Are you one of the many crypto investors out there wondering how to manage your crypto taxes? Or perhaps you’re planning to dip your toes into the world of cryptocurrency, but the thought of tax reporting leaves you feeling overwhelmed.
Fear not, because this ultimate USA crypto tax guide is here to help. In this comprehensive guide, we’ll walk you through the ins and outs of crypto taxation in the US. From capital gains tax to income tax and even NFT taxes.
We aim to make crypto taxation as digestible as possible, so you can feel confident and prepared when it’s time to report your transactions to the IRS. So, whether you’re a seasoned crypto investor or just starting, this guide is the best way to navigate your way through the intricacies of crypto taxes in the US.
Latest Updates/Guidelines
03/10/2023 — Updated to accommodate ICO, Gifts and Donation Taxes
03/10/2023 — Updated to accommodate DAO taxes
How Is Crypto Taxed in the USA?
The IRS categorizes cryptocurrency as virtual currency and considers it as ‘property’ for tax purposes.
According to the IRS, “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.”
In 2014, the IRS issued Notice 2014–21, which clarified that they treat virtual currency as ‘property’ for tax purposes. As a result, if you engage in cryptocurrency transactions, you might have to pay either Income Tax or Capital Gains Tax. The specific tax you owe depends on the type of cryptocurrency transaction you’re involved in. We will explain both taxes in detail to make things easier for you. Remember, you must pay your taxes by April 18th, 2023.
The USA has both short-term and long-term capital gains taxes. If you’ve held your assets for less than a year before disposing of them, any gains you’ve made will attract short-term capital gains and disposals made after holding the assets for over a year attract long-term capital gains tax.
Short-term capital gains tax ranges from 10–37% based on the amount of gains you’ve made. While long-term capital gains are taxed at 0%, 15%, or 20% depending on the gains. If your gains are below $41,676 (for the 2022 tax year), you don’t need to pay any long-term capital gains tax.
Example:
Consider the following transactions:
01/13/2022 — Jack bought 2 BTC
02/15/2022 — Jack bought 2 ETH tokens
04/16/2022 — Jack sold 1 BTC
06/04/2022 — Jack sold 2 ETH
01/16/2023 — Jack sold 1 BTC
As evident from the above ledger of transactions, three disposals were made.
Out of the three disposals, two were short-term disposals made within a year, and one was long-term disposal.
1st Disposal
1 BTC sold on 04/16/2022
Let’s assume Jack incurred a capital gain of $8,000 on this transaction, for the sake of simplicity
2nd Disposal
2 ETH sold on 06/04/2022
Let’s assume Jack incurred a capital gain of $2,000.
Collective Gain from both disposals = $8,000 + $2,000 = $10,000
So the above amount will be subjected to short-term capital gains tax.
3rd Disposal
1 BTC sold on 01/16/2022
Let’s assume Jack made a capital gain of $14,000 on this transaction.
But since the disposal was made after holding the asset for over a year, it comes under long-term capital gain.
But since the gain is less than $41,676, and Jack owes no long-term capital tax to the IRS.
Can the IRS Track Crypto?
Of course, it can. Crypto taxes can be simplified by leveraging various avenues to source and utilize your data, ensuring seamless compliance with tax guidelines. Therefore, if you have contemplated or are considering omitting certain transactions to reduce your tax liability, we strongly advise against it. It is highly recommended to report all your transactions to the IRS. Here are a few avenues that provide access points for taxpayers’ crypto transactions to the IRS:
- All major crypto exchanges are required to complete KYC checks for all users
- Exchanges process bank transactions for all users who buy/sell crypto assets for fiat currency
- Exchanges also track your wallet addresses to which your transfer your assets
- Almost all major crypto exchanges send From 1099 to the IRS and the users
- Major crypto exchanges like Kraken and Coinbase were legally coerced into sharing user information with the IRS
Capital Gain Tax USA
As previously discussed, the USA treats cryptocurrency as a ‘capital asset’, which means you’re responsible for paying capital gains tax if you dispose of your crypto assets. There are various ways to dispose of your cryptocurrency in the USA, and some of them are.
- Selling cryptocurrency for fiat currency (such as USD & Euro)
- Trading cryptocurrency for other cryptocurrencies (such as stablecoins, tokens, or NFTs)
- Using cryptocurrency to purchase goods or services.
