Crypto Tax Guide for 2023

In the United States, crypto can be taxed as ordinary income or capital gains, depending on which taxable event produced the earnings. Your cryptocurrency tax rate will vary based on a number of factors.

Crypto is taxed similarly regardless of the kind of crypto. So whether you’re trading Bitcoin, Ethereum, or other altcoins, you can anticipate a similar tax treatment by the IRS. Crypto trades, sales, or swaps are taxed as capital gains. 

What affects your crypto taxes?

For US taxpayers, the key factor that affects tax on crypto gains is whether a given profit was realized in the short- or long-term.

Long-term tax rates on profits from tokens held for a year or longer peak at 20%, whereas short-term capital gains are taxed at the same rate as income: 10-37%.

Your exact cryptocurrency tax rate depends on the length of time the asset was held and your overall income but ranges between 0-37% based on short- and long-term capital gains tax rates.

Mining, staking, lending, or payments for goods or services are considered ordinary income for purposes of your crypto tax bracket. You’ll pay a crypto tax rate that corresponds to your gross income, ranging from 10-37%.

How to benefit from free crypto taxes

Although complete avoidance of cryptocurrency tax during crypto trading is not feasible for the majority of taxpayers, there exist straightforward and lawful approaches that the typical crypto user can employ to reduce crypto taxes. 

To mitigate their liability concerning crypto taxes, taxpayers can engage in tax loss harvesting, utilize specialized cryptocurrency tax software such as TokenTax, contribute crypto through donations, prioritize long-term capital gains, and execute sales in years of reduced income.

Taxpayers may also be interested in crypto tax free countries as a viable long-term strategy for serious investors.

All earnings from crypto mining, staking, or payments are taxed at your ordinary income rate (like other forms of property), which varies depending on which of the income brackets you fall into. 

The crypto capital gains tax rate, however, varies based on the length of time you held a given asset. The US encourages long-term trades by taxing them at the lower, long-term capital gains rate. If you hold for over a year, your crypto tax rate will typically be much lower.

Short-term crypto tax rate
If you hold a digital asset for a year or less, your proceeds will be considered short-term capital gains. They will be taxed at your ordinary income rate, which is determined by your overall income.

Long-term crypto tax rate
If you hold cryptocurrency for more than a year, your proceeds will be taxed at the advantageous long-term capital gains rate. Your rate also depends on your overall income, but long-term capital gains are generally lower than the short-term capital gains rates.

According to the IRS’ cryptocurrency tax FAQs, the holding period begins on the day after you receive an asset. The asset's cost basis is its purchase price plus any applicable fees.

Your cryptocurrency tax rate depends on whether you held assets for short- or long-term capital gains. Here’s a breakdown by income level so you can find your crypto tax bracket and crypto tax rate for the 2023 tax year (for US taxpayers).

2023 Federal income tax brackets (taxes due in 2024)

2023 Long-term capital gains tax rates (taxes due in 2024)

- IRS

Here is an overview of a range of crypto transactions and their tax implications, with a focus on crypto taxes in the United States per the current IRS rules. International crypto taxpayers may benefit from our helpful guides to international crypto taxes.

Crypto taxes for crypto capital losses

Crypto losses can be used to offset taxes on profits gained from selling any type of capital asset, along with up to $3,000 of income. These losses can also be carried forward into subsequent years. By including crypto capital losses in their tax reports, individuals have the opportunity to decrease their taxable income, thus potentially reducing their total tax obligation.

Crypto taxes on lost or stolen crypto

Regrettably, in cases where you no longer possess lost or stolen crypto, there exists no distinct procedure for asserting theft-related losses. In 2018, the IRS provided clarification that only losses that stem from federally declared disasters are eligible for deduction through Form 4684 (Casualties and Thefts).

Crypto taxes on bankruptcies

If you hold crypto that becomes worthless due to a third party’s bankruptcy after the resolution and conclusion of a cryptocurrency company's bankruptcy proceedings, you have the option to balance out the loss from the cryptocurrency by utilizing its original purchase cost against your profits. You may offset any surplus loss against regular sources of income, such as wages, for an amount of up to $3,000. If the loss surpasses the $3,000 limit, the remaining amount can be carried forward to the subsequent tax year.

Crypto taxes on your income

Crypto for US taxpayers is subject to crypto taxes under either standard income tax or capital gains regulations. The following activities have the potential to generate income taxed at the going income tax rates of 10-37%.

• Cryptocurrency mining

• Accumulating rewards from staking cryptocurrency

• Receiving cryptocurrency as compensation for goods or services

Crypto taxes for crypto sales and trading

The IRS considers the following scenarios taxable events:

• Exchanging one cryptocurrency for another (e.g., BTC for SOL)

• Utilizing crypto for purchases of goods or services (e.g., BTC for a Tesla)

• Trading cryptocurrency for traditional fiat currency (e.g., BTC for USD)

• Any other form of relinquishing or disposal of cryptocurrency

Short- and long-term capital gains rates apply to the above transactions. Short-term capital gains are taxed at the going income tax rates, while long-term gains are taxed at a lower rate ranging from 0-20%.

