Crypto Tax Guide 2023: How to Report Crypto on Your Taxes
Make no mistake: You need to report your crypto activity on your tax return. Cryptocurrency has become very popular in recent years, and that hasn’t gone unnoticed by the IRS. If you were active in the crypto markets over the past year, you’ll need to report it on your tax return, or risk being penalized.
Because of this, it’s important that investors know the basics regarding filing and paying taxes on their cryptocurrency investments, which includes reporting their trading activity and income.
Table of Contents
How Cryptocurrency Taxes Work
One of the most important things investors need to know before investing in cryptocurrency is how crypto taxes work. Additionally, investors should be aware that classification of cryptocurrencies varies depending on the federal government agency overseeing the investment activity.
The IRS defines cryptocurrencies as digital assets, and that includes non-fungible tokens (NFTs), and stablecoins, too. Despite the fact that crypto is often thought of as a currency, they are not considered currency for federal tax purposes.
Instead, transactions of cryptocurrencies are treated as property, like stocks, bonds, and other capital assets. So, when someone uses, sells, or is paid in a cryptocurrency, they are generally required to pay taxes on their realized gains.
Note, though, that even as the IRS treats cryptocurrencies as property for tax purposes, this categorization is not consistent across all federal government agencies.
The Commodity Futures Trading Commission (CFTC), for example, classifies cryptocurrencies as a commodity when regulating a variety of crypto-related trading markets. The CFTC oversees cryptocurrencies when they are “used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.”
In contrast, the U.S. Securities and Exchange Commission (SEC) attempts to regulate different cryptocurrencies as securities and investors can be subject to securities laws.
In all, there’s something of a turf war happening in Washington D.C. over crypto regulation. But for taxpayers, the most important thing to know is that crypto is considered “property” by the IRS, and investors will need to report it as such on their tax returns.
Do You Have to Pay Taxes on Crypto?
Investors are required to pay capital gain taxes on cryptocurrency when selling, trading, or disposing of their holdings. Additionally, cryptocurrencies can be taxed as income if an individual receives the crypto as a gift, from mining, or for services rendered. There are different types of income, and crypto income is among them.
So, there are two types of taxes potentially at play.
However, not all crypto transactions result in a tax liability. These nontaxable events include buying crypto with cash and holding it, donating it to a qualified charity or non-profit, or transferring crypto to yourself between wallets or accounts. In effect, investors need to realize a gain or loss.
Situations When You’ll Need to Pay Taxes on Crypto
• Cryptocurrency is sold for cash: When an investor sells cryptocurrency for government-backed currency (fiat currency) and makes a profit, the investor will have to pay capital gains taxes on the proceeds, just as they would on the sale of a share of stock.
• Cryptocurrency is used to purchase a good or service: If an individual uses their cryptocurrency to buy a new car or pay for a haircut, they will likely owe capital gains taxes on the purchase. To the IRS, using crypto to buy something is the same as selling it for cash, because the crypto needs to be sold for dollars before it can be used to exchange for a good or service. This creates a “realized” gain.
• Exchanging cryptocurrencies: Converting or exchanging one crypto for another is comparable to selling the one to purchase the other. As a result, the investor may have to pay capital gains tax on the sale of the first crypto, if it was sold for a profit.
• Being paid in cryptocurrency: If an individual decides to be paid in cryptocurrency, they will need to pay income taxes on that income (just as if they were being paid in dollars) which will depend on their individual tax bracket.
• Mining cryptocurrency: The proceeds from mining Bitcoin and other cryptocurrencies are typically taxed as income. It’s also possible for the proceeds of some miners to be taxed as business income.
• Crypto is acquired via an “airdrop” or “hard fork”: In the event of a crypto airdrop or hard fork that results in new coins, those new coins are taxed as income.
Is Crypto Investing Taxed as Income?
Crypto investing is taxed more or less the same way that investing in stocks, ETFs, or other securities is taxed. That is, tax liabilities are generated when an investor disposes of their holdings by selling or exchanging them. Only then do they have both a purchase price (cost basis) and a disposal price, which can be positive or negative ( a gain or a loss).