The capital gains you make from the disposal of crypto assets will be subject to capital gains tax.
Crypto Capital Gains Tax Rates
Like most investments taxed by the IRS, your gain or loss on cryptocurrency may be either short-term or long-term, based on how long you hold your assets.
- If you hold your assets for less than one year before disposing of them, any profits are generally categorized as ‘short-term capital gains’, which are subject to taxation at your ordinary income rate.
- However, if you’ve held the assets for more than one year, any profits are typically considered ‘long-term capital gains’ and are subject to long-term capital gains tax rates.
Short-Term Capital Gain Tax Rate
Short-term capital gains are taxed at the same rate as your taxable income, which is determined by the Federal Income Tax rate brackets.
Please refer to the following chart to determine your short-term capital gain rate for the tax year 2022, which you have to fill by 18th April 2023.
Looking for the next financial year? Here is the chart for short-term capital gain tax brackets for the 2023–2024 tax year, to be filed in 2024.
Long-Term Capital Gain Tax Rate
It’s important to note that, for most taxpayers, the long-term capital gains tax rate for cryptocurrency is typically lower compared to the short-term capital gains tax rate. The tax rate you will incur can be either 0%, 15%, or 20%, depending on the total amount of gains you have realized within a given tax year. If your gains fall below $41,676 (for the 2022 tax year), you are not required to pay any long-term capital gains tax.
You can refer to the long-term Capital Gains Tax rates for the 2022 tax year (to be filled in 2023) listed below:
Now, here is the chart for tax brackets for the 2023 tax year, to be filed in 2024.
How to Calculate Crypto Gains and Losses
The process of calculating your crypto gains or losses in a tax regime that imposes a capital gains tax on crypto disposal involves two steps. The first step is to determine the cost basis for each asset that you have either swapped, sold, or gifted during the tax year. This entails adding up the acquisition cost of the asset along with any associated fees such as transaction fees or gas fees paid during the acquisition process.
Once you have obtained the cost basis, you can readily calculate your capital gains or losses by subtracting the cost basis from the disposal amount. If the result is positive, it represents a gain and is subject to capital gains tax. Conversely, if the result is negative, it signifies a loss. While losses do not attract any tax liabilities, it is essential to actively track and report all losses to the IRS. This allows you to utilize them for reducing your overall tax bill.
Consider the following transactions:
01/14/2022 — Mark buys 2 BTC for $20,000 each
03/16/2022 — Mark buys 1 BTC for $21,000
04/05/2022 — Mark buys 10 ETH for $2,200 each
04/28/2022 — Mark buys 2 ETH for $3,000 each
05/06/2022 — Mark sells 2 BTC for $34,000 each
07/16/2022 — Mark sells 1 BTC for $35,000
08/18/2022 — Mark sells 8 ETH for $3,400 each
As evident from the above ledger of transactions, Mark made 3 disposals.
Let’s look at each transaction separately and calculate the gains/loss associated with them.
1st Disposal
2 BTC sold for $34,000 each
Now since BTC tokens were acquired on two different dates for different prices, we need to figure out which one was sold by Jack, and we need to use a specialized accounting method as suggested by the IRS.
The IRS allows inventors to use any one of these three accounting methods:
- FIFO
- LIFE
- HIFO
We will be using FIFO for these calculations.
The FIFO accounting method assumes that the first asset you buy is the first one you sell.
So the BTC tokens sold were the ones acquired on 01/14/2022 for $20,000 each
Cost Basis = $20,000
Disposal Amount = $34,000
Capital Gain/Loss = Disposal Amount — Cost Basis = $34,000 — $20,000 = $14,000(For 1 BTC)
Gain from 2 BTC = 2*14,000 = $28,000
2nd Disposal
1 BTC sold for $34,000
This token was acquired on 03/16/2022 for $21,000
Cost Basis = $21,000
Disposal Amount = $34,000
Capital Gain/Loss = $34,000 — $21,000 = $13,000
3rd Disposal
8 ETH sold for $3,400 each
Now using the FIFO accounting method, these tokens belong to the same group of tokens acquired on 04/05/2022 for $2,200 each
Cost Basis = $2,200
Disposal Amount = $3,400
Capital Gain/Loss = $3,400 — $2,200 = $1,200(from 1 ETH)
Gain from 8 ETH tokens = 8* 1,200 = $9,600
Collective Gain from all 3 disposals = $28,000 + $13,000 + $9,600 = $50,600
This is your taxable base and capital gains tax will be levied on it.