Crypto taxes when buying crypto with stablecoins

While stablecoin value variations generally tend to be minor and have a limited impact on the total tax obligation, it’s essential to disclose crypto stablecoin transactions in your tax reporting. Trading in and out of stablecoins for crypto has the same tax implications as if you were trading in and out of fiat currency.

Crypto taxes for moving crypto between wallets

Moving crypto between wallets does not trigger a taxable event, provided you solely move the tokens and refrain from exchanging them for another cryptocurrency or converting them to traditional fiat currency during the asset transfer.

Crypto taxes for adding/removing liquidity from DeFi protocols

When you participate in a DeFi liquidity pool, this can lead to tax implications. In certain scenarios, trading your cryptocurrency for a liquidity pool token, representing your pool share, might trigger a taxable event, following standard capital gains rules. Conversely, if you lock your coins in the pool and later claim rewards tokens, taxation occurs upon claiming those rewards. 

Upon exiting a liquidity pool and realizing gains or losses, another potential taxable event arises. The lack of specific IRS guidelines on liquidity mining has led to uncertainty. Given the IRS treatment of coins from airdrops and forks as income, there is speculation that they might adopt a similar stance on liquidity mining rewards, classifying them as income rather than capital gains.

Crypto tax on airdrops and hard forks

Clear guidance from the IRS confirms that airdrops and hard forks are taxable. The income you report matches the fair market value (FMV) of the cryptocurrency at the time of receipt. The transaction's ledger or blockchain timestamp determines the receipt date.

Crypto taxes on crypto gifts and donations

Receiving crypto as a gift does not initially incur crypto gift taxes. Taxes come into play upon selling, resulting in capital gains or losses. Selling at a gain means your cost basis matches the donor's. Selling at a loss means your basis is the lesser of the donor's or fair market value at receipt. The unknown giver's basis results in a $0 basis for the sale. The holding period includes the giver's time if known. Otherwise, it begins at receipt. 

Gifting crypto incurs no tax, but recipients need the giver's asset basis. Donating crypto to a 501(c)(3) yields a tax-free charitable deduction. For over a year's holding, the deduction is fair market value. Under a year is the lower cost basis or market value.

Crypto mining tax

Taxes related to crypto mining differ based on location. In the US, crypto miners should expect to pay taxes on mining rewards as income and on capital gains when selling mined coins. Distinctions exist in crypto mining tax for hobbyists versus professional miners operating as a business. Business miners might qualify for specific tax deductions.

Crypto staking taxes

Both income and capital gains are involved in crypto staking taxes. Proper reporting involves declaring the fair market value of staking rewards upon receiving them and accurately calculating capital gains or losses upon eventual disposal.

Crypto taxes on DeFi

Earnings from DeFi crypto staking can be subject to either capital gains or income taxation, as they can arrive in two ways: through extra tokens or an increase in the value of existing tokens. Certain DeFi platforms provide interest or rewards by directly adding more coins to a lender's wallet.

Crypto tax on DAOs

When a US taxpayer obtains crypto from a DAO in exchange for goods or services, they are required to report it as income. Any profits earned from the subsequent sale of these acquired assets are then subject to capital gains tax. Additionally, if distributions involve governance tokens or NFTs, they are also treated as taxable income. Subsequent profits from selling these distributed assets are likewise subject to capital gains tax.

Crypto taxes on NFTs

NFTs are taxable upon sale, with no legal loopholes to avoid NFT taxes for US taxpayers. The IRS treats NFTs as property, and some will be considered collectibles, leading to potential higher tax rates. 

Regardless of classification, gains and losses from NFT sales must be reported on tax returns, with rates based on the holding period and overall income. The IRS' new approach to taxing NFTs as collectibles was declared in March 2023, subjecting certain NFT gains to a 28% rate, distinct from standard capital gains rates.

Most US taxpayers must submit their 2022 tax returns or file for an extension by Tuesday, April 18, 2023. Similar to federal holidays, Washington, D.C. holidays affect tax deadlines. The due date is April 18, not April 15, due to the weekend and the Emancipation Day holiday on April 17 in the District of Columbia. 

For those seeking a crypto tax extension, the filing deadline extends to Monday, October 16, 2023.

The IRS requires taxpayers to report crypto transactions. Any trading, selling, swapping, or disposal of crypto constitutes taxable capital gains or losses. Moreover, earnings from crypto mining, staking, and yield farming are also taxable as income.

