Crypto Tax: The Definitive USA Guide 2023
Last Updated: May 30, 2023
Crypto Taxes – FAQs
Is crypto taxable?
Yes, purchasing crypto with fiat or holding crypto is not taxable, but selling, trading or spending your crypto is taxable, as well as any income earned from the crypto such as staking. If you are a US taxpayer, you should report your crypto gains, losses and income in your yearly tax return.
I made money in crypto, do I have to pay crypto taxes?
Yes, every US taxpayer is required to pay taxes on any income or gains from the sale or exchange of cryptocurrency. While you may not receive a tax form from the exchanges, you should report all trades and income in your yearly tax return and pay any tax due by the applicable due dates.
I lost money, should I file crypto taxes?
Yes, it is important to report any gains and losses from cryptocurrency transactions on your tax return. Even if you lost money and owe no tax, you should file as you can use these losses to offset other gains in the current or future years.
I had funds in a bankrupt exchange, can I get tax relief?
If you managed to sell or trade the coins, you must report any gain or loss no different than any other gains or losses from trading. If you still own the coins but are currently unable to access them due the bankruptcy proceedings, such as the case of FTX, you are not currently allowed to write them off based on the current tax law. Furthermore, FTX customers with funds on the exchange have not lost all the funds, as they are considered creditors in the bankruptcy case. It is expected that customers will recover some amount, however, the amount of the recovery after other creditors are paid remains unknown. For this reason, taxpayers have not realized a total loss yet and the amount of the loss will remain unknown until the bankruptcy proceedings are finalized, which could take over a year.
Is mining taxable?
Yes, the value of the coins mined is reported as income based on the coins’ fair market value at the time you obtain control of the new coins.
Do I pay taxes if I buy something with crypto?
Yes, the purchase of goods or services with cryptocurrencies is considered a taxable disposal. It is no different than if you sold your crypto for fiat first, then you made the purchase with the proceeds. The disposal of the cryptocurrency is the taxable event and you must calculate and report your taxable gain or loss.
I have never filed crypto taxes and should have, what can I do?
If you owe tax for years that you have not reported, a good first step would be to find a tax advisor who can help guide you through the process of back-filing. You should also get set-up with Accointing so that you can calculate your crypto taxes for any years missed – this will be required in filing any back taxes. Tax evasion is a criminal offense that should not be taken lightly.
Cryptocurrency Taxes – TL;DR
Capital Gains Tax on Crypto
Any time you sell, trade or use your crypto, you will incur a taxable gain or loss on the disposition of the crypto subject to capital gains taxes, a tax on the gains from the sale of assets. Every trade is taxable – whether selling crypto back into fiat (any government-issued money) or trading one crypto into another.
As cryptocurrency is considered property for tax purposes, any gains and losses from disposition of crypto assets are subject to capital gains tax. This applies to coins, tokens, NFTs and any other type of digital asset that is not a fiat currency.
Your taxable gain or loss is calculated as:
Taxable Gain (Loss) = Proceeds from sale – cost basis
Proceeds from sale: Amount in USD you receive for your crypto
Cost basis: Acquisition cost of your crypto, including any fees
Once you have connected all your wallets and reviewed your data with accointing, our tool will calculate your capital gains (and losses) and provide you with a tax report that you can use to accurately file your crypto taxes.
The IRS issued Notice 2014-21 along with FAQs providing that crypto (virtual) currency is taxable as property for Federal income tax purposes. As such, any gains and losses on disposition of crypto are subject to capital gains taxes.
Any time you receive crypto as income this is subject to income taxes and should be reported on your income tax return. The list of taxable crypto events includes (but is not limited to):
- Mining income
- Staking income
- Master node income
- Liquidity pool income
- Interest & Yield
- Trade or business crypto income
- Receiving crypto as compensation
While crypto income can have many forms, the rule of thumb is that if you open up your wallet (or exchange account) and you have more coins or tokens than you had before, then the new coins or tokens received should be recognized as ordinary income based on their value at the time that you obtain control of the coins.
