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Personal Finance

How is cryptocurrency taxed? Our Crypto Tax Guide 2023

Jo Willetts, EA

Director, Tax Resources

Published on: May 22, 2023

The global crypto market is worth over a trillion dollars. By some estimates, 20% of American adults own cryptocurrency. The result? Millions of people need to understand the tax implications of crypto investing. If you’re one of them, or want to be, keep reading. 

When you invest in Bitcoin, Ethereum, Dogecoin, Tether, and thousands of other cryptocurrencies, you take on all the related tax risks and obligations. This guide will help you understand the basics of crypto taxation to protect yourself and your investments. 

What is crypto? 

Cryptocurrency, or crypto, is digital or virtual currency. The IRS defines virtual currency as a "digital asset that has an equivalent value in real currency or acts as a substitute for real currency." 

Crypto is usually distributed by, and accessible through, decentralized computer networks using blockchain technology. While some governments have experimented with issuing their own cryptocurrencies, most crypto comes from private parties, not central banks or governments. 

Do you pay taxes on crypto? 

Yes. In the United States all income is subject to taxes and the IRS considers crypto to be property, like stocks, bonds, and real estate. This means any income or losses from crypto can affect your taxes. If you make money on crypto, you need to report it and will likely owe taxes on it. On the other hand, if you lose money, you may be able to take a tax deduction. 

When you trade crypto, sell it, withdraw money from it, have an air drop, or experience a fork, you are generally making capital gain transactions, which means you pay tax on the amount you earned. If you lose money on your crypto investment, or your cryptocurrency exchange goes bankrupt (which happened multiple times in 2022), it counts as a loss in the eyes of the IRS. This could help reduce how much income tax you owe or increase your refund.  

Do you have to report crypto earnings on taxes? 

Yes. You must report all crypto-related income, gains, and losses to the IRS, even if the transaction value is less than $600. 

If the value of your crypto investment goes up and you cash out, you owe money on the amount  of increase in your investment, called capital gains. If you lose money and cash out, you need to report the losses, which will reduce your adjusted gross income. 

What are the IRS crypto tax rates? 

The tax rate for crypto earnings depends on how much income you received and how long you owned your crypto assets. 

If you owned your cryptocurrency for a year or less before selling or exchanging it, you will have a short-term capital gain or loss. You pay the same tax rate on short-term gains as you pay on all your income. This is often called your ordinary tax rate. 

If you sell or withdraw crypto you have had for more than a year, you will have a long-term capital gain or loss. Capital gains rates are 0%, 15%, or 20%, depending on your taxable income amount. 

Capital gains on crypto are taxed at the same rate as other property investments. IRS.gov has detailed information on capital assets

Do you have to report crypto if you didn’t sell? 

No. You don’t need to tell the IRS when you buy or own crypto assets. However, you do have to report your crypto to the IRS when you realize (cash out) any gains or losses from it, use it to pay someone, and/or sell your crypto assets. Also, if you receive crypto as payment for goods or services, the IRS considers it income. You must report it on your tax return. 

It’s important to keep track of all your crypto transactions so you can report the cost basis when you do realize gains or losses. The cost basis is the how much you originally paid for the asset, and it determines how much you have earned or lost. 

How does the IRS know if you have cryptocurrency? 

Cryptocurrencies often claim to be anonymous, but the IRS can track crypto activity to individuals.  

In fact, crypto exchanges such as Coinbase report crypto trades to the IRS via Form 1099-B. If you have crypto activity during the year, the IRS probably already knows about it before you file your taxes. 

If the IRS believes people are trying to use cryptocurrency for illegal activity, they may be able to identify the specific individuals behind the transactions.  

How should you report crypto transactions? 

When you place a crypto transaction through a brokerage or exchange, or use crypto as a means for payment, it is considered a sale or exchange of property. As a result, you need to document the crypto sales details, including how much you bought it for and when. You typically report these transactions on IRS Form 8949, Schedule D, and Form 1040. 

How should you handle crypto gains and losses? 

You are required to document and report each of your crypto transactions on your annual tax return. You should receive a Form 1099-B from the brokerage or exchange you used, and report it on Form 8949 and Schedule D. These transactions are still taxable even if there is no Form 1099-B. 

What if you use cryptocurrency as payment for goods or services? 

If you use crypto to pay another person or business, it is a capital transaction because you are either selling your crypto or buying it. Whether you have a gain or loss depends on whether the value of your crypto rose or fell since you originally purchased it. 

When you receive crypto as payment, it is part of your total income for the year. The amount you report is based on the value of the crypto when you received it, not how much it is worth when you file taxes. 

Can you (legally) avoid paying taxes on crypto? 

You must report all crypto income to the IRS. If you do not, it is fraud and subject to penalties and interest, or worse.  

However, if you held your crypto asset for more than a year before selling or using it to pay others, you may fall into the 0% capital gains tax rate. In that case, you would not owe taxes on the gains, but you must report the transaction(s). 

New opportunities for cryptocurrency investing emerge frequently. They open new possibilities for what you can do with your money and can expand your tax-filing responsibilities.  

Jackson Hewitt stays on top of the latest crypto tax rules and regulations. Our Tax Pros can help you

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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