Step 1: Calculate Gains and Losses
For any crypto action like selling or trading, you trigger taxable events. Find the difference between asset value at disposal and its cost basis to compute gains/losses. Count transaction fees in your cost basis.

Step 2: Complete IRS Form 8949
Use Form 8949 to declare crypto gains/losses. This form is for every crypto sale within the year. Organize info like asset details, acquisition date, sale date, proceeds, cost basis, and adjustments.

Step 3: Attach Form 8949 to Schedule D
Attach Form 8949 to Form 1040 Schedule D, summarizing capital gains/losses. Separate short- and long-term gains/losses. If you have capital losses from previous years or plan to carry them, report on Schedule D.

Step 4: Report Crypto Income and Complete Return
Crypto income (mining, staking, etc.) is ordinary income. On Form 1040 Schedule 1, disclose it under "Additional Income and Adjustments to Income." Finish your return by filing the necessary forms and settling your taxes.

At TokenTax, we're here to revolutionize the way you approach filing your crypto taxes. We understand that crypto taxes can be a maze of complexity, but that doesn't mean they need to be a source of stress. 

We pair cutting-edge crypto tax software with a proven and trusted team of crypto tax experts. By bridging technology and human insight, we've made even the most intricate crypto tax scenarios manageable and straightforward.

Our crypto tax software seamlessly integrates with your exchanges, protocols, and wallets. Backed by skilled crypto accounting and reconciliation teams, we ensure precision in reporting across crypto, DeFi, and NFT transactions. We go the extra mile by offering comprehensive filing add-ons, so you can trust that your crypto tax matters are handled with utmost care.

Our service caters to a wide spectrum of users, from enthusiasts to advanced traders, with tailored plans designed to cater to your individual requirements. Our features include automated forms, real-time reports, and a specialized tax loss harvesting dashboard, empowering you to make informed decisions. Furthermore, our integration with TurboTax streamlines the filing process, bringing you unparalleled convenience.

Consider TokenTax your partner to conquer the challenges of crypto taxes this and every tax season. With a truly robust suite of features, unparalleled customer support, and customized plans, we're committed to simplifying crypto taxes.

The IRS tracks crypto transactions through exchanges, third-party reports, and blockchain analysis. Here’s a brief look at how the IRS tracks crypto for the purpose of ensuring compliance:

• Third-Party Reports: Exchanges share users' transaction data with the IRS.

• Blockchain Analysis: The IRS uses blockchain experts to trace public crypto transactions.

• John Doe Summons: The IRS might issue John Doe summons to cryptocurrency platforms, allowing them to gather information about users who meet specific criteria, such as those with a certain number or value of transactions.

• Subpoenas: Subpoenas gather user data from platforms, aiding IRS investigations. Subpoenas are legal tools for the IRS to collect relevant data. They help identify tax evaders in crypto transactions. Exchanges like Coinbase, Circle, Kraken, and Bitstamp have received subpoenas.

It’s best to assume the IRS has full transparency into your crypto activity and to plan accordingly. 

If you want to avoid higher taxes and pay a lower crypto tax rate, you should prioritize long-term crypto trades whenever possible. As indicated, crypto capital gains tax rates are more favorable when you make long-term capital gains.

The IRS allows specific identification accounting for digital currency. This inventory valuation method lets you track individual tax lots, so you’re able to strategically match up sales and acquisitions. If you want to lower your crypto tax rate, it is generally best to focus on long-term trading.

When you use TokenTax, you can choose which method of specific ID accounting you want to use: FIFO, LIFO, HIFO, or Minimization. This helps to ensure you get the most beneficial crypto tax rate possible, and our expert team is available to work with you to ensure your filing is thorough, accurate, and optimized.

Save crypto taxes: Learn how to reduce your crypto taxes

Here are some common FAQs related to your crypto taxes and crypto tax brackets, the cryptocurrency tax rate, and tax on crypto gains.

Can I reduce my income and get to a lower crypto tax bracket?

There are some simple ways to reduce your crypto tax rate. They include:

• Take advantage of qualified deductions

• Invest in a tax-deferred 401k

• Donate to an IRS-qualified charity

• Use a flexible spending account for childcare or healthcare

• Take losses on stocks or other crypto holdings

Do I have to report crypto losses on my taxes?

While it's not obligatory to report crypto losses on taxes, US taxpayers are obligated by the IRS to report all cryptocurrency transactions, even losses from sales. Neglecting to properly report crypto transactions can result in penalties and heightened IRS attention. Furthermore, failing to report crypto losses prevents their use for offsetting capital gains or income.

Can I reduce my crypto tax liability by using tax loss harvesting?

Taxloss harvesting is a legitimate strategy to reduce your crypto tax liability. By strategically selling crypto assets at a loss, you can offset gains from other investments or crypto trades. This can lead to a lower tax bill. However, it's essential for US taxpayers to follow IRS rules and regulations.