Cryptocurrency Tax in 2023 – Forbes Advisor

Cryptocurrency is no longer a new investment asset on the block. This means that in 2023, income earned from cryptocurrencies will receive a lot of attention from the IRS.

Unfortunately, tax rules for cryptocurrencies are still a bit complicated. The IRS has clearly stated that virtual currency may be subject to either income tax or capital gains tax depending on how it is used.

How are cryptocurrencies taxed?

First, there is no obligation to pay taxes on cryptocurrencies if you simply “hold” them, as enthusiasts say. However, if you earn income from cryptocurrencies, such as by staking, lending, or selling, you may have to pay taxes on that income.

The IRS treats all virtual currencies as capital assets. This means that if you sell your virtual currency and make a profit, you will be subject to capital gains tax. This is exactly what happens when you sell traditional securities such as stocks and funds for a profit.

Let's say you bought $1,000 in Ethereum and later sold the coin for $1,600. He must report the $600 capital gain on taxes. The taxes you pay depend on how long you held the coins.

If you hold your ETH for less than a year, the $600 gain will be taxed as short-term capital gain. Short-term capital gains are taxed like ordinary income. In other words, your adjusted gross income (AGI) determines the tax rate you pay.

The top federal income tax rate is 37%. For his 2022 income to put him in the top bracket for paying taxes in 2023, his income last year as a single filer would have given him more than $539,900.

2022 federal income tax bracket (tax due in 2023)

If you hold your ETH for more than a year before selling it for a profit, it will be subject to long-term capital gains rates. For many filers, this rate is lower than regular income tax, but it depends on your AGI.

2022 long-term capital gains tax rate (tax due in 2023)

Taxes on cryptocurrency payments, staking and mining

If you earn virtual currency through mining, receive it as a promotion, or receive it as payment for goods or services, it counts as regular taxable income. You are liable to pay taxes on the entire value of the virtual currency at your marginal income tax rate on the day you receive it.

Cryptocurrency earned through profitable products such as staking is also considered regular taxable income.

If you hold cryptocurrency in any of these activities and later use or sell it for more than its value when you first received it, you may receive short-term or long-term capital gains on that gain, depending on the period. You are obligated to pay taxes. held it.

Money lost in virtual currencies can be counted as capital loss

If you sell your investment assets at a loss, you can deduct a portion of the loss from your taxes. If you sell your virtual currency for less than what you paid for it, you can also claim a capital loss and use it to offset other income taxes.

How to file cryptocurrency taxes in 2023

The standard Form 1040 tax return now asks whether you made any virtual currency transactions during the year. The current 1040 includes the following questions: “At any point in 2022, did you receive, sell, transmit, exchange, or otherwise obtain a financial interest in virtual currency?”

Although the purchase of virtual currency is not taxable, the sale of virtual currency is a taxable transaction.

leave a record

You need to track all your cryptocurrency transactions, including how much you paid for the cryptocurrency, how long you held it, how much you sold it, and receipts for each transaction. You should also be aware of the fair market value at which the cryptocurrency is used or sold.

Cryptocurrency exchanges may offer 1099-Bs to report cryptocurrency transactions to both the IRS and users, but they may not be able to transfer coins between an offline cold wallet and a user's account without cost basis or crypto The original amount paid for the currency may not be recorded.

Tools like Koinly and Cointracker connect to exchanges and crypto wallets to track your crypto transactions and fill out the forms needed to file your crypto taxes.

fill out a tax form

Once you have a record of your cryptocurrency transactions, you will need to fill out specific tax forms depending on how you use your cryptocurrency. Below are some examples of forms you may need to fill out.

• Form 1040. This is the standard form used to file your annual income tax. The form has a row to report the total profit or loss in virtual currency.
• Form 1099-NEC. If you earn virtual currency through mining, it is considered taxable income and you may need to fill out this form.
• Form 8949. This form records any purchase or sale of cryptocurrency as an investment. This includes the amount of cryptocurrency, the date and price you bought it, the date and price you sold it, and the profit or loss of each trade.
• Schedule C. If you receive coins from mining, you must disclose whether you received them as a business or as a hobby. If you run a cryptocurrency mining business, you may be liable to pay self-employment tax if your income exceeds your expenses during the year.
• schedule d. This form summarizes the total capital gains and losses from all investments, including cryptocurrencies.
• Schedule SE. You can use this form if you earned crypto income through self-employment.

declare taxes

If you keep your records in software like Koinly or CoinTracker, you can connect them to your online tax software of choice. Then, use online tax software to file your entire state and federal tax return.

For those looking for a one-stop service, TokenTax offers a complete suite of accounting services to track and prepare both crypto and regular taxes.

Consider hiring a professional

Preparing for cryptocurrency taxes can be complicated, especially as the laws surrounding cryptocurrencies are constantly evolving.

If you earn a lot of money from cryptocurrencies, it may be worth hiring a certified public accountant (CPA) who specializes in this type of tax work to avoid being pursued by the IRS later.

How to minimize cryptocurrency taxes

• Hold cryptocurrencies for the long term. If you hold your cryptocurrency investment for at least one year before selling, your gains will qualify for preferential long-term capital gains interest rates.
• Offset profits with losses. Just like any other investment, you can take advantage of your cryptocurrency gains by claiming losses on other investments during the year. This process is known as loss recovery, and the maximum amount that can be written off in a year is $3,000.
• It's time to sell your cryptocurrencies. If you have time, you can always wait until the tax rate is lower.
• We charge mining fees. Although it may seem like a low-cost activity, crypto mining theoretically comes with significant costs, including computer, server, electricity, and internet service provider fees. If you are a cryptocurrency miner, you can deduct these costs from your mining income, but the amount you can deduct depends on whether you classify your operation as a business.
• Consider investing for your retirement. Investing in cryptocurrencies using a retirement plan, such as a traditional Individual Retirement Account (IRA) or a Roth IRA, is not as easy as investing through a regular brokerage account, but it allows you to defer or avoid investment gains altogether. can do.
• charitable donation. If you don't need all of the profits from your crypto investments, you can reduce your tax burden by donating at least a portion of your crypto to charity. You will receive a deduction equal to the fair market value of the virtual currency at the time of your donation.

What happens if I don't declare my virtual currency on taxes?

Failure to report virtual currency taxable events can result in an IRS audit resulting in interest, penalties, and even criminal charges. You may also receive a letter from the IRS if you fail to report income or pay taxes on virtual currency, or if you fail to properly report transactions.

Cryptocurrency Tax Frequently Asked Questions