The crypto industry is continuously gaining popularity due to such notable advantages over traditional money as decentralization, privacy, security, accessibility, fast transaction speed, low charges, and more. You might be engaging with cryptocurrencies as a vehicle for exchange or a store of value; or benefiting from DeFi’s transparent, secure, and inclusive financial services. Whether you’re receiving cryptocurrency as payment, exchanging different cryptocurrencies, selling assets, staking, trading, and mining crypto to make life-changing money, achieve financial freedom, and earn passive income, or simply collecting NFTs, understanding your crypto taxes is paramount for avoiding an IRS audit and substantial fines related to tax fraud. The taxation policies differ depending on your location, the type of digital assets you’re holding, your profit and losses, etc.
For example, U.S. law deems cryptocurrencies as capital assets subject to capital gains and capital losses, just like stocks or bonds.
So how much is crypto taxed? If you’re wondering which transaction is considered a taxable event and trying to figure out the complex tax landscape marked by digital currencies, we’ve got you covered. This article will tell you everything you need to know about your crypto taxes, how your gains and losses in crypto transactions affect your taxes and demonstrate how to navigate cryptocurrency tax implications successfully.
Let’s get right to it!
Key Takeaways
- The IRS treats virtual currencies as property and classifies cryptocurrency transactions as taxable by law.
- To determine if you must pay taxes, you need the cost basis, i.e., the total amount paid to purchase your crypto, and compare it to the crypto’s sales price.
- Crypto tax rates depend on your income, tax filing status, and the length of time you owned your crypto before selling it.
What Are Crypto Taxes?
The crypto economy achieved a market capitalization of more than US $3 trillion in 2021, i.e., more significant than Microsoft’s market valuation at $2.52 trillion and Apple’s $2.47 trillion market cap. DeFi introduces decentralized low-cost, high-speed transactions, but it also makes it difficult for tax authorities to come to grips with the exponential growth in digital assets. While precise guidelines on crypto taxes on the purchase, ownership, and sale vary widely between jurisdictions, in the U.S., the IRS treats virtual currencies as property and classifies cryptocurrency transactions as taxable by law. Therefore, users must report any taxable event, with failure to do so resulting in penalties.
You owe taxes when you sell, trade, exchange virtual currency, or make a profit through crypto in any way. The different types of taxable events for cryptocurrency transactions are purchasing goods or services using crypto, trading different kinds of cryptocurrency, or selling crypto for fiat currency. Additionally, if you send crypto to your friends, family, or loved ones as a gift, you’ll need to file a gift tax return if it exceeds $15,000 per recipient. However, these are only considered taxable income if your crypto’s value has increased. To determine if you must pay taxes, you need the cost basis, i.e., the total amount paid to purchase your crypto, and compare it to the crypto’s sales price. If you recognize a loss, you can deduct that to lower your taxable income by a maximum of $3,000, with additional losses to be carried over to future years. You can also offset your capital losses against your capital gains to reduce your overall tax bill.
Crypto tax rates depend on your income, tax filing status, and the length of time you owned your crypto before selling it. If you held it for 365 days or less, then you generally pay short-term capital gains taxes, which are equal to income taxes, i.e., the same tax rates you pay on all other income – 10% to 37% for the 2022-2023 tax filing season, depending on your income level. If you have owned it for longer, you pay less, i.e., long-term capital gains taxes ranging from 0% to 20%, depending on your income level.
These taxes apply even if you use crypto to make purchases. Learn more with this IRS worksheet and the IRS website for the latest information about virtual currency gains.
Since 2021, IRS Form 1040 asks recipients if they have received, sold, exchanged, or disposed of another financial interest through virtual currency at any point throughout the year. It has also been clarified to specify only taxable events, including receiving cryptocurrency as payment, airdrops, exchanging different cryptocurrencies, selling assets, and earning from mining and staking. It’s important to note that if you’re self-employed and running a crypto mining business, you’ll also need to pay Self Employment Tax to cover your Medicare and social security contributions.
