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Cryptocurrency Tax Guide: A Beginner’s Guide to Filing Crypto Taxes

Over 34 million US adults use cryptocurrency. If you too, use, trade, or accept cryptocurrencies — it is important to understand the tax implications. The final date for filing taxes is right around the corner. Report your taxes on cryptocurrencies today to avoid any penalties.

To make it easy, we have prepared an ultimate guide highlighting each and every step in detail. By the end of this blog, you will be able to report crypto investments on your income tax report — before the 18th April deadline. Let’s get going.

Is crypto taxable in the US?

While there are a few crypto tax-free countries, the United States is not one of them. According to the IRS, you may have to pay income tax on crypto — depending on your trades. It can be as low as 0% to as high as 37%. (more about that later)

There are instances when tax does not apply to crypto transactions. Here are a few cases:

  • When you buy crypto with fiat currency
  • While holding crypto for a lifetime
  • Transferring crypto among your own wallets
  • Gifting crypto (until you reach the transaction limit for gifting — $16,000 for 2022 or $17,000 for 2023)
  • Donating crypto to a registered NGO
  • Creating Non-fungible tokens (NFTs)

Can the IRS track your crypto transactions? If so, how?

During the signup process, most crypto exchanges collect critical user information like your name, date of birth, valid government ID, etc. The IRS can request these records from any exchange by issuing a John Doe summons — an inspection conducted to determine the identities of unknown individuals who are believed to be evading taxes.

In the past, IRS has inspected popular exchanges like Coinbase and Kraken by issuing John Does summons. Crypto platforms registered in the US are required to issue 1099 forms to their customers and report their data to IRS. This way, IRS can track all your crypto transactions online.

Taxes levied on crypto in the US

Bitcoin and other cryptocurrencies are considered property from a tax standpoint. Thus, for individuals, two potential taxes are applicable based on their transactions — Income Tax (for short-term capital gains) or Capital Gains Tax (for long-term capital gains). Let’s understand them individually.

Crypto Capital Gains Tax

Capital gain tax is usually applicable whenever you dispose of your crypto assets. This can happen in a few ways:

  • Trading crypto for fiat currency
  • Exchanging crypto
  • Purchasing goods through crypto

Taxes will be applicable on any capital gains (profit) earned from your transactions. As such, there’s no specific capital gain tax rate — it boils down to the tenure of your investment and the amount you make.

Short-term Capital Gains Tax applies to crypto investments for up to 12 months or less. And for any assets held for over 12 months, long-term Capital Gains Tax will be levied. Let’s look at each tax bracket one by one.

Long-term Capital Gains Tax

Long-term capital gains tax is lower as compared to federal tax. If your total earnings in a financial year, including crypto investments, are less than $41,676, you don’t have to pay any taxes. Post that, taxes will be levied as follows:

Long-term Capital Gains Tax rates for the 2022 tax year are:

Tax Rate Single Head of Household Married filing jointly Married filing separately
0% Up to $41,675 Up to $55,800 Up to $83,350 Up to $41,675
15% $41,676 – $459,750 $55,801 – $488,500 $83,351 – $517,200 $41,676 – $258,600
20% $459,750+ $488,500+ $517,200+ $258,600+

 

The long-term Capital Gains Tax rates for the 2023 tax year (for taxes due in April 2024) are:

Tax Rate Single Head of Household Married filing jointly Married filing separately
0% Up to $44,625 Up to $89,250 Up to $44,625 Up to $59,750
15% $44,626 – $492,300 $59,751 – $523,050 $89,251 – $553,850 $44,626 – $276,900.
20% $492,301+ $523,051+ $553,851+ $276,901+

 

Short-term Capital Gains Tax (Federal Income Tax):

For all your short-term capital gains, you are liable to pay the same tax rate that’s applicable to your income. They start from 10% and can go all the way up to 37%. For 2022, the rates are:

Tax Rate Single Head of Household Married filing jointly Married filing separately
10% $0 – $10,275 $0 – $14,650 $0 – $20,550 $0 – $10,275
12% $10,276 – $41,775 $14,651 – $55,900 $20,551 – $83,550 $10,276 – $41,775
22% $41,776 – $89,075 $55,901 – $89,050 $83,551 – $178,150 $41,776 – $89,075
24% $89,076 – $170,050 $89,051 – $170,050 $178,151 – $340,100 $89,076 – $170,050
32% $170,051 – $215,950 $170,051 – $215,950 $340,101 – $431,900 $170,051 – $215,950
35% $215,951 – $539,900 $215,951 – $539,900 $431,901 – $647,850 $215,951 – $323,925
37% $539,901+ $539,901+ $647,851+ $323,926+

 

For 2023 — the Income Tax rates are:

Tax Rate Single Head of Household Married filing jointly Married filing separately
10% $0 to $11,000 $0 – $15,700 $0 – $22,000 $0 – $11,000
12% $11,001 – $44,725 $15,701 – $59,850 $22,001 – $89,450 $11,001 – $44,725
22% $44,726 – $95,375 $59,851 – $95,350 $89,451 – $190,750 $44,726 – $95,375
24% $95,376 – $182,100 $95,351 – $182,100 $190,751 – $364,200 $95,376 – $182,100
32% $182,101 – $231,250 $182,101 – $231,250 $364,201 – $462,500 $182,101 – $231,250
35% $231,251 – $578,125 $231,251 – $578,100 $462,501 – $693,750 $231,251 – $346,875
37% $578,126+ $578,101+ $693,751+ $346,876+

 

How to calculate crypto capital gains?

The amount of tax you’re liable to pay depends on your crypto capital gains. But how do you calculate it?

Capital gains or losses are the difference between the value of your crypto from the day you acquired it until you sell it. Whenever you profit from your transactions, it will be considered a capital gain, and if you incur a loss, it will be treated as a capital loss.

To calculate your crypto capital gains or losses, you will have to determine the cost basis — the total cost of acquiring your crypto assets. This includes additional charges like transaction fees, platform charges, etc.

Cost Basis = Cost Price of Crypto Asset + Any Additional Charges

Finally, to determine whether you have capital gain or loss, you will need to subtract your cost basis (cost of the crypto asset + any additional fees) from the value of your crypto asset at the time you sold it.

Capital Gains/Loss = Selling price of the asset – Cost Basis

Let’s say you acquired a Bitcoin for $100. The transaction fee you bore was $1, and the platform also charged you $1 as a processing fee. This means your cost basis will be $102. Now if you sell it for $150 — you will have a capital gain of $48. Here, the taxable amount will be $48.

In case you incur losses, you’re not liable to pay anything. However, tracking your losses is a good practice as it may help you reduce your overall tax liability. You can add losses of up to $3000 per year.

Did you know? Losses cannot be claimed on lost or stolen crypto.

Taxes will apply to your capital gains (if any). To get exact numbers, add up all your long-term and short-term capital gains separately.

Pro Tip: You can use a crypto tax calculator to estimate your taxes.

Now you know how to calculate your capital gains or losses, it’s time to file your income tax return report. Let’s look at the process of filing taxes in the US.

How to report crypto on taxes?

The deadline for filing crypto gains, losses, and total income for 2023 is approaching. Act now to avoid late filing and payment penalties which could be as much as 4.5% of the due balance every month up to 25%. Better to start now than pay extra later.

Let’s understand how to report cryptocurrency on taxes.

To get started, you will have to accurately calculate your crypto gains, losses, income, and expense. Once you have all the numbers, follow these steps:

  • Add all your taxable crypto transactions to Form 8949.
  • Carry your net capital gains and losses from Form 8949 to Schedule D (Form 1040).
  • If you earn from bonuses, airdrops, liquidity pools, etc., you must fill out Schedule 1. And if you’re running a crypto business — complete Schedule C instead.

Finally, attach all your forms 8949, Schedule D, Schedule 1, or C to your individual income tax return form 1040. Let’s break down the entire process into four steps.

4 Steps to reporting crypto on Income Tax

1. IRS Form 8949 — Add all your taxable transactions

IRS form 8949 is used for reporting sales and exchanges of capital assets — stocks, bonds, and cryptocurrencies. It’s divided into two parts: Part 1 is for short-term, and part 2 is for long-term capital gains. [IRS Form 8949 – Download form]

IRS Form 8949

Here, you’re required to fill out the respective details of sections A through H based on your transactions. At the bottom of the form, you have to add your total gains and losses.