From there, capital gains taxes can be calculated, similar to how things work with traditional investment tax rules.
Crypto is taxed as income under a few select circumstances, as discussed. So, no, crypto investing itself isn’t taxed as income, but that doesn’t mean that crypto itself is never taxed as income.
How Much Do I Owe in Crypto Taxes?
The amount of crypto taxes owed varies depending on an investor’s income, tax filing status, and the length of time that an investor owned a crypto asset before selling it. Additionally, the type of crypto transaction affects what tax rate an individual will be charged. As mentioned above, some situations result in a capital gains tax liability, and others an income tax liability.
Long-Term Capital Gains Crypto Tax Rates for 2023
If an investor owned a cryptocurrency for more than 365 days before selling or using it, the proceeds of the transaction are taxed at the long-term capital gains tax rate. Here are the cryptocurrency capital gains rates on long-term gains for the 2022 tax year (taxes filed in 2023):
| Long-Term Capital Gains Tax Rates for 2022 | ||||
|---|---|---|---|---|
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 0% | $0-$41,675 | $0-$83,350 | $0-$41,675 | $0-$55,800 |
| 15% | $41,675-$459,750 | $83,350-$517,200 | $41,675-$258,600 | $54,101-$488,500 |
| 20% | >$459,750 | >$517,200 | >$258,600 | >$488,500 |
|
Source: Internal Revenue Service |
||||
Short-Term Capital Gains Crypto Tax Rates for 2023
If an investor owned a cryptocurrency for less than a year before selling it or using it, the gains are taxed as ordinary income. Additionally, if an individual was paid in crypto, mined crypto, or received crypto via an airdrop, they are taxed as ordinary income. Here are the income tax brackets for the 2022 tax year (taxes filed in 2023):
| Short-Term Capital Gains and Income Tax Rates for 2022 | ||||
|---|---|---|---|---|
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 10% | $0-$10,275 | $0-$20,550 | $0-$10,275 | $0-$14,650 |
| 12% | $10,275-$41,775 | $20,550-$83,550 | $10,275-$41,775 | $14,650-$55,900 |
| 22% | $41,775-$89,075 | $83,550-$178,150 | $41,775-$89,075 | $55,900-$89,050 |
| 24% | $89,075-$170,050 | $178,150-$340,100 | $89,075-$170,050 | $89,050-$170,050 |
| 32% | $170,050-$215,950 | $340,100-$431,900 | $170,050-$215,950 | $170,050-$215,950 |
| 35% | $215,950-$539,900 | $431,900-$647,850 | $215,950-$539,900 | $215,950-$539,900 |
| 37% | >$539,900 | >$647,850 | >$539,900 | >$539,900 |
|
Source: Internal Revenue Service |
||||
How to File Taxes on Cryptocurrencies
The most important thing for investors to understand is that they are required to report crypto holdings, gains, and losses to the IRS when filing their tax returns. If a cryptocurrency return is generated — positive or negative — or some type of income is realized from holdings, your crypto activity will need to be reported to the IRS. This is why it’s important to keep track of any and all crypto transactions.
Here are the basic steps to take when filing taxes on cryptocurrencies.
• Determine what, if anything, is owed. If an investor completed a crypto transaction (selling, exchanging, or using to purchase a good or service), it is likely that it generated a tax liability.
• Record and report transactions. All cryptocurrency transactions will need to be reported on your tax return. Like with stocks and other investments, the IRS requires a paper trail to ensure an individual reports their full tax liability. In some cases, crypto exchange will provide the transaction history for the investor via a 1099 form, or something similar.
• File the correct forms with your tax return. The IRS requires specific forms depending on the activity an individual has conducted with their crypto. That could include making calculations on Form 8949 , and then reporting the results on Schedule D of Form 1040 , which outlines and summarizes capital gains or losses
Filing Crypto Taxes on Your Own
It is possible to figure out your crypto tax liabilities, and file on your own. But know that many experts may recommend against this, especially if you’re a particularly active crypto investor or trader. That’s because there can simply be so much information that needs to be reported, that it can be overwhelming for the typical person, and thus, hard to keep track of.
