How to file crypto taxes in 2023?

Find out how crypto income is taxed. This article will be helpful to anyone interested in crypto transactions, regardless of whether you are paying with virtual currency, receiving payments, or planning to try trading.

Speaking of crypto trading, people often mean a virtual currency that exists in a decentralized ecosystem (that is, one that can function with no participation of any financial institutions) and has its internal security system (blockchain). However, US tax law treats crypto not as currency but as property. That is why the crypto tax issue sometimes needs to be clarified. This article will answer the most common questions about crypto tax and help you protect yourself from trouble with the tax office.

Do I need to report crypto on my tax return?

IRS Notice 2014-21 defines crypto as not money itself but property. Accordingly, this asset must be taken into account when completing and filing Schedule D and Form 8949 (both gains and losses). Based on this, any transactions with virtual currency will affect your crypto tax the same way as dollar transaction does. Accordingly, you can’t do without a tax return.

How much crypto tax do I have to pay?

If it comes about a non-retirement account, the amount of tax levied will depend on whether it is a short- or long-term gain. 

Owning an asset for one year or less and making a profit from it is regarded as short-term profit. So crypto income will be ordinarily taxed from 10% to 37% depending on the amount of income.

If you had profited from cryptos for more than one year before you sold the asset, the amount of crypto tax in the tax return would be calculated at the rate for long-term capital gains (the preferential rate is 0%, 15%, or 20%, depending on the amount of income).

How to calculate the amount of crypto income on your account?

To correctly calculate crypto taxes on your account, follow the instructions below.

1. Determine the adjusted cost basis of your property. This is the amount you paid for trading a crypto asset plus any fees and commissions you paid.
2. Similarly, you determine the adjusted cost base when selling an asset on crypto exchanges: reduce the sale amount by all the fees you paid to get the correct figure.
3. If the amount received exceeds the adjusted cost basis, you have made a profit. You are at a loss if it is less than the initial costs.

In the event that you were given crypto to account not from trading for free (as a gift, for example), you can calculate the basis of the crypto tax by referring to IRS Publication No. 551.

We also recommend using specialized crypto tax software to avoid unexpected errors when compiling and submitting reports of crypto.

How to specify crypto when filling out a tax return?

How you report crypto on the crypto tax form depends on how you obtained the asset and how you used it during the reporting period. For example, if you receive gain from crypto transactions throughout the year, this will be treated as ordinary income and taxed at the standard rate.

There are several ways to get crypto assets. Depending on these, you will file crypto taxes differently:

• crypto trading as an investment for monetary gain;
• crypto mining;
• receiving cryptocurrencies as payment;
• crypto exchanges;
• receiving a gain of currency as a result of Airdrop and hard fork.

How to report crypto in your tax return if you are trading?

If you buy cryptos as an investment or hold it, the IRS will not consider this fact a taxable event. You must pay tax when you sell your asset and make a profit (the exceptions are deferral or tax-exempt accounts). Use crypto tax software to avoid mistakes when you provide your trading data.

In this case, you pay regular crypto tax. However, recognizing a loss may offset your other gain by up to $3,000 during the reporting period. If you recorded the fact of a loss in the tax return but did not use it, it can be transferred to subsequent periods with the same conditions.

Accounting for mining in the tax return

The crypto tax office will consider this a taxable event if you receive your crypto to account through mining. Such income must be reported as crypto on tax form 1099-NEC. At the same time, the amount of tax is affected by the asset’s market value as of the day it was received.

If you do not have a Form 1099, you must also report crypto gain earned, as this may be subject to additional self-employment crypto tax.

Receive payments with cryptocurrencies

When receiving crypto as payment, the crypto tax is charged, taking into account the market value on the day of the crypto transaction.

Crypto exchange

Since the currency in which the crypto tax is calculated is the US dollar, you must consider the fair market value when filing a declaration with gains, even if you are buying one cryptocurrency for another. At the same time, as in the case of purchasing an asset as an investment, you must pay tax when transferring the asset to another participant in the transaction. This implies recognizing the gain or loss and paying the corresponding crypto tax, as described above.

Airdrop and hard fork 

A hard fork and an airdrop are related events that can lead to you having a new cryptocurrency. A hard fork is a global change to the blockchain network that invalidates old records and forces users to switch to a new protocol. Airdrop is a free distribution of tokens of a new currency to users, which appears due to a change in the network protocol. If you received a new gain in this way, it is also subject to crypto tax, and accordingly, this event must be indicated in your income tax return.

We hope this article was helpful to you. One of the following articles discusses how spending cryptocurrency affects your crypto tax. Good luck!