IRS Form 8949 - 2

Here, you will have to add every crypto transaction in the report — including losses. Every year you can include losses of up to $3000 against your profits.

After completing Form 8949, you can proceed with Schedule D (Form 1040).

Pro Tip: You can use tax automation software for calculating your capital gains, losses, income, and expenses automatically. Here’s a list of top tax automation software for 2023.

2. Schedule D (Form 1040) — Include your net capital gains/losses

You can add your net capital gains and losses from all investments to Schedule D (Form 1040). Just like Form 8949, Schedule D is also divided into two parts — short-term and long-term capital gains and losses. [Schedule D (Form 1040) – Download Form]

In part 1, you can either fill lines 1a, 1b, 2, or 3. In columns D, E, and H — carry forward the total proceeds, cost basis, and gain or loss from Form 8949.

IRS Form 1040 - 1

In part 2, you can either fill out lines 8a, 8b, 9, or 10 and add totals in D, E, and H. You can refer to Form 8949 if required.

IRS Form 1040 - 2

In part 3, you have to add up your transactions from parts 1 and 2. Check relevant boxes and proofread your form carefully.

IRS Form 1040 - 3

3. Schedule 1 & Schedule C (Form 1040) — Report additional crypto income

Not all crypto investments can be considered as a capital gain or loss. There are instances when your investments will be viewed as income. Based on your transactions, you will either use Schedule 1 (Form 1040) or Schedule C (Form 1040). Let’s understand both of them one by one.

A. Schedule 1 (Form 1040)

If you’re earning crypto as a side hobby from sources like airdrops, forks, sign-up bonuses, etc. — you should report it on Schedule 1 (Form 1040) under ‘other income’ (part 1, line 8). [Schedule 1 (Form 1040) – Download Form]

Schedule 1 - Form 1040

B. Schedule C (Form 1040)

There are a few scenarios when you can use Schedule C to report your crypto income. For instance, if you’re self-employed and also earn through crypto or run a mining business. In case your income matches the amount of a self-employed taxpayer — you will need to pay your self-employment taxes as well as fill out Schedule C (Form 1040). [Schedule C (Form 1040) – Download Form]

IRS Form 1040SC Part 1

In part 1 of Schedule C, you can add your gross income and profits. If you are also running a mining business, you can deduct the expenses (if any) in part 2 of Schedule C (line 30).

IRS Form 1040SC Part 2

Add relevant details in all the fields on Schedule C (Form 1040), and you’ll be ready for the final step of the process.

4. Form 1040 — Reporting crypto in your individual income tax return.

Finally, it’s time to fill out your individual tax return form. Here, you need to attach all the forms that you’ve completed so far. Here are a few lines that are associated with previous forms: [IRS Form 1040 – Download Form]

  • Net Capital gain or loss report from Schedule D on line 7.
  • Other income report from Schedule 1 on line 8.

IRS Form 1040 1

Also, remember to check the ‘Digital Assets’ box.

IRS Form 1040 2

Fill out all the other relevant information on the form and submit it before 18th April 2023.

Cryptocurrency tax exemptions

The government offers a few tax exemptions to all crypto investors. Let’s look at them:

  • Gifting crypto

Every year, you can gift up to $16,000 in crypto without paying any taxes. This way, you can transfer Bitcoins to any of your friends or family members tax-free.

  • Capital Gains Tax-Free Allowance

On long-term capital gains, you won’t need to pay any taxes if the total income for 2022 is less than $41,675. This amount is raised to $44,625 for 2023.

  • Long-term Capital Gains Tax Rate

If you keep your crypto for over a year, you will pay a significantly lower tax rate. It could be between 0% to 20% based on your earnings for a financial year.

File your tax return today

If you are an active crypto investor, now is the time to file your tax return. We hope this guide helped you understand taxation rules and regulations for reporting taxes on your crypto investments.

IRS is constantly updating its guidelines and tightening the restrictions to track crypto investments. Tax fraud or evasion are federal offenses and can incur penalties of up to $100,000 as fines or up to 5 years in prison. So if you’re yet to file your taxes, act today.

Speed Team

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