The IRS addressed mining in Notice 2014-21, while it provided guidance on airdrops and hard forks in Rev. Rul. 2019-24. In both cases, the conclusion is that if the taxpayer receives new units of a cryptocurrency, those new units are taxable. While no formal guidance has been provided by the IRS on other types of income such as staking, the accepted practice has been to treat staking rewards the same as mining.
Crypto Capital Gains
If you make money from crypto by means of buying low and selling high, you will pay tax on the gains which are reported on Form 8949 of your yearly tax return.
What are Common Taxable Crypto Disposals?
Any time you sell, trade or spend your crypto, you have a taxable disposal. While acquiring and holding crypto is not subject to taxes, when you dispose of that coin, you will have to pay taxes on your gain or loss. The most common taxable disposal is by exchanging your crypto into another coin (or stablecoin). However, all of the following would be considered taxable disposals:
- Swaps on a decentralized exchange
- Spending crypto
The taxable gain or loss for each disposal is calculated with a formula.
In the United States, taxpayers have to report all their gains and losses from any taxable disposals during the year with their yearly income tax return. A tax tool such as Accointing will provide you with a tax report and Form 8949 so you can report your crypto capital gains in your own tax return.
- Erik purchased one Bitcoin in 2019 for ,000. He held it at the exchange where he purchased it and did nothing else with it until 2021, when he transferred it to his hardware wallet. In 2022, he transfers the Bitcoin back to the exchange and sells it for 5,000 USDC, which he holds in his wallet. Assume Erik had no other crypto transactions.
- Erik has a capital gain to report only in 2022, the year in which he sold his Bitcoin. He has a gain of 1,000 (5,000 USD value of USDC – ,000 cost basis).
- Same fact pattern, but assume that Erik used his Bitcoin in 2022 when it was trading at 5,000 to buy a car that was worth 5,000.
- Erik has a capital gain in 2021 as using his Bitcoin to buy goods is the same as if he sold his Bitcoin for cash first then he used the cash to buy the goods. He has a gain of 1,000 (5,000 USD value of USDC – ,000 cost basis).
- George buys 100 Solana in 2021 when it was trading at 50, for 5,000. George decides to sell this for USD in 2022 when Solana is trading at 0 for 000.
- George has a taxable loss of 3,000 (,000 proceeds – 5,000 cost basis) that he can use if he has any other capital gains.
- Laura daily-cost-averages into Bitcoin by putting in 00 once a week. Once she buys her Bitcoin, she either keeps it at the exchange or occasionally transfers it to her hardware wallet, but does not trade, sell or do anything else with this Bitcoin other than save it.
- Laura has no taxable transactions to report or pay tax on from her Bitcoin investments.
The IRS issued Notice 2014-21 along with FAQs providing that crypto (virtual) currency is taxable as property for Federal income tax purposes. The IRS directs taxpayers to Publication 544 – Sales and Other Dispositions of Assets for more information, which further explains that “ if you disposed of any virtual currency in 2022 that was held as a capital asset through a sale, exchange, or transfer, use Form 8949 to figure your capital gain or loss and report it on Schedule D (Form 1040).”
Short-Term vs Long-Term Capital Gains and Losses Tax on Crypto
For United States taxpayers, capital gains taxes have a different tax rate depending on whether the gains are long-term or short-term. The idea is to incentivize holding of investments by providing a lower tax rate while taxing more active traders with ordinary tax rates. Any long-term gains, from crypto held for more than one year, will be taxed at the long-term capital gains tax rates which depending on your ordinary rate, will be 0%, 15% or 20%, while any short-term gains, from crypto held for a year or less, will be taxed at the taxpayer’s marginal rate, which will range from 10% to 37%. Please refer to sections Ordinary Income Tax Rates and Long-term Capital Gain Rates for a breakdown of tax rates per taxable income bracket.
While depending on your situation various tax rates can apply, long-term gains will always be taxed at a lower rate than short-term gains for any individual taxpayers, so generally speaking, it is better to pay taxes on long-term gains over short-term gains.
