer the benefit of potentially lowering your overall tax bill for the year. However, you can only use your capital gains losses to offset up to $3,000 worth of income for a single year.
Short vs. Long-Term Capital Gains
Taxes on capital gains are applied at both the state and federal levels, and they are classified as either short or long-term, depending on how long you’ve held onto the cryptocurrency. Short and long-term classifications will strongly impact how much tax you’ll end up owing to the government. If you’ve held onto your crypto for more than a single year before selling, it will be classified as a long-term gain, and you’ll typically have to pay a lower rate than you would have for a short-term gain.
This discrepancy is because long-term gains are taxed at a reduced capital; gains rate of either 0%, 15%, or 20% vary based on your income, while short-term gains are taxed at your ordinary-income rate, which is usually higher and less favorable. However, please keep in mind that higher-income taxpayers may also be subject to a 3.8% Net Investment Income Tax on their capital gains or other forms of income.
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Crypto Tax Frequently Asked Questions
Do I need to report crypto if I didn’t sell?
Yes, absolutely. The IRS views crypto as property, not currency. So while you might not have sold it, any gains or losses must be reported to the IRS. For example, if you bought a cryptocurrency at $1 and it’s now worth $2, that would count as a gain of $1 which needs to be reported in your taxes. Likewise, if the value decreased from $1 to 50 cents then that would need to be reported as a loss.
While reporting crypto on tax forms may seem intimidating at first glance – it doesn’t have to be complicated. All taxable events related to cryptocurrency need to be tracked and included with your tax filing documents. It’s important for cryptocurrency traders or investors to keep track of.
Related: UNDERSTANDING THE NEW TAX IMPLICATIONS OF DIGITAL CURRENCY
How can I avoid getting taxed on crypto?
Unfortunately, the IRS considers crypto trading and investing as taxable events. This means that you must report any profits or losses on your taxes. However, there are a few strategies you can use to help reduce the amount of taxes you owe.
For example, if you have held onto a cryptocurrency for more than one year before selling it, then the capital gains rate is typically lower than if you had sold it within a year.
You can also consider buying assets that are tax-advantaged such as Exchange Traded Funds (ETFs) or Real Estate Investment Trusts (REITs). These investments provide attractive returns while avoiding taxation on some of the investment income. Additionally, taking advantage of tax deferment options like IRAs.
Do you have to report crypto gains under $600?
Yes, you must report any gains or losses you incurred through cryptocurrency trading or investment. Even if the gain is less than $600, it still needs to be reported. This means that all profits and losses associated with your crypto transactions need to be included in your tax filing documents. Failing to do so could result in a hefty fine from the IRS.
It’s important for cryptocurrency traders or investors to keep track of all taxable events related to cryptos, even those under $600. Not reporting your crypto taxes correctly can lead to serious penalties from the IRS, so make sure you understand how taxes work before investing in cryptocurrency.
What happens if you don’t report cryptocurrency on taxes?
If you fail to report cryptocurrency on taxes, you could face a range of consequences. Depending on the severity of your actions, this could include hefty fines or even criminal charges.
The IRS takes crypto tax evasion very seriously and penalties can be steep. It is important to understand what kind of taxes are owed on crypto investments and make sure they are accurately reported in your taxes.
In addition to possible legal repercussions, failing to report crypto gains means you may not be able to take full advantage of the deductions available for investing in cryptocurrency.
Properly reporting crypto gains allows investors to maximize their returns and minimize their overall tax liability. So it’s important that cryptocurrency traders or investors keep track of all taxable events related to cryptos and ensure they file.
Related: BEST CRYPTO TAX TOOLS YOU NEED TO KNOW
What triggers crypto tax?
Crypto taxes are triggered when you sell, trade, or exchange cryptocurrency. This includes exchanging one type of cryptocurrency for another. Any gains or losses incurred through these transactions must be reported to the IRS in your tax return. The taxable gain or loss is the difference between what you paid for the crypto and what it was sold, traded, or exchanged for.
In addition to selling, trading, or exchanging cryptos, taxes may also need to be reported if you use crypto to make purchases. If a purchase is made with cryptocurrency and its fair market value (FMV) is greater than what it was purchased for, then any gain needs to be reported on taxes as well. So it’s important for investors to keep track of all taxable events and cryptocurrency taxation laws.
Final Thoughts and Considerations to Keep in Mind Regarding Your Crypto Taxes
Now that you’ve taken the time to read through this guide for your 2022 cryptocurrency taxes, you should understand the basics of what you’ll need to consider and do to correctly file your crypto taxes this year to avoid any issues or complications with the IRS.
For more information on crypto taxes and cryptocurrency as a whole, please consider exploring some of the other helpful guides provided by our team of trusted experts here at unBanked today. Also, don’t forget to explore our range of top-quality services, including our borderless bank accounts and crypto-friendly debit cards. We proudly offer consumers the best, most effective way to buy, sell and send their crypto without any hidden fees or confusion, all while allowing them to earn stellar rewards on all of their crypto purchases.
Have you started to make a decent headway towards future financial freedom with the help of cryptocurrency over the past year? Then it’s time to prepare for the upcoming tax season with the help of our trusted experts and top-quality educational resources here at unBanked today.