What Is Crypto Income?
Crypto income is taxed as ordinary income at its fair market value on the date the taxpayer receives it. You must keep records 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 and note the fair market value of the cryptocurrency when it was used to get an idea of how much tax you owe. While buying cryptocurrency isn’t a taxable event, selling it is considered a taxable transaction. Here are the most common examples of what is considered crypto income:
- Mining or staking rewards.
- I am receiving crypto as a mode of payment for goods or services.
- Airdrops
- Earning through play-to-earn games.
- Financial interest earned through lending pools.
- Earning through liquidity pools, etc.
Pro-Tip
Use tax loss harvesting. If you’ve had gains and losses on different cryptocurrencies, you can sell both and use the losses to offset your gains.
Crypto Transactions That Will Not Incur a Tax Liability
While you must pay taxes on personal income, capital gains, and business income from crypto, here are a few crypto transactions that will not incur a tax liability:
Buying Cryptocurrency Using Fiat Currency
Purchasing virtual currency using fiat currency and keeping it within the crypto exchange doesn’t incur a tax liability. You don’t have to file crypto taxes based on the guidance listed on your Form 1040 tax return. Unless you sell or trade the virtual currency, no cryptocurrency taxes must be paid.
Moreover, even if the virtual currency you’re hodling goes up in value, you’re not liable to pay taxes on your crypto gains unless you sell it for fiat currency or trade it for another crypto.
Pro-Tip
To keep your tax burden to a minimum, hodl successful crypto investments for over a year before selling or using them.
Transferring Crypto to Another Wallet
Hodling your digital asset in custodial wallets provided by crypto exchanges or non-custodial wallets, like hardware or software wallets, is not taxed. Moreover, you can transfer your crypto between the wallets you own without worrying about paying taxes on them.
Donating Cryptocurrency
If you choose to donate a crypto asset to a qualified charity or non-profit organization, then the transaction does not incur a tax. You must simply record the transaction at the fair market value of the coins at the time of the donation. However, the donation can also be tax deductible, so it’s essential to take note of your donations’ cost basis properly.
Gifting or Receiving Crypto as a Gift
In 2021 alone, according to a survey by BlockFi, one in 10 people received crypto as a gift during the holiday season. There is no tax on cryptocurrency gifts under $15,000. If you decide to sell a crypto gift valued over $15,000, you will use the same cost basis as the person who originally purchased it.
Capital Gains Tax
Capital gains is a tax on the profit made from buying and selling property or assets like stocks, and real estate, including crypto. A capital gain occurs if you sell a cryptocurrency for more than your initial investment. Capital gains taxes are considered short-term if held for less than a year and long-term gain if held for more than a year. Short-term capital gain tax rates correspond to an individual’s ordinary income tax bracket, while long-term rates also depend on an individual’s filing status and taxable income.
Additionally, you’re taxed on net capital gains, i.e., the difference between gains and losses.
The type of activity will determine which tax forms you may need. The tax forms include Form 1040, Form 8949, Schedule C, Schedule D, and Schedule SE. If you find it confusing to calculate capital gains on your own, you may use crypto tax software such as CoinTracker or TokenTax to generate crypto tax reports.
Here are cases when you must report cryptocurrency trades on your tax return:
- Trading Cryptocurrencies
You must pay capital gains tax when you use crypto as a means of exchange, including selling your crypto for fiat currency such as U.S. dollars or swapping crypto for another. You must also pay tax for paying for goods and services with crypto. - Trading or Minting NFTs
If you’re creating or minting NFTs, knowing what events are taxable and how they’re taxed is essential. The specific tax implications of an NFT depends on whether you’re an NFT creator or investor and if you’re interacting with NFTs as a hobby or a business. Once you sell an NFT for crypto or swap it for another NFT, that triggers another taxable event. Any royalties you earn for an NFT you created would also be taxed as income.