On your individual tax filing, short-term losses will first offset short-term gains, while long-term losses will first offset long-term gains. The result, a net short-term gain or loss and a net long-term gain or loss, are further added together to come up with your capital net gain or loss. Your tax is based on a formula that considers the portion of short vs long term gain included in the net number, and if you end with a net loss, you can use up to ,000 a year against ordinary income (such as wages) and carry forward the excess.
- During 2022, Sonya sold the following amounts of crypto (all for USD):
- Sonya will file her crypto taxes as:
- .5 BTC for 6,000 – cost basis of ,000, purchased in 2020
- 2 ETH for ,000 – cost basis of 00, purchased in 2020
- 1000 MATIC for ,150 – cost basis 00, purchased on June 2022 (sold November 2022)
- 00 worth of SHIB – purchased in April 2022 for ,500
- Short-Term – total ST Loss (50)
- Long Term – total LT Gain $ 14,400
- Total Net Gain of 4,150 taxed as a long term gain
- 50 gain from MATIC (,150 – 00)
- ,000 loss from SHIB (00 – ,500)
- 2,000 gain from BTC (6,000 – ,000)
- ,400 gain from ETH (,000 – 00)
- During 2022, Peter sold the following coins:
- Peter will file his crypto taxes as:
- Assume Peter has no other capital gains or losses.
- 1 BTC for 6,000 on November 2022 – cost basis of ,000, purchased in 2020
- 10 ETH for 2,000 on November 2022 – cost basis of 0,000 purchased in 2022
- Short-term loss (8,000) – 10 ETH: (2,000 – 0,000)
- Long-term gain ,000 – 1 BTC: (6,000 – ,000)
- Total Capital Loss (0,000)
- Peter can use ,000 of this loss as a deduction against other taxable income in 2022 (wages, business income, interest, dividends, crypto income such as staking, hard forks or airdrops)
- Peter can carry forward the remaining ,000 loss to future years to apply against future gains. If he has no other capital gains, he can use ,000 of this loss against other taxable income in each future year.
All information on reporting of crypto capital gains is based on reporting of property transactions, based on the IRS FAQs. For more information on reporting capital gains refer to the instructions to Form 8949.
There are different tax methods taxpayers can use when disposing of units of the same property, such as units of crypto.
- FIFO (first-in-first-out)
- LIFO (last-in-first-out)
- HIFO (highest-cost-in-first-out)
- Specific Identification
The different methods exist to simplify calculating disposals since identifying the specific unit of crypto disposed of could be extremely difficult. They tell us how to account for disposals when we have multiple coins, e.g. I sold 20 coins out of my pool of 100 coins, which ones did I sell?
The IRS recommends using FIFO, unless the taxpayer can specifically identify the disposed coins. In Question 39 of their FAQs, the IRS states that taxpayers “may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.” In Question #41 they state that “If you do not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.”
Applying HIFO or LIFO might also satisfy the requirements for specific identification, as your Accointing tax report will provide all necessary information for each disposal. Question #40 says that “You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address. This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”
- During 2019 and 2020, Jason made the following purchases of Bitcoin.
- He sells 3 BTC in 2022, each for 5,000 for a total of 5,000. His gains, with each method would be calculated as:
- 1 for ,000 – May 2019
- 1 for ,500 – June 2019
- 1 for ,800 – August 2019
- 1 for 2,500 – January 2020
- 1 for ,000 – March 2020
- 1 for 2,000 – August 2020
- 1 for ,000 – September 2020
- He is assumed to have sold his first acquired Bitcoin first. Therefore the May 2019, June 2019 and August 2019 Bitcoin are deemed sold.
- Taxable Gains total 3,700
- 5,000 – ,000 = 9,000
- 5,000 – ,500 = 9,500
- 5,000 – ,800 = 5,200
- He is assumed to have sold his most recently acquired Bitcoin first. Therefore the September 2020, August 2020 and March 2020 Bitcoin are deemed sold.
