How To File Crypto Taxes In The U.S in 2023?

If you’ve put your money into Bitcoin or any other type of digital currency, it’s crucial to grasp the way the IRS handles the taxation of these investments and what qualifies as a taxable event. The fluctuating nature of cryptocurrency can make it quite bewildering to keep track of your capital gains. Moreover, comprehending the ins and outs of tax implications becomes even more essential if you use crypto for transactions, whether receiving or making payments.

Bitcoin and other cryptocurrencies are subject to both Capital Gains Tax and Income Tax. We have compiled a comprehensive guide to enlighten you about the taxation of crypto in the United States. This ultimate crypto tax guide covers various aspects, including how crypto is taxed, the applicable tax rate, capital gains tax associated with crypto, and income tax related to crypto.

Also read: Indian Budget 2023 on Cryptocurrency: How much tax do you need to pay?

Why do you need to file taxes on crypto in the US?

Cryptocurrency has become super popular recently, attracting a lot of attention. Some folks who are just starting out might believe they can skip reporting their gains, but that’s not a smart move. Ignoring taxes on these earnings, even in the early stages, could lead to hefty fines that could surpass the profits you make from this market. It’s essential to stay on the right side of the law and pay what you owe to avoid any penalties down the line.

According to the IRS, cryptocurrency is considered a type of property rather than a traditional currency. As a result, any profits you earn from selling coins or tokens are still subject to taxes. It’s crucial to report your capital gains and losses on your Schedule D tax form. This way, you stay compliant with IRS regulations and fulfil your tax obligations appropriately.

Learn more about: Comprehensive Taxation Guide For Cryptocurrency Investors

Capital Gains Tax on Crypto

Whenever you sell, trade, or utilize your cryptocurrency, it triggers a taxable gain or loss that falls under the category of capital gains taxes. These taxes are imposed on the profits made from selling assets. It’s important to note that every trade, whether converting crypto back into regular government-issued currency or swapping one type of cryptocurrency for another, is subject to taxation. Since cryptocurrency is regarded as property for tax purposes, any gains or losses resulting from the disposition of digital assets like coins, tokens, NFTs, or any other non-fiat currency are subject to capital gains tax.

To determine your taxable gain or loss, you can use the following calculation:

Taxable Gain (Loss) = Proceeds from sale – cost basis

• The “proceeds from sale” refers to the total amount of money you receive in USD when you sell your cryptocurrency.
• The “cost basis” represents the initial cost you incurred to acquire the crypto, including any fees associated with the purchase. This cost basis helps establish the value of your investment.

When it comes to taxes on cryptocurrency earnings and gains in the United States, there are a few important things to understand. Short-term capital gains and income from crypto can be subject to taxes ranging from 0% to as high as 37%. On the other hand, long-term capital gains are typically taxed between 0% and 20%, but it’s worth noting that certain NFTs considered collectibles may face a 28% tax rate. The specific amount of tax you’ll owe on your crypto income depends on factors such as your overall earnings, the type of transaction involved, and how long you’ve held the asset.

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

Income Tax on Crypto in the US

Whenever you earn cryptocurrency as income, it’s important to remember that it is subject to income taxes and must be reported on your income tax return. There are various taxable events related to crypto that you should be aware of and report, which include (but are not limited to):

• Mining income
• Staking income
• Master node income
• Nodes
• Hardforks
• Airdrops
• Liquidity pool income
• Interest and Yield
• Rewards
• Trade or business crypto income
• Receiving crypto as compensation

2023 tax year – the Federal Income Tax rates are:

Tax Free Crypto

Not all crypto transactions in the USA are taxed. Buying crypto with fiat currency or similar digital assets like NFTs is not taxable. Holding crypto doesn’t trigger taxes either. Taxable events occur when you sell, trade, burn, or dispose of the asset. Earnings from crypto (rewards, staking, yield) are taxable as ordinary income. Donating crypto to charity is tax deductible, with potential appraisal requirements for donations exceeding $5,000. Gifting crypto is tax-free within the lifetime gift limit. Non-receipt-based forks or upgrades are not taxed. Transferring crypto to your own wallet or exchange account is not taxable.

How to File your taxes in the US?

Now that we have a better understanding of how crypto is taxed, let’s discuss the steps you need to take to calculate your crypto totals for reporting on your tax return. To ensure accurate reporting, you’ll need to gather information from various platforms and account for all your crypto activities starting from the very beginning of your investing journey.

Tax Calculating Methods

To get started with your crypto tax preparations, the first thing you should do is gather all your transactions from various wallets and exchanges. Next, you’ll have to figure out the U.S. dollar value of each transaction at the time it took place. Having a clear record of these transactions in chronological order makes it simpler to determine your cost basis and calculate your capital gain. Fortunately, the IRS allows for several methods to calculate the cost basis of investments that are subject to capital gains tax.

