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 USA. From capital gains tax to income tax and even NFT taxes.
Our goal is 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 out, let’s dive into the world of crypto taxation together.
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 more detail so you can easily understand and pay your taxes. Remember that you must pay your taxes by April 18th, 2023.
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 USA
The capital gain tax rates for cryptocurrency in the USA are quite simple. Like other 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 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
Remember that long-term capital gains tax for cryptocurrency is usually lower than short-term capital gains tax for most taxpayers. You will pay a tax rate of either 0%, 15%, or 20%, depending on your taxable income. If your income, including any gains from cryptocurrency, is below $41,676 (for the 2022 tax year), you don’t need 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.
Crypto Losses
If you trade or invest in crypto assets or in 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 a method called 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 lesser taxes.
Moreover, if you’ve made losses in excess of $3,000 in a tax year, you can use the excess amount to offset your gains in the subsequent tax year, this is called capital loss carryforward and allows you to have a backup loss reserve for high ROI disposals.
Also, it’s important to note that long-term capital losses must be used to offset long-term capital gains, while short-term capital losses must be used for short-term capital gains. It is only after you’ve exhausted your taxable base in the long-term capital gains category using your capital losses, can you use your long-term capital gains as an offset against your short-term capital gains.
You can report all your capital losses to the IRS through Form 8949.
Lost and Stolen Crypto
Before the Tax Cuts and Jobs Act, individuals investing in cryptocurrency were able to deduct theft and casualty losses as capital losses. However, with this legislation in place, the tax deductibility of such losses is no longer available. So, if you have suffered a loss of your cryptocurrency to chain hacks, scams, or due to misplaced private keys, regrettably, you will not be able to avail of the tax benefits.
If you can prove that you owned the assets and provide documentation from the exchange that shows the amount you lost in the hack, you may be able to deduct losses that happened before 2017.
In the event of delisted tokens or rug-pulls, you can dispose of your assets to generate a fictitious capital loss which in turn is tax deductible. You can dispose of such assets in the following ways:
- Sell at a CEX or a DEX if possible
- Swap it for some other token or asset
- Send your assets to a burning wallet
How to Calculate Crypto Gains and Losses
Calculating your crypto gains or losses is a two-step process in any tax regime that levies a capital gains tax on crypto disposal. The first step while calculating your crypto gains or losses is to calculate the cost basis for every asset that you’ve swapped, sold, or gifted during a tax year. Which simply amounts to adding up the cost of acquisition and any fees (transaction fees, gas fees) paid in the process of acquisition.
Once you’ve got that figured out, you can easily calculate your capital gains or losses by subtracting your cost basis from the disposal amount. If it’s positive then it’s gain and is subjected to capital gains tax, and if it’s negative then it’s a loss and while it attracts no tax liabilities, you should actively track all your losses and report them to the IRS to use them for reducing your tax bill.
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
We claimed that calculating the cost basis for your assets is a pretty straightforward process and all you need to do is add some numbers, and while that’s true for simple transactions, things get a little more complex when the transactions involve multiple assets or multiple transactions over a single asset.
Consider this for instance, If you bought 1 BTC for $5,000 in 2018 and then added another BTC to your portfolio in 2019 for $10,000, and you decided to sell a BTC in 2021 at the price of $30,000.
Which cost basis would you use to calculate your capital gain for this transaction?
It’s confusing and that’s exactly why you need to know about the various accounting methods available to you for cost-basis calculations. The IRS allows US citizens to use several accounting methods:
- 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
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 in the US. 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
Any income generated from a de-fi transaction like staking, lending and liquidity farming is also considered as a taxable income. Moreover, with the rise of interact-to-earn platforms, any income made as rewards from play-2-earn, engage-2-earn, and learn-2-earn platforms is also considered taxable income and is subjected to income tax rules.
Income Tax Rate USA
Based on your income, the following are the tax brackets that you might fall into
How to Calculate Crypto Income
The process of determining your crypto income is fairly straightforward, albeit time-consuming if you have multiple income streams. Essentially, all you need to do is ascertain the fair market value of the crypto you received in USD on the day it was acquired. This value represents the amount you’ve earned, and you’ll be required to pay taxes on it according to your Federal Income Tax rate, as well as your State Income Tax rate, if applicable.
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 amounts 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)
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, in the event that 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 and you don’t end up with tax problems at the end of it:
- 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 individual tax return using From 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.
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.
2. 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.
3. 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.
4. 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.
5. Invest in IRAs and OZFs
Invest in your investment funds and your investment remains tax-free and compounds while you plan your retirement trip to the Bahamas, or simply contribute some of your assets towards public good through an opportunity zone fund(OZF).
Tax on Mining Crypto USA
If you earn cryptocurrency through mining, you’ll be liable to pay Income Tax according to the prevailing fair market value of the received crypto on the day of acquisition. In addition, if you decide to sell, exchange or use any of the mined cryptocurrency, you’ll also be required to pay Capital Gains Tax on the profits gained from such transactions.
Crypto Margin Trading, Futures and CFDs
If you’re an individual investor the tax treatment of margin trades, crypto futures, and CFDs is similar to other crypto transactions that attract capital gains tax liabilities. Any gains made from these financial instruments is considered capital gain and are subjected to a capital gains task. Similar to how the disposal of assets is considered a taxable event, you attract tax liabilities only when you close 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.
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.”
Which 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 not 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 itemize 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.
De-Fi Crypto Taxes US
The IRS is yet to declare clear guidelines on the nature of De-Fi transactions and how they are viewed from the tax perspective. Since De-Fi 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 De-Fi 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 de-fi transactions that can attract tax liabilities from the IRS:
- Earning liquidity tokens or new tokens from De-Fi protocols
- Taking a loan against collateral from De-Fi protocols or private lenders
- Paying interest in crypto for loans sourced from De-Fi 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 De-Fi margin trades
Can the IRS Track Crypto?
Yes, it can. It has multiple avenues from where it can source your data and use it to make sure you’re complying with the tax guidelines. So, if you are/were thinking about skipping a few transactions to tilt your tax bill a little on the lighter side, we suggest you drop that plan and report all your transactions to the IRS. Here are some avenues that offer 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
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
- Market value of your assets on the day of acquisition
- 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 of all transfers made between your personal and external wallets
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.
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 to 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.