- Taxable Gains total 8,000
- 5,000 – ,000 = 6,000
- 5,000 – 2,000 = 3,000
- 5,000 – ,000 = 9,000
- He is assumed to have sold his highest cost Bitcoin first. Therefore the January 2020, August 2020 and August 2019 Bitcoins are deemed sold.
- Taxable Gains total 0,700
- 5,000 – 2,500 = 2,500
- 5,000 – 2,000 = 3,000
- 5,000 – ,800 = 5,200
Wash Sale Rule
While the wash sale rule does not apply to crypto (yet), this will probably change in the near future as legislators have sought to close this loophole.
In traditional finance, the Wash Sale Rule forbids traders from selling assets at a loss, claiming their loss and purchasing back the same asset. Claiming the tax loss while remaining in the same economic position makes the sale appear for tax purposes only, and the deduction of the loss is forbidden and deferred until the disposal of the newly acquired property.
There has been no official guidance in the USA on crypto wash sales. Internal Revenue Code §1091 provides the law on wash sales, which applies specifically to “stocks or securities”, while the IRS FAQs state that cryptocurrencies are property, not stocks or securities. This has created a loophole in the industry that is likely to be closed in the near future.
- Jane has 1 BTC that she purchased at 0,000. BTC is currently trading at 7,000 and she chooses to sell her BTC because she wants to harvest her tax loss. She sells her BTC and:
- Jane buys back the BTC minutes after for 6,500 (and keeps the extra 00).
- Realizes a loss of 3,000 (7,000 proceeds – 0,000 cost basis)
- Her new BTC takes a cost basis of 6,500 (purchase price)
- She can still claim her loss of 3,000 as the wash sale rule does not apply.
- If the wash sale rule applied:
- She cannot claim her 3,000 loss
- Her new BTC takes a cost basis of 9,500 (6,500 purchase price + 3,000 deferred loss)
Crypto Trader Rule
Traders of securities have the advantage of being able to elect different tax treatment as “traders” as the Internal Revenue Code section 475(f) gives trades in securities or commodities the option to elect to mark to market their assets and treat losses as ordinary losses. This election is not available to crypto traders or crypto investors as cryptocurrency is not considered a security or commodity.
Scams, Thefts and Losses
There is currently no official guidance for deducting losses from many common types of crypto scams or theft. However, if a loss fits into one of the following categories, you can deduct the loss which is generally based on the cost of your assets lost or stolen by filing the right tax form.
- The loss from a sold or traded crypto asset is reported on Form 8949. If you have a coin with no liquidity, it is recommended to send the coins to a burn address in order to formally dispose of the coins and deduct your tax loss.
- The loss from an abandoned business or investment asset is reported on Form 4797, line 10.
- A loss or theft of business or income producing property, is reported on Form 4684 Section B.
- A loss on a Ponzi-type investment, using the safe-harbor under Rev. Proc. 2009-20 is reported on Form 4684 Section C, but you must make sure to qualify which generally requires an indictment or complaint being filed against a lead figure in the Ponzi-scheme.
Thefts and losses of personal property generally fall under the Casualty Losses Framework which are currently limited to losses or theft caused by a federal declared disaster until after 2025.
- Jason purchased a token that was later discovered to be a rugpull. He still has this coin in his wallet, but there is no liquidity. If Jason sends this coin to a burn address, he will have disposed of the coin. His proceeds will be /bin/sh and his loss will be equal to his tax basis in the coins. As he disposed of his coins, he should update his accointing portfolio accordingly and the capital loss will be reported on his tax report and Form 8949.
- Jade has a crypto wallet that she can no longer access because she lost her secret phrase. Under the current guidance, she cannot deduct this loss unless it qualifies as an abandonment or loss of income producing property. Jade should mark these coins as lost in accointing, and the tax report will report separately so she can decide with her accountant what the best approach to deduct may be.
