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Cryptocurrency Taxes June 2024 – Forbes Advisor
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Cryptocurrency it is no longer the new investment asset on the market, which means that cryptocurrency income will receive a lot of attention from the IRS in 2023.
Unfortunately, the taxation rules for cryptocurrencies remain a bit complicated. The IRS clearly states that cryptocurrencies may be subject to income or capital gains taxes, depending on how you use them.
How is cryptocurrency taxed?
First of all, you don’t have to pay taxes on cryptocurrencies if you’re simply “hodling”, as enthusiasts would say. But when you earn income from cryptocurrencies, whether from staking, lending or selling, you may have to pay taxes on the proceeds.
The IRS treats all cryptocurrencies as capital assets and that means you are in debt capital gains taxes when they are sold at a profit. This is exactly what happens when you sell more traditional securities, such as stocks or funds, for a profit.
Let’s say you purchased $1,000 Ethereum and then sold the coins later for $1,600. You’ll have to report that $600 capital gain on your taxes. The taxes owed depend on the length of time you have held your coins.
If you held your ETH for a year or less, the $600 profit would be taxed as short-term capital gain. Short-term capital gains are taxed the same way as regular income and that means your adjusted gross income (AGI) determines the tax rate to be paid.
Federal income tax brackets top out at a rate of 37%. To find yourself in the top bracket of taxes paid in 2023, on 2022 income, you would have earned more than $539,900 last year as a single filer.
2022 Federal Income Tax Brackets (Taxes Due in 2023)
If you held your ETH for a year or more before selling it for a profit, you would qualify for the long-term capital gain rate. For many filers, this rate is lower than regular income taxes, although it depends on AGI.
Long-Term Capital Gains Tax Rates 2022 (Taxes Due in 2023)
Taxes on cryptocurrency payments, staking and mining
If you earn cryptocurrency from extraction, receiving it as a promotion, or obtaining it as payment for goods or services, counts as regular taxable income. You must pay tax on the full value of the cryptocurrency on the day you receive it, at your marginal income tax rate.
Any cryptocurrency earned through products that generate returns such as episode is considered regular taxable income.
If you hold cryptocurrency from any of these assets and later spend or sell it for more than its value when you first received it, you must pay short-term or long-term capital gains taxes on the profits, depending on how long did you keep it.
Money lost on cryptocurrencies can be considered a capital loss
When you sell an investment asset at a loss, you can deduct part of the loss from your taxes. If you sold cryptocurrencies for less than you paid, you can also claim a capital loss and use it to offset other income taxes.
Compare the best tax software of 2024
How to File Cryptocurrency Taxes in 2023
Your standard Form 1040 tax return now asks if you have any virtual currency transactions during the year. The current 1040 includes this question: “At any time during 2022, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
While the purchase of cryptocurrency alone is not a taxable event, the sale of a cryptocurrency qualifies as a taxable transaction.
Keep records
You need to keep track of all your cryptocurrency transactions, including how much you paid for the cryptocurrency, how long you held it, and how much you sold it for, as well as receipts for each transaction. You will also need to note the fair market value of the cryptocurrency when it was used or sold.
While yours cryptocurrency exchange may provide a 1099-B that reports your crypto transactions to both the IRS and you, it may not record your cost basis or original amount paid for your cryptocurrency 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 needed to file cryptocurrency taxes.
Fill out tax forms
Once you have a record of your crypto transactions, you will need to fill out certain tax forms depending on how you used your cryptocurrency. Here are some examples of forms you may need to fill out.
- Form 1040. This is the standard form you will use to file your annual income taxes. There is a line on the form to report total gains or losses from cryptocurrencies.
- Form 1099-NEC. If you earn cryptocurrency by mining it, it is considered taxable income and you may need to fill out this form.
- Form 8949. This module records every purchase or sale of cryptocurrencies as an investment. This should include the amount of cryptocurrency, the date and price you purchased, the date and price you sold, and your profit or loss for each transaction.
- Program C. If you received coins from mining, you must disclose whether you received them for work or as a hobby. If you run a cryptocurrency mining business, you may have to pay self-employment taxes if your income exceeds your annual expenses.
- Scheduled. This form summarizes the total capital gains and losses from all investments, including cryptocurrencies.
- SE Program. You may want to use this form if you have earned cryptocurrency income through self-employment.
File your taxes
If you keep records in software like Koinly or CoinTracker, you can connect them to your favorite online tax software. Then use online tax software to file your overall state and federal tax returns.
For those looking for one-stop services, TokenTax offers a full suite of accounting services to track and prepare both your cryptocurrency and regular taxes.
Consider hiring a professional
Preparing for cryptocurrency taxes can be tricky, especially because the laws surrounding them are constantly changing.
If you’ve made a lot of money from cryptocurrency, it might be worth hiring a certified accountant (CPA) who specializes in this type of tax work, so you won’t have the IRS chasing you later.
How to Minimize Cryptocurrency Taxes
- Hold cryptocurrencies for the long term. If you hold a cryptocurrency investment for at least a year before selling it, your earnings qualify for the preferential long-term capital gains rate.
- Offset gains against losses. As with any investment, you can take advantage of cryptocurrency gains while also claiming losses on other investments throughout the year. This process is known as tax loss harvesting, and the maximum amount you can write off in a year is $3,000.
- It’s time to sell your cryptocurrencies. If you have the luxury of time on your side, you can always try waiting for a lower tax rate to arrive.
- Claim mining fees. While it might seem like a low-cost activity, in theory cryptocurrency mining involves considerable expenses, including computers, servers, electricity, and more. Internet service provider expenses. If you are a cryptocurrency miner, you can deduct these costs from your mining income, although the amount you can deduct will depend on whether your operation is classified as a business.
- Consider retirement investments. If you invest in cryptocurrencies using a retirement plan such as a traditional individual retirement account (ANGER) or Roth IRA, you can defer or avoid investment gains altogether, though it’s not as easy as investing through a regular brokerage account.
- Charitable donations. If you don’t need all the profit from your cryptocurrency investment, you can reduce your tax burden by donating at least a portion of your cryptocurrency to charity. You will receive a deduction equal to the fair market value of your cryptocurrency at the time of donation.
What happens if you don’t report cryptocurrency on your taxes?
If you fail to report a taxable cryptocurrency event, you could face interest, penalties, or even criminal charges if the IRS audits you. You may also receive a letter from the IRS if you haven’t reported income and paid cryptocurrency taxes or if you haven’t properly reported your transactions.
Cryptocurrency Tax FAQs
Where do I report cryptocurrency on my taxes?
The IRS treats cryptocurrencies as “property,” which means you will need to report certain crypto transactions on your taxes. On the main form, Form 1040, you will also be asked whether you have received, sold, sent, exchanged, or otherwise acquired “any financial interest in any virtual currency.”
Overall, the type of cryptocurrency taxable event determines any additional forms you may need to complete and how you will report such crypto activity.
How do I report cryptocurrency staking rewards on my taxes?
You can report staking rewards as “other income” on Form 1040. If you own your own cryptocurrency business, you will need to fill out Schedule C.
What tax forms do you need for cryptocurrencies?
The type of business will determine which module you may or may not need. Forms that are often used in filing crypto taxes may include: Form 1040, Form 8949, Schedule C, Schedule D, and Schedule SE.
Do I need to report cryptocurrency-related losses on my taxes?
You pay no capital gains on crypto losses. But you shouldn’t just chalk it up to a bad investment, as you can offset your losses with the gains on your tax bill.