Crypto Losses
If you trade or invest in crypto assets or any other asset class for that matter, losses are inevitable. However, there’s a bright side to the story because you can use some of these losses to reduce your tax bill through tax-loss harvesting. This is exactly why you’re required to report your capital losses along with your gains to the IRS because the tax authorities allow every U.S. resident to offset $3,000 worth of capital losses every year against the capital gains they’ve made upon disposal and pay fewer taxes.
Furthermore, if your losses in a tax year exceed $3,000, you have the opportunity to utilize the surplus amount to offset any gains in the following tax year. This practice, known as capital loss carryforward, enables you to maintain a reserve of losses to counterbalance gains from high return on investment disposals.
Additionally, it is crucial to understand that long-term capital losses must be used to offset long-term capital gains, while short-term capital losses must be applied to offset short-term capital gains. Only after depleting your taxable base in the long-term capital gains category through the use of capital losses can you employ long-term capital gains to offset any short-term capital gains you may have.
You can report all your capital losses to the IRS through Form 8949.
Lost and Stolen Crypto
Prior to the implementation of the Tax Cuts and Jobs Act, individuals who invested in cryptocurrency were eligible to deduct theft and casualty losses as capital losses. However, as a result of this legislation, the tax deductibility of such losses is no longer applicable. Therefore, if you have experienced a loss of your cryptocurrency due to chain hacks, scams, or misplaced private keys, unfortunately, you will not be able to benefit from tax deductions.
Nevertheless, there is a possibility to deduct losses that occurred before 2017 if you can provide evidence of ownership of the assets and documentation from the exchange indicating the amount lost in the hack.
In situations involving delisted tokens or rug-pulls, it is possible to generate a fictitious capital loss by disposing of your assets, and this loss can be tax deductible. You can go about disposing of such assets through the following methods:
- Sell at a CEX or a DEX if possible
- Swap it for some other token or asset
- Send your assets to a burning wallet
Crypto Tax Breaks USA
While the tax regime in the US is considered to be a little rough by crypto investors and traders, there are some tax-free allowances offered by the IRS that can help you reduce your tax bill significantly:
- Capital Gains Tax-Free Allowance: US citizens are allowed a capital gains tax-free allowance. In 2023, if your taxable income is $44,625 or less for single filers or $89,250 or less for married couples filing jointly, you could potentially be eligible to benefit from a 0% long-term capital gains rate.
- Gifting Crypto: US citizens are also offered an annual gift tax exclusion which allows every citizen to gift up to $17,000 worth of crypto assets to anyone and the transaction is considered non-taxable.
- Long-Term Capital Gains Tax Rate: By holding onto your crypto assets for over a year, you can take advantage of a reduced long-term Capital Gains Tax rate that ranges from 0% to 20%, depending on your earnings.
Crypto Cost-Basis Method USA
While calculating the cost basis for your assets may seem straightforward at first, involving simple addition, things can become more intricate when transactions encompass multiple assets or multiple transactions for a single asset.
Consider the following scenario: In 2018, you purchased 1 BTC for $5,000, and in 2019, you acquired an additional BTC for $10,000. Later, in 2021, you decided to sell one BTC for $30,000. Now, which cost basis should you utilize to calculate your capital gain for this transaction?
This situation can be perplexing, highlighting the importance of understanding the various accounting methods available for cost-basis calculations. The IRS permits US citizens to employ several accounting methods, such as:
- FIFO Accounting- FIFO or First In First Out accounting implies that the first asset you bought is the first asset you sell
- LIFO Accounting- LIFO or Last In First Out accounting implies that the last asset you bought is the first asset you sell
- HIFO Accounting- Highest In First Out accounting implies that the most expensive asset bought is the first one you sell
Example:
Consider the following transactions:
01/23/2022 — David buys 1 BTC for $20,000
03/04/2022 — David buys 1 BTC for $28,000
06/04/2022 — David buys 1 BTC for $23,000
08/22/2022 — David sells 1 BTC for $30,000
We will use all three accounting methods for capital gain calculations
- Using FIFO
If we use FIFO accounting, the BTC token sold by David is the same one that was acquired on 01/23/2022 for $20,000
Cost Basis = $20,000
Disposal Amount = $30,000
Capital Gain = $30,000 — $20,000 = $10,000
2. Using LIFO
If we use LIFO accounting, the BTC sold is the same one acquired on 06/04/2022 for $23,000.