Gifts of cryptocurrency are not subject to capital gains tax or income tax to the donor or recipient when the gift is made, however, they could have gift tax consequences to the donor. You are allowed to gift up to 6,000 (7,000 for 2023) per person without having to pay any gift tax; this exclusion is per taxpayer, so if you file jointly with your spouse, you can exclude up to 2,000 (4,000 in 2023). If you gift more than this amount to a single recipient (excluding your spouse), you will have to file a Gift Tax Return where your taxable gifts will be subject to an amount from 18% to 40%. Your accointing tax report will separately report any gifts sent for you to report, if needed.
The tax basis of the gift to the recipient depends on whether you have a gain or loss – if a gain it is the tax basis of the donor, if a loss it is the fair market value at the time of the gift. If the donor owes any gift tax, this should be included in the tax basis as well. Any gifts received are not taxable income, but disposing of these coins will result in a taxable disposal subject to capital gains tax.
- Tina gives 4,000 worth of BTC to Larry. Since this is less than the exclusion amount of 6,000, Tina does not have to pay gift tax. Tina does not have to pay any capital gains tax and Larry does not have to pay any income tax. If Larry sells this BTC, he will have to pay capital gains tax.
- Bob and Karen are married and file jointly, and they gifted 0,000 worth of BTC to John. Since they file jointly, their exclusion is 2,000 per donee, and they do not have to pay gift tax.
- Suppose that Bob and Karen gifted 0,000 worth of BTC to John. In this case the gift is a taxable gift and while it is still free of capital gains tax and does not have to be reported in their income tax return, Bob and Karen must file a gift tax return and pay tax on this gift. Any amount of tax paid can be added to John’s basis in the BTC.
The tax authority for gift taxes is based on the IRC §2503 and §102. The IRS has also commented on the taxation of cryptocurrency gifts in its Virtual Currency FAQs. The IRS has published a FAQ on gift taxes for additional information on gift taxes.
Crypto Charitable Donations
If you donate cryptocurrency to a qualified 501(c)(3) organization, you can deduct your donation and you do not have to recognize a gain or loss on the disposal of the crypto. If you have held the crypto for more than one year before gifting it to a charity, your donation is the fair market value of the donated crypto at the time of the donation. If you held the crypto one year or less, your donation would be the lesser of your cost basis in the donated crypto or fair market value at the time of the donation of the crypto. Please be aware of the requirements by the IRS on donations of property.
The IRS requires donors to sign Form 8283 for donations of ,000 or more and to provide a qualified appraisal. A qualified appraisal must be prepared by a qualified appraiser, who is defined as an individual with verifiable education and experience in valuing the type of property for which the appraisal is performed, and must follow the requirements set by the IRS. These include being made, signed and dated in accordance with generally accepted appraisal standards, having a valuation effective date no earlier than 60 days before the date of the contribution and no later than the date of the contribution and not involving a prohibited appraisal fee. The qualified appraisal must be received before the due date, including extensions, of the return on which a charitable contribution deduction is first claimed for the donated property.
- Kevin has 10 BTC and wishes to make a charitable donation while hopefully getting a tax benefit. He donates 2 BTC to his favorite animal charity at the time BTC is trading at 0,000. Assume his tax basis in each BTC is ,000 and all positions are long-term.
- Kevin gets to deduct 00,000 (0,000 x 2) as an itemized deduction on his tax return.
- Kevin technically has a gain of 6,000 – (0,000 proceeds ‘value of donation’ – ,000 cost basis) x 2 – but this is not recognized as he donated his crypto to a qualified charity.
- Kevin not only avoided the tax on the appreciated BTC, but also got a tax deduction he can use against other ordinary income.
The tax authority for donations is based on the IRC §170. The IRS has also commented on cryptocurrency donations in its Virtual Currency FAQs, questions 34 and 35.
