How Is Crypto Taxed? (2023 IRS Rules)

The Internal Revenue Service (IRS) has stated that cryptocurrency must be included in your taxes. In 2023 and going forward, it is essential that you properly file your crypto taxes to avoid penalties, fines, or even criminal charges.

In short, yes. US-based taxpayers must pay taxes on their earnings from crypto activity, and the IRS has stated “taxpayers should continue to report all digital asset income.” 

In 2023, the IRS continues to treat Bitcoin and other digital assets as property, just like it treats stocks and other capital assets, and subjects crypto to either regular income tax or capital gains. The IRS considers the following to be taxable events:

• Trading one cryptocurrency for another (BTC for SOL)

• Spending crypto for goods or services (BTC for a Tesla)

• Selling cryptocurrency for fiat (BTC for USD)

• Otherwise disposing of crypto

Additionally, the following activities may result in earnings taxed as income:

• Mining crypto

• Earning rewards from staking crypto

• Receiving crypto as payment for goods or services

Failing to report and pay taxes on cryptocurrency transactions can have serious consequences. These range from IRS crypto tax audits to penalties to criminal prosecution.

US-based taxpayers who realize gains or losses from crypto trades, or earn income from crypto activity, during a given tax year will have tax consequences as a result. The complexity of these tax consequences depends on the nature of your crypto activity. 

If you purchased a single cryptocurrency, held it less than a year, and sold it for profits, you’ll simply report those capital gains and can expect to be taxed at the regular short-term capital gains rates based on the current (2023) tax rates for cryptocurrency set by the IRS. Taxes on crypto gains from assets held for longer than a year are subject to a favorable long-term capital gains rate.

Crypto taxes become more complex for those who trade professionally or engage in activities such as crypto margin trading, staking, or cryptocurrency mining. When in doubt, a cryptocurrency accountant like ours at TokenTax can assist to ensure you properly prepare and file your crypto taxes.

The IRS treats realized earnings or losses from trades, swaps, sales for fiat, or other disposals of cryptocurrency as capital gains or losses. 

How is crypto taxed? Fundamentally the tax on crypto gains from each of these types of transactions is the same. Whether you sell crypto for fiat, swap one crypto into another, or use crypto to purchase tangible goods, you’ve triggered a taxable event in the eyes of the IRS.

Example: Selling crypto for fiat

In the above example, if Scott held his one Bitcoin for longer than a year, his $5,000 in capital gains would be taxed as long-term capital gains (up to 20%). If he held for less than a year, the $5,000 would be subjected to higher short-term capital gains (up to 37%).

Note the same tax consequences would apply if Scott sold his one Bitcoin for $40,000 worth of Ethereum or another cryptocurrency, or if Scott had used the Bitcoin valued at $40,000 to purchase a used Tesla. Because the Bitcoin appreciated in value and was disposed of, the IRS considers these gains taxable.

US-based taxpayers can also offset crypto gains with crypto losses, which allows you to carry forward realized losses into future tax years.

How is crypto taxed in 2023? Cryptocurrency tax rates as a US-based taxpayer depend on whether you hold assets for short- or long-term capital gains. Here’s a breakdown by income level so you can find your crypto tax rate for the 2023 tax year.

International taxpayers will find helpful information about crypto taxes outside the United States in our country guides.

U.S. income tax brackets (2023)

U.S. long-term capital gains tax rates (2023)

At a basic level, calculating your taxable crypto gains or losses is straightforward. The initial cost of the acquisition (in fiat) is the cost basis, and the amount received in a sale (also in fiat) is the proceeds.

Subtract the cost basis from the proceeds and you have your gain or loss. These values must be reported on Form 8949 in USD.

Capital gains calculation example

• You buy 1 BTC for $40,000, so your cost basis for this lot of 1 BTC is $40,000.

• You later sell this 1 BTC for $55,000, thus the proceeds are $55,000.

• Subtract the cost basis of $40,000 from the proceeds of $55,000, and you get $15,000, your taxable capital gains amount.

However, these calculations quickly become more difficult when you make a higher volume of trades or trade at a more advanced level. Activities such as margin trading, using DeFi platforms, making cross-chain trades, or crypto lending will make your tax filing more complicated. Crypto tax software like ours at TokenTax is a huge help in these scenarios.

Profits from crypto mining, staking, or receiving crypto as payment for goods or services are taxed as income.

Example: Mining bitcoin

If you earn this crypto as an individual hobbyist, when you receive it, it is treated as ordinary income and taxed at your income bracket's crypto tax rate. Any subsequent change in value is treated as a capital gain or loss after you sell for fiat or swap for another cryptocurrency.

Crypto income may be earned in the course of business or trade activities. A common example of a commercial activity is any crypto mining that relies on more than a personal computer’s excess computing power.

If you conduct business as a sole proprietor, independent contractor, or a member of a partnership, your profits will be taxed as self-employment income and reported on your Schedule C. You will have to pay self-employment tax.

If you’ve incorporated your business as a C corp, your profits will be taxed as corporate income, reported on Form 1120. For more on the pros and cons of incorporating, read our post on how to create an LLC or corporation for crypto.

Businesses may deduct qualified expenses from their income.

The IRS has given explicit guidance that airdrops and hard forks are taxed as income. The amount of income you recognize is equivalent to the fair market value (FMV) of the crypto when received. The receipt date is the time of the transaction on the ledger/ blockchain. Crypto received as income has a cost basis of the FMV of the assets when received.

Buying crypto with fiat

Buying cryptocurrency with cash is not a taxable event.

Gifting or donating crypto

Giving crypto as a gift (less than $17,000 for the 2023 tax year) or donating cryptocurrency to a 501(c)(3) organization is not a taxable event. Direct donations of cryptocurrency to charitable or nonprofit organizations are not taxable. Additionally, they may be used as deductions to offset your gross income.

Transferring crypto between wallets

Moving cryptocurrency between wallets is not a taxable event, as long as you do not trade the tokens for another crypto or to fiat currency when you transfer the assets.

How is crypto taxed? Here are answers to some frequently asked questions about taxes on crypto, tax on crypto gains, and how crypto is taxed.

Do I have to pay taxes on crypto if I don't sell?

No, you do not have to pay taxes on crypto that you are still holding. In the United States, tax on crypto gains only occurs when a given asset is sold or swapped for profit.

How much taxes do you pay on crypto?

US-based taxpayers pay regular income tax rates on short-term capital gains and long-term capital gains rates on gains from crypto held for over a year. International taxpayers will find helpful information about crypto taxes in our country guides.

How do I avoid paying taxes on crypto?

The simplest way for US taxpayers to avoid paying taxes on crypto is to not sell and to hold for long-term capital gains, which are taxed at a lower rate. You may also consider donating crypto to a qualified charity or a tax-loss harvesting strategy. Certain countries have highly favorable crypto tax legislation, which we outline in our crypto tax free countries guide.

Can you take crypto losses off your taxes?

Reporting crypto capital losses on your tax return can reduce your tax obligation. If you have a total capital loss in crypto, you can use that loss to offset gains in other capital assets such as stocks, and to deduct up to $3,000 from your income taxes. Additionally, you can carry forward a capital loss to deduct from future capital gains whether in crypto or other asset classes.