Cost Basis = $23,000
Disposal Amount = $30,000
Capital Gain = $30,000 — $23,000 = $7,000
3. Using HIFO
If we use HIFO accounting, the BTC sold is the same one with the highest acquisition price.
Cost Basis = $28,000
Disposal Amount = $30,000
Capital Gain = $30,000 — $28,000 = $2,000
It’s important to note that different accounting methods can yield different gains for the same transactions when determining the cost basis.
Crypto Income Tax USA
Now that you know everything there is to know about how capital gains and losses are taxed in the US, it’s now time to explore how crypto income is taxed. There are many ways you can earn crypto as an income, here are some common ones:
- Receiving crypto as airdrops
- Getting paid in crypto in exchange for a product or a service
- Mining crypto as a hobby
- Hard forks
- Referral programs
- Staking rewards
It’s crucial to understand that any income derived from Defi transactions, such as staking, lending, and liquidity farming, is considered taxable income. Additionally, with the emergence of interact-to-earn platforms, any earnings received as rewards from play-2-earn, engage-2-earn, and learn-2-earn initiatives are also considered taxable income. These incomes are subject to the rules and regulations governing income tax.
Income Tax Rate USA
Based on your income, the following are the tax brackets that you might fall into
How to Calculate Crypto Income
Determining your crypto income involves a relatively straightforward process, although it can be time-consuming if you have multiple income streams. Essentially, you need to establish the fair market value of the crypto you received in USD on the day it was acquired. This value represents the amount you have earned, and you are obligated to pay taxes on it based on your Federal Income Tax rate. Additionally, if applicable, you will also need to consider your State Income Tax rate.
Tax-Free Crypto Transactions
Not all crypto transactions attract tax liabilities, here are some crypto transactions that are considered tax-free by the IRS
- Buying crypto with fiat currency
- Buying and HODLing crypto
- Moving crypto between personal wallets
- Gifting crypto — under the lifetime gift limit
- Creating an NFT
- Crypto donations to charity may be tax deductible but amount over $5,000 may require an appraisal
Taxed Crypto Transactions
If you’ve been involved in any of the following transactions during the tax year, you might attract some tax liabilities from the IRS:
- Selling cryptocurrency for fiat currency
- Trading one cryptocurrency for another
- Using cryptocurrency to purchase goods or services
- Earning cryptocurrency as income
- Receiving cryptocurrency through mining or staking activities
- Giving cryptocurrency as a gift or donation (subject to gift tax rules)
- Inheriting cryptocurrency (subject to estate tax rules)
Tax on Mining Crypto USA
If you earn cryptocurrency through mining, you are subject to Income Tax based on the fair market value of the mining rewards at the time of acquisition. Furthermore, if you choose to sell, exchange, or utilize any of the mined cryptocurrencies, you will also be responsible for paying Capital Gains Tax on the profits generated from such transactions.
Tax on Staking Crypto
As of now, the IRS has not provided specific guidelines regarding the taxation of staking rewards. In the past, both investors and authorities commonly regarded staking rewards as akin to mining rewards and treated them as taxable income. However, a recent case filing against the IRS has brought forth an argument suggesting a different perspective on this matter. It indicates that there may be a divergence of opinions regarding the taxation of staking rewards.
The IRS rejected a refund claim made by a couple who had staked Tezos, providing no explanation for the denial. The couple pursued legal action and filed a case against the IRS, seeking a refund. Although the court offered them a refund, the couple declined it, aiming to establish a legal precedent for future taxation scenarios, specifically advocating for staking rewards to be classified as capital gains rather than income. However, the court ruled in favour of the IRS, dismissing the couple’s request. In response, the couple intends to appeal the decision, potentially leading to a revision of the existing tax treatment of crypto staking rewards.