Crypto Futures and Margin Trading
When trading crypto, there are two common types of trades that investors use to increase their gains through the use of leverage: margin trades and futures contracts. Both leverage strategies allow investors to generate a higher return on their capital, but there are key differences in how these trades are executed and taxed. Margin trades, placed in the spot market, involve borrowing funds to increase the amount of capital for trades. On the other hand, futures contracts involve obtaining agreements to buy or sell an asset at a future date and price, and are placed in the derivatives market, with generally higher leverage available than in margin trades.
From a tax perspective, unless a contract qualifies under Section 1256 of the Internal Revenue Code (IRC), gains and losses from crypto futures and margin trades must be reported as capital gains. A §1256 contract refers to:
- A regulated futures contract
- A foreign currency contract
- A non-equity option
- A dealer equity option
- A dealer securities futures contract
There are some exceptions to this definition such as a securities futures contract or option on such a contract (unless it is a dealer securities futures contract) and an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.
To qualify as a regulated futures contract:
- The contract must be traded on a qualified board or exchange
- Requires deposit or withdrawal amounts in your margin account to adjust based on daily market conditions, known as marking to market.
Under §1256, any gains or losses from these qualified contracts are treated as 60% long-term capital gains and 40% short-term capital gains, regardless of the actual holding period. This leads to a lower tax rate for the majority of gains compared to the ordinary income tax rates that would apply to the same gains if they were treated as solely short-term capital gains.
In the case of futures contracts, special tax rules apply including the annual marking of open positions to market, which impact the tax outcome. For example, Bitcoin futures and options that trade on the Chicago Mercantile Exchange (CME) currently qualify as §1256 contracts and are subject to these special tax rules. The tax treatment of other crypto derivatives will depend on their classification as §1256 contracts.
Crypto Taxable Income
If you receive crypto as compensation it will be taxable at its fair market value at the time of receipt. This is true whether your crypto income is the result of employment, an active business activity or a passive activity such as staking or earning rewards.
Crypto Income for Investors
As a passive investor, that is, anyone who has purchased crypto not for a trade or business, there are several types of taxable crypto income that taxpayers must report and pay income taxes on. The main types of income that crypto investors tend to encounter are:
- Mining income
- Staking income
- Master node income
- Liquidity pool income
- Interest & Yield
The above transactions might differ in operation, but for tax purposes, all of the above are taxable events and should be reported as income based on the value of the coins or tokens at the time that the taxpayer obtains control of the coins. While proper tax authority has not been issued for all types of crypto income transactions, given the IRS’s stance on mining, hardforks and airdrops, the conservative practice has been to treat all income events as taxable.
The tax basis of any coins or tokens acquired through one of the above events is also based on the value of the coins at the time received, and will be equal to the amount of taxable income reported. This is important as when you dispose of these coins you will need to consider this basis so you do not pay tax on the same income twice – fortunately, accointing automates this for you.
- Jason receives 1 BTC as his share of a mining operation in December 2022 at a time when BTC is worth 7,000.
- Jason sells this BTC in April 2023 when BTC is trading at 7,000.
- In 2022, Jason would report 7,000 of taxable income from the mining of the BTC.
- The 7,000 of taxable income reported becomes his tax basis in this BTCl.
- In 2023, upon selling, Jason will have to report a taxable gain of 0,000 (7,000 proceeds – 7,000 tax basis) and he only pays tax on the further appreciation.
In Rev. Rul. 2019-24 the IRS concludes that “(2) A taxpayer has gross income, ordinary in character, under § 61 as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency.”
The Internal Revenue Code §61(a) defines gross income as “all income from whatever source derived, including (but not limited to) the following items…” The list that follows is not important, but the language ‘including but not limited to’ means that any type of income is taxable, unless specifically excluded by law, which crypto income is not.
Mining Bitcoin (or any other coin) results in taxable income. The value of the coins mined is reported as ordinary income based on the fair market value of the coin at the time you successfully mined a block. If the mining operation qualifies as a trade or business, capital expenditures as well as other business expenses can be deducted and should be filed on the appropriate business tax form. If your mining activity does not rise to the level of a trade or business, you should report as other income and will not be allowed to deduct the cost of any expenses.
“Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?