Short-Term Capital Gains Tax Rates
Short-term capital gains tax rates are given below:
For the year 2022:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 10% | $0 – $10,275 | $0 – $14,650 | $0 – $20,550 | $0 – $10,275 |
| 12% | $10,276 – $41,775 | $14,651 – $55,900 | $20,551 – $83,550 | $10,276 – $41,775 |
| 22% | $41,776 – $89,075 | $55,901 – $89,050 | $83,551 – $178,150 | $41,776 – $89,075 |
| 24% | $89,076 – $170,050 | $89,051 – $170,050 | $178,151 – $340,100 | $89,076 – $170,050 |
| 32% | $170,051 – $215,950 | $170,051 – $215,950 | $340,101 – $431,900 | $170,051 – $215,950 |
| 35% | $215,951 – $539,900 | $215,951 – $539,900 | $431,901 – $647,850 | $215,951 – $323,925 |
| 37% | $539,901+ | $539,901+ | $647,851+ | $323,926+ |
For the year 2023:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 10% | $0 to $11,000 | $0 – $15,700 | $0 – $22,000 | $0 – $11,000 |
| 12% | $11,001 – $44,725 | $15,701 – $59,850 | $22,001 – $89,450 | $11,001 – $44,725 |
| 22% | $44,726 – $95,375 | $59,851 – $95,350 | $89,451 – $190,750 | $44,726 – $95,375 |
| 24% | $95,376 – $182,100 | $95,351 – $182,100 | $190,751 – $364,200 | $95,376 – $182,100 |
| 32% | $182,101 – $231,250 | $182,101 – $231,250 | $364,201 – $462,500 | $182,101 – $231,250 |
| 35% | $231,251 – $578,125 | $231,251 – $578,100 | $462,501 – $693,750 | $231,251 – $346,875 |
| 37% | $578,126+ | $578,101+ | $693,751+ | $346,876+ |
You can use the data given above to calculate your short-term capital gains tax.
Long-term Capital Gains Tax Rates
The tax rates on long-term capital gains are shown in the table down below:
For the year 2022:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 15% | $41,676 – $459,750 | $55,801 – $488,500 | $83,351 – $517,200 | $41,676 – $258,600 |
| 20% | $459,750+ | $488,500+ | $517,200+ | $258,600+ |
For the year 2023:
| Tax Rate | Single | Head of Household | Married filing jointly | Married filing separately |
| 15% | $44,626 – $492,300 | $59,751 – $523,050 | $89,251 – $553,850 | $44,626 – $276,900 |
| 20% | $492,301+ | $523,051+ | $553,851+ | $276,901+ |
Using the data given above, you can easily calculate your capital gains and losses and file your federal tax returns.
How To Calculate Cost Basis?
There are multiple ways to calculate the cost basis for your capital asset and use that to figure out your tax liability. If you hold multiple assets, then finding the most suitable cost basis for your holdings will decide whether you end up paying higher taxes or a fair amount. Four cost-basis methods are allowed by the IRS, and you can only use one during one financial year. The methods are as follows:
- FIFO (First In, First Out): The first asset bought is the first asset being sold.
- LIFO (Last In, First Out): The last asset bought by you is the first one to be sold.
- HIFO (Highest In First Out): The asset bought at the highest price is sold first.
- Specific Identification (Spec ID): Choosing the assets sold by you along with the complete records.
Conclusion
The tax season is right around the corner, and it would be wise for you to start filing your taxes for your crypto trades. Remember to include all your capital gains and losses, including the capital loss you might have had during the crypto winter of 2022, to claim a tax deduction. It’s also important to know that you can’t deduct losses for lost or stolen crypto on your return. You can simply write those off and disregard them from your tax calculations.
In summary, cryptocurrency trading is considered a taxable event, and failure to file taxes can attract penalties.