Currently, staking rewards from both POS networks like Cardano and Polkadot as well as staking and lending protocols are considered income and are subjected to income tax rules. However, taxation of staking rewards is a grey area in the US crypto tax infrastructure and we recommend seeking guidance from an experienced tax professional to avoid complications in the future.
Crypto Margin Trading, Futures and CFDs
For individual investors, the tax treatment of margin trades, crypto futures, and CFDs is similar to other crypto transactions that incur capital gains tax. Any profits derived from these financial instruments are classified as capital gains and are subject to capital gains tax. Just like the disposal of assets, tax liabilities arise only upon the closure of a margin trade, future, or CFD position.
Regarding crypto futures, trading regulated products can lead to more advantageous tax outcomes, particularly due to the IRS 60/40 rule. Essentially, this rule stipulates that if investors engage in regulated futures trading, 60% of any capital gains will be taxed as long-term gains, while the remaining 40% will be taxed as short-term gains, regardless of the duration of the position. Although it’s important to note that most crypto futures are currently unregulated and therefore exempt from this rule.
Crypto Gifts and Donation Taxes
Gifting crypto is taxable in the US. However, citizens enjoy a gift exemption limit of $16,000 for the 2022 tax year and $17,000 for the 2023 tax year. So if you’re a US citizen, you can donate up to $16,000 ($17,000 in 2023) without attracting any tax liabilities.
If the total value of the gifted assets is over $16,000 ($17,000 in 2023), you are required to pay a gift tax of 40%. However, this is only when you cross the lifetime gift exemption limit of $12.06 million (which has been increased to $12.92 million in 2023).
Receiving crypto gifts is not a taxable event in the US. The recipient simply inherits the cost basis of the assets from the gifter when he/she decides to sell the gifted assets. The sale of gifted assets attracts capital gains tax in the US.
The IRS has clear guidelines on crypto donations and according to these guidelines, any donations made to a registered charity in the US are tax-free. Moreover, you can claim tax deductions on your donations, the value of your donations is simply the FMV of the donated assets at the time you donate them.
However, the charity you’re donating to must have the 501(c)3 status with the IRS for you to claim a charitable donation deduction. Here’s a list of all charitable organisations having 501(c)3 status with the IRS.
When making a donation of more than $500 in cryptocurrency, it is necessary to complete Form 8283 while filing your crypto taxes. Moreover, the IRS specifies that if the donation exceeds $5,000 in crypto value, you will require a qualified appraisal to apply a deduction.
Meanwhile, if you’re donating property, you can claim a deduction of 20 to 50% of your adjusted gross income, depending on the type of organization you’re donating to.
DAO Taxes
DAOs are member-owned communities with a shared vision. All the decisions in a DAO are made by the members in the absence of central leadership. DAOs are new-age institutions that aim to democratise decision-making and allow people to have a say in decisions that directly affect them. DAOs are often called the soul of Web3 and enable members to earn rewards in multiple ways. DAO contributors are rewarded for their contributions to the organization, similar to how centralized organizations pay salaries to their employees. They also pay out bounties for one-time projects and redistribute any profits generated through operations.
The IRS is yet to release specific guidance on how income from DAOs is taxed. However, DAOs aren’t registered organisations and can’t file taxes independently, they’re closer to flow-through organizations. Therefore, it’s safe to assume that any income from DAOs will be subjected to income tax, and any gains incurred on the disposal of tokens received from DAOs will be taxed as capital gain.
NFT Taxes US
According to the section titled “Digital Assets” on the 16th page of the new tax guidelines report:
“Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.”
This makes it pretty evident that the Internal Revenue Service (IRS) considers NFTs to be a form of property, similar to cryptocurrencies. In other words, disposing of digital assets, such as through a sale or exchange, may result in tax obligations, just like with any other type of property. This is because such transactions may result in capital gains or losses that must be reported to the IRS.