A-8: Yes, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.”
The IRS has not formally commented on taxation of staking income, but as previously discussed, the conservative approach is to tax staked coins as ordinary income based on the fair market value of the coins at the moment of receipt.
It is reasonable to tax staking income the same as mining income since they are the results of the two most popular consensus mechanisms – staking secures the network and provides rewards to validators in proof-of-stake protocols while mining accomplishes the same outcome in proof-of-work protocols.
If you are staking on a centralized exchange and you earn over 00 in rewards from the platform, you will likely receive a Form 1099-MISC. Even if you don’t receive a Form 1099-MISC, you should report your taxable staking income.
We recently saw the Jarret case attempt to challenge this treatment and defer any income recognition on staking until disposal of the coins. Unfortunately taxpayers will have to keep waiting for further guidance as a Tennessee district court dismissed the case, leaving many crypto investors without any formal guidance on the topic.
Airdrops and Hard Forks
While an airdrop does not follow a hard fork (an airdrop is a marketing event in which coins are sent to users who meet certain criteria; a hard fork is a change to the protocol that results in a new coin being given to users who held the forked coin, for example, Bitcoin went through a hard fork in 2017 and created Bitcoin Cash), this does provide the basic guidance that a taxpayer has income from the receipt of coins or tokens “if the taxpayer receives units of new cryptocurrency”.
If you have any new coins in your wallet from seemingly thin air, this is taxable as ordinary income based on the fair market value of the coins upon control.
Airdrops are taxed as ordinary income based on the value of the tokens at the time that the taxpayer obtains control. In cases where the taxpayer has to take some type of action prior to receiving the airdrop, the coins would not be taxable until the taxpayer has access to the tokens.
Hard forks are taxed as ordinary income based on the value of the coins at the time that the taxpayer obtains control. Similar to airdrops, the coins would not be taxable until the taxpayer obtains control of the coins (accrual basis taxpayers should seek the opinion of an CPA).
It is worth noting that in Rev. Rul. 2019-24, the Service states that “A taxpayer does not have gross income under § 61 as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency.” This indicates that what matters is not the term (hard fork, soft fork, protocol upgrade) but rather the economic outcome. In cases where a coin goes through any protocol upgrade and new coins are given to the holders, the coins are taxable income. In cases where the taxpayer does not receive new coins, the upgrade is not taxable and is ignored for tax purposes.
Yield and Other Income
As previously discussed, the IRS has not formally commented on taxation of many types of crypto income, including yield, rewards, interest, etc. Many exchanges offer yield to investors in exchange for holding their assets at the exchange. Regardless of the term used (yield, rewards, interest) coins earned are taxable as ordinary income based on the value of the upon receipt by the taxpayer.
Similar to staking on exchanges, if you earned over 00 of rewards on a U.S. based exchange, you will likely receive a Form 1099-MISC.
Scam Airdrops and Unwanted Coins
One of the problems that many crypto investors face is receiving unwanted airdrops into their crypto wallets. Whether these airdrops are scam tokens or simply unwanted spam tokens, the question arises of whether taxpayers should pay tax on these coins.
We have not seen any guidance on this topic, but the good news is that many of these tokens have a fair market value of /bin/sh. Therefore when reporting the value of the tokens received for taxes, taxpayers would report a /bin/sh value. On the other hand, if the airdropped tokens do have a value, it is likely the taxpayer would accept them and thus be liable for income tax on the coins.
Platforms exist that allow investors to dispose of such scam tokens by sending them to a burn wallet, or something similar, in exchange for a nominal amount of tokens. Doing so allows taxpayers to formally dispose of their tokens and realize a taxable event. However, taxpayers need to keep in mind that any income is ordinary income, while any losses on disposal are capital losses, which can only offset ordinary income by ,000 per year.
Crypto Income for Businesses
A key distinction for taxpayers to recognize is that business income is taxable as such regardless of the currency or asset used as the means of payment. Whether you are selling widgets for US dollars, or for crypto, you will pay income taxes on your gross income (measured in USD) less any allowed business deductions.