There are services that can help you keep track of your transactions, but if you’re using multiple exchanges or brokerages, and even some decentralized exchanges, you may miss a portion of your activity that needs to be reported.
If you only have a handful of crypto transactions to account for, you may be able to file your crypto taxes yourself. But it may be best to reach out to professionals for help.
How to Lower Crypto Tax Liability
If an investor is looking to lower their crypto tax liability (who isn’t looking for ways to reduce income taxes, and other taxes?), there are several options. Many of the same strategies that are used for traditional investments, like stocks, apply to crypto holdings. Here are a few examples:
Buy and Hold
The buy-and-hold strategy can help investors take advantage of the long-term capital gains tax rate, which is lower than the short-term capital gains tax rate as noted above. When an investor holds on to their crypto for at least one year, their tax rate for the crypto will be lower than if they sold within the first year.
Tax-Loss Harvesting
If a loss is realized on a crypto transaction, it can be used to offset the gains made on other holdings. This is called “tax-loss harvesting,” and is a common tactic used to lower tax liabilities on other investments. However, if an investor’s crypto is somehow stolen or lost, they are out of luck and won’t be able to apply the loss against their gains to lower their liability.
Investors can use tax-loss harvesting for their crypto holdings to offset as much as $3,000 in non-investment income. If they’ve incurred losses beyond that limit, they can carry forward those losses to use in future years.
Also, investors who are concerned about triggering wash sale rules in regards to their crypto sales have no reason to fear. Under current rules, wash sales do not apply to cryptocurrencies. (Though it’s generally expected that this will change at some point in the future.)
Charitable Donations
The IRS classifies crypto as property, and property donations are tax-deductible, and not subject to capital gains taxes.
Here’s how this might work in an investor’s favor: If an investor bought a Bitcoin for $10,000 more than a year ago, and it now has a value of $35,000, they would owe capital gains taxes on that $25,000 gain if they cashed out. But by donating it, they can avoid those capital gains taxes and also take a deduction “generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year,” according to the IRS .
Buy and Sell Cryptocurrency in 401(k) or IRA
Some tax-advantaged retirement accounts like a 401(k) or an IRA allow investors to add cryptocurrencies into their portfolios. In these accounts, no annual taxes are assessed on the transactions, since they enjoy tax-free growth. Investors can therefore take advantage of these benefits to trade within the accounts and not be taxed on every transaction.
However, depending on the type of account used, an investor may face taxes upon withdrawal. For instance, if you were to withdraw money from an IRA account prior to reaching age 59.5, you’d be subject to a 10% penalty.
Recommended: Guide to Bitcoin IRA: Pros, Cons, and What to Know
The Takeaway
Investors need to report their crypto activity to the IRS, and pay applicable tax liabilities. Most crypto activity is subject to capital gains taxes, but depending on the circumstances outlined above, cryptocurrency transactions and investments may be taxed as property, like stocks, or as income.
Investors should keep this in mind, remembering that cryptocurrency tax situations are nuanced and complicated. For that reason, it may be best to reach out to a tax professional for help when filing your taxes. But by keeping track of your crypto holdings and transactions, managing your cryptocurrency tax liabilities shouldn’t be too difficult.
FAQ
How much are crypto taxes?
The amount an investor owes in crypto taxes depends on several factors, including how much trading they did, and how much they profited from those trades. Income taxes may also be applicable, too.
When do your taxes for crypto investments need to be filed?
Investors need to report and pay applicable crypto taxes at the same time that they file their tax return. Generally, that’s due by mid-April, on Tax Day. Investors can ask for an extension, or even sign up for an installment plan if they can’t afford to pay their crypto taxes.
What happens if you don’t pay your crypto taxes?
If you don’t pay your crypto taxes (or fail to report your crypto activity to the IRS), you could incur financial penalties, or even jail time. If caught, you could be facing audits of several years’ of tax returns, and even face serious charges, such as tax evasion.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount
Bonus Payout
Low
High
$50
$99.99
$10
$100
$499.99
$15
$500
$4,999.99
$50
$5,000+
$100
SOIN1222001