The recent mandate has provided a clearer understanding of NFTs and established a more defined framework for their taxation. The tax rate for NFTs is nNot paying taxes in the Czech Republic leads to serious consequences. The tax authorities take it seriously, and you could face penalties, interest, or even legal action. They have the power to garnish wages, seize assets, and freeze bank accounts to collect unpaid taxes. Non-compliance may also result in the loss of benefits and negatively impact your credit rating, making it harder to secure loans or credit in the future. To avoid these issues, it’s essential to fulfill your tax obligations and seek professional advice if needed.ot fixed and may vary based on factors like mode of purchase, duration held, and amount of gains or losses incurred upon disposal.
To determine the amount of taxes owed to the IRS, you will need to itemise all of your NFT transactions on form 8949 and then use the standard deduction chart at the end of the form to calculate the tax due.
You can refer to the complete NFT tax guide here.
Defi Crypto Taxes US
The IRS is yet to declare clear guidelines on the nature of Defi transactions and how they are viewed from the tax perspective. Since Defi is a new landscape and is still evolving, making space for new avenues of earnings for people across the globe, there’s no way to accommodate all Defi transactions and the returns offered by them into a set of tax guidelines.
However, it’s important to note that you might attract tax liabilities if you appear to be making an income or capital gain from de-fi transactions. Given below are some Defi transactions that can attract tax liabilities from the IRS:
- Earning liquidity tokens or new tokens from Defi protocols
- Taking a loan against collateral from Defi protocols or private lenders
- Paying interest in crypto for loans sourced from Defi protocols, which in some cases may be considered as a disposal of crypto assets and hence attracts capital gains tax.
- Staking, yield farming, and adding or removing liquidity from liquidity pools
- Gains made from Defi margin trades
ICO Taxes
ICOs are special events that allow investors to acquire tokens from unreleased projects in exchange for mainstream tokens like BTC and ETH. ICOs are similar to IPOs in traditional markets and are viewed as crypto-to-crypto trades for tax pusposes across jurisdictions.
The IRS is yet to release guidelines on the taxation of ICOs. We suggest seeking guidance from an experienced tax professional on the matter to avoid complications with the IRS. Relevant details regarding ICO taxation will be added here soon as the guidelines hit our radar.
How are Airdrops and Forks Taxed in the US?
Any new tokens received from airdrops and hard forks are considered income and are subjected to income tax in the US. Moreover, these tokens inherit the cost basis equal to the market value of the tokens at the time of receipt and in the event of disposal of these assets, a capital gains tax is also levied on them.
Soft forks, on the other hand, are non-taxable because no new tokens are awarded to the users.
When to Report Crypto Taxes in the US
Typically, in the US, you must report your cryptocurrency taxes by April 15th, which coincides with the deadline for filing individual income tax returns. However, if April 15th falls on a weekend or holiday, you may be granted an extension to the next business day.
How to File Crypto Taxes in the US
You can file your crypto taxes online or offline. If you decide to go the traditional way and use paper forms to file your taxes with the IRS, follow these steps to make sure everything goes smoothly:
- First download Form 8949 and use it to report all your crypto disposals within a tax year.
- Use Schedule D on Form 8949 to report all your capital gains and losses
- If you receive crypto income from sources such as airdrops, forks, liquidity pools, or bonuses, you’ll need to fill out Schedule 1. However, if you happen to be self-employed or operating a crypto-based business and earn crypto income, you should utilize Schedule C instead.
- Once all of this is done, complete your tax return using Form 1040 and add all other tax forms with it before you file it with the IRS.
If you choose to go the modern route, there are several ways to file taxes online:
- You can use an online crypto tax platform like Kryptoskatt that can guide you through the process step-by-step, help you find deductions and credits, and e-file your tax return directly with the IRS.
- If you meet certain income requirements, you can use the IRS Free File program to file your taxes online for free. The program partners with various tax preparation companies to offer free filing options to eligible taxpayers.
- Many tax professionals offer online tax filing services through their websites. These services typically involve uploading your tax documents to a secure portal and allowing the tax professional to prepare and file your return on your behalf.
What Crypto Records Will the IRS Want?
The IRS requires taxpayers to maintain adequate records to support the positions taken on their tax returns. To meet this requirement, it is essential to keep records of all crypto transactions, including
- The market value of your assets on the day of acquisition
- The market value of your assets on the day of disposal
- A detailed record of all your gains and losses
- Date and time of your transactions
- Receipt of all sales and purchases
- Record all transfers made between your personal and external wallets
How to File Crypto Taxes Using Kryptoskatt?