• First in first out (FIFO): Under this method, the digital assets you purchased first are considered the first ones sold when you make a transaction.
• Highest in first out (HIFO): With HIFO, the focus is on selling the most expensive digital assets first, regardless of when you acquired them.
• Last in first out (LIFO): In contrast to FIFO, LIFO involves selling the assets you bought most recently as the first ones in a transaction.
• Specific identification (Spec ID): This method allows you to calculate the specific cost basis for each individual transaction, considering the exact purchase price of the assets involved.

Filing taxes

After figuring out the amount of tax you owe, it’s time to tackle the necessary paperwork. Take a look at the following forms you may need to complete:

• Capital gains tax: To report your capital gains tax, you’ll need to fill out Form 8949. If you’ve experienced losses, you might have the opportunity to deduct that amount from your capital gains tax liability. In that case, make sure to complete Form 1040, Schedule D.
• Crypto-based income taxes: When it comes to taxes on your crypto-related income, most individuals will have to complete either Form 1040, Schedule 1, or Schedule C. These forms allow you to report your income from crypto activities and determine the corresponding tax obligations.

However, it’s important to note that depending on your specific situation or tax status, you might be required to complete a different type of 1040 form.

Useful tools for calculating and filing Crypto taxes in the US

If you’re an investor who only conducts a few digital asset activities each year, calculating taxes can be relatively simple. However, for those who are highly involved in the crypto space, dealing with multiple platforms and assets can make the process much more challenging. That’s where crypto tax tools come into play. These software solutions are specifically designed to streamline transaction tracking, calculate capital gains and losses, and generate precise reports.

Now, let me introduce you to a few incredibly useful tools that can assist you in managing your crypto taxes effectively.

Turbo tax.

TurboTax offers independent tax handling with expert assistance through TurboTax Live. You can connect with tax experts via video calls, chats, or phone calls for guidance and answers to your tax-related questions. It caters to all levels of investing and various investment types, guaranteeing 100% accuracy. Importing thousands of stock and crypto transactions from financial partners simplifies the process, saving you time and ensuring a seamless tax preparation experience. TurboTax provides comprehensive support and reliable accuracy, simplifying the entire tax filing journey.

Coin Ledger

Coin Ledger offers a convenient solution for managing your wallets and taxes. It allows you to track your gains, losses, and calculate taxes in fiat currency, among other features. The process is simple and user-friendly. The best part? Coin Ledger IO is completely free to use for most functions. You only pay when you download your tax reports, where you’ll see the cost. It supports over 500 wallets and exchanges, all through API and automated processes.

Also Check Out: Cryptocurrency Tax Software Market Scenario in 2022

What happens if you don’t report cryptocurrency on taxes in the US?

Penalties

Not reporting your crypto taxes can have serious consequences. The IRS has the authority to impose fines of up to 75% of your undisclosed crypto gains, with maximum amounts of $100,000 for individuals and $500,000 for corporations. Furthermore, if you fail to report your crypto taxes, the IRS can keep your tax year under audit indefinitely. The repercussions can even include criminal convictions, which may lead to a five-year imprisonment. To avoid any complications and ensure accurate filing, it’s highly recommended to consult a tax professional who can assist you with calculating and submitting your tax returns.

Tax Deadlines

When it comes to filing tax returns in the USA, the deadline can vary depending on the taxpayer and the tax year they’re dealing with. For the majority of individual taxpayers, the deadline to file their tax return is typically set for April 15th. However, there are instances where this deadline is pushed back by a few days, usually due to holidays or weekends. For example, in the year 2023, the deadline is extended to April 18, 2023.

If taxpayers need additional time to complete their tax return, they have the option to request an extension. This allows them to extend their filing deadline by up to 6 months. To do this, individuals can fill out an automatic extension form called Form 4868, while businesses can use Form 7004.

The following are the typical due dates for taxpayers who follow a calendar tax year:

• Form 1040 is scheduled for April 15th, with a 6-month leeway available until October 15th.
• Form 1065 is scheduled for March 15th, with a 6-month leeway available until September 15th.
• Form 1120 is scheduled for March 15th, with a 6-month leeway available until September 15th.
• Form 1120-S is scheduled for March 15th, with a 6-month leeway available until September 15th.
• Form 1041 is scheduled on April 15th, with a 5 ½ month leeway available until September 30th.

It’s important to note that these due dates may vary for taxpayers who follow a fiscal year. Additionally, certain filers may have different extension times, so it’s always advisable to refer to the instructions provided by the IRS for accurate information regarding specific forms and deadlines.

To conclude

Dealing with crypto taxes can add a layer of complexity to your tax returns, especially if you engage in various activities across multiple wallets or exchanges. The cryptocurrency world is still relatively new and constantly evolving, which means that additional rules and regulations will continue to emerge. It can be quite challenging to navigate the landscape of crypto taxation, which is why having a knowledgeable tax advisor is essential. They can guide you through the intricacies of crypto taxes and ensure compliance with the latest updates and requirements. Stay informed about any new developments in this area to ensure you’re up to date with the evolving tax landscape.