Now that you’re aware of how your crypto transactions are taxed and what forms you need to fill out to complete your tax report, here’s a step-wise breakdown of how Kryptoskatt can make this task easier for you:
- Visit Kryptoskatt.com and sign up using your email or Google/Apple Account
- Choose your country, currency, time zone, and accounting method
- Import all your transactions from wallets and crypto exchanges
- Choose your preferred report and click on generate report option on the left side of your screen and let Kryptoskatt do all the accounting.
- Once your Tax report is ready, you can download it in PDF format.
If you still need clarification regarding the integrations or generating your tax reports, you refer to our video guide here.
How to Avoid Tax on Cryptocurrency in the US
To make things clear, there’s no legal way to avoid paying taxes on crypto entirely in the US and any attempt at doing so will be met with regulatory and legal repercussions from the feds. However, there are ways you can avoid paying taxes on a portion of your gains and here are some of them:
- Buy and HODL Crypto Assets
As mentioned above buying crypto assets and holding them is not a taxable event in the US. An individual attracts tax liabilities only when he/she disposes of his/her assets and makes a capital gain as a result.
- Utilize Tax Deductions
The IRS offers several exemptions that can significantly lower your tax bill, therefore it’s advisable to utilize your tax deductions like tax-free capital gain allowance, and the gifting allowance to reduce your taxable base.
- Actively Track Your Losses and Harvest Them
You can close some of your dud positions or even potentially good ones at a loss and use them as an anchor to bring down your net capital gains and hence save thousands of dollars in capital gains taxes. The wash-sale rule for tax-loss harvesting is only applicable for securities at the moment and therefore, you can sell your assets to create a fictitious loss and then buy the same assets right after.
- Gift and Donate Crypto
Gifting and donating crypto are considered tax deductibles by the IRS and can be used to bring down your tax bill, however, make sure the total amount of crypto gifted should not exceed $17,000 and the donations made are towards a registered charity and isn’t directly or indirectly linked to you in any way.
- Invest in IRAs and OZFs
Invest in tax-advantaged investment funds to compound your returns and plan for the future. Alternatively, contribute to an Opportunity Zone Fund (OZF) to support public good initiatives while potentially benefiting financially.
Frequently Asked Questions(FAQs)
- Do you pay tax on crypto in the US?
Yes, in the United States, cryptocurrency is treated as property for tax purposes, which means that any gains or losses from buying, selling, or trading cryptocurrency are subject to capital gains tax. The tax rate depends on various factors, such as how long the cryptocurrency was held and the individual’s income tax bracket. Additionally, cryptocurrency transactions may trigger other tax requirements, such as reporting requirements for foreign accounts. It’s always best to consult with a tax professional or accountant to understand your specific tax obligations related to cryptocurrency.
2. Is cryptocurrency legal in the US?
Yes, cryptocurrency is legal in the United States. Although the government has been engaged in efforts to establish cryptocurrency regulations, there are no federal statutes forbidding individuals from engaging in the purchase, sale, or retention of cryptocurrencies. However, it’s important to note that the use of cryptocurrency for illegal activities, such as money laundering or financing terrorism, is illegal and can lead to criminal charges.
3. Do you pay tax when transferring crypto in the US?
Transferring cryptocurrency from one wallet to another wallet or from one exchange to another exchange is generally not a taxable event in the United States. This means that you will not owe taxes on the transfer itself. However, you may be subject to taxes on the cryptocurrency if you sell or exchange it for another cryptocurrency or fiat currency.
4. What happens when you don’t report crypto in your tax report?
Failure to report cryptocurrency on your tax return can result in penalties and interest charges from the Internal Revenue Service (IRS). The penalties for not reporting cryptocurrency can vary depending on the specific circumstances of the situation but they can include:
- If you fail to file your tax return on time, the IRS may impose a penalty of 5% of the unpaid tax amount per month, up to a maximum of 25% of the unpaid tax.
- If the IRS determines that you understated your tax liability due to negligence or disregard of tax rules, they may impose a penalty of 20% of the understated tax liability.
- In case of intentional tax evasion or fraud, you could face criminal penalties, including fines and imprisonment.