Trade or Business – Requirements
In order for your crypto earnings to qualify to be reported as a trade or business, your activity from which you are earning crypto (staking, mining, nodes) must rise to the level of a trade or business. If your activity is not considered a business, then any income will be reported as other income and you will not be able to deduct any ‘business expenses’.
The IRS explains in the instructions to Schedule C that “An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity, not-for-profit activity, or a hobby does not qualify as a business.” In order for an activity to qualify as a business, you must show that you are engaging in that activity continuously with an intent to make profit and income.
Unfortunately there is no bright-line test to determine this as there is no formal definition of “trade or business” in the Internal Revenue Code, which has led to much confusion and litigation over the years. The best advice is that if you say you are in a business, you should actually be in the business – working regularly, in a for-profit activity and treating it like a business – this means an LLC, accounting records and such. If you are paying a fee, not doing anything else and only collecting rewards, this is not likely to be seen by the courts as a business activity, but either a passive activity or an investment activity.
If you have a mining operation set up and you are working to keep the hardware running, expanding, doing activities for the business constantly, and this is the main source of income on which you depend on to live, you certainly have a business activity. Should playing Axie Infinity for a living and earning income be a business activity? Best advice is to use common sense – are you working enough in an activity that you would consider it a business, or is it a passive “chill at the beach while I earn” type of activity?
Business Taxable Income and Reporting Considerations
If your activity does qualify to be reported as a trade or business, here are some considerations:
- You can generally deduct all business expenses provided they are both ordinary and necessary. Refer to IRS Publication 535 for more information on deductible business expenses.
- Capital expenditures will generally have to be capitalized and depreciated based on U.S. tax depreciation rules. This applies to equipment, furniture, software, hardware, vehicles and real estate business use assets. Certain exclusions apply where you can deduct the full cost of a capital expenditure provided that it meets the de minimis safe harbor of ,500 (or ,000 for entities with an applicable financial statement).
- All income will be reportable as gross income based on the fair market value of the asset received (whether coins, tokens, fiat, NFTs, etc).
- You can generally deduct your cost of goods sold – this could be applicable to NFT creators if subject to the accrual method of accounting for tax reporting.
- You will need to make estimated tax payments on any income, and you will also be responsible for self-employment taxes of 15.3% on top of any federal or state income taxes. Careful tax planning and cash management is key with any business.
- Depending on the size of your business and other stakeholders, your company may track their financial statements and financial net income. While looking at your net income can be a good indication for business performance, taxable income can vary substantially from book income due to book to tax differences. You should consult with a tax professional to help you in tax planning.
What type of entity is your business? This will determine the type of Tax Return or schedule that you will have to file. There may be other business fees associated with this depending on the entity you chose. The current corporate tax rate, if you file a Form 1120, is a flat 21% in the US (plus any applicable state taxes). If you chose a pass-through entity, such as an S-Corporation, sole proprietorship or partnership, your income will be taxes based on your individual marginal tax rates.
This is an unincorporated business run by a single person. This is simple to start but the owner has unlimited personal liability for his business. Earnings from this type of business would be reported on a Schedule C, on Form 1040, the taxpayer’s individual income tax return (no separate business filing is required).
Limited Liability Company (LLC)
A limited liability company has become a very popular way to enter into business due to its flexibility. As the name implies, the LLC protects owners’ personal liability. Owners are known as members, and a LLC can have a single or multiple members, while they can be member-managed or manager-managed. Due to this flexibility, LLCs can operate similar to sole proprietorships, partnerships or corporations while maintaining limited liability and operational flexibility.
Earnings from an LLC may be reported either on a Schedule C on the taxpayer’s Form 1040, Form 1065, Form 1120 or Form 1120-S. Each filing type has advantages and disadvantages, and if your business activity is substantial, it is recommended that you speak to a tax advisor to help you navigate the entity election process.
There are many different types of partnerships such as general partnerships, limited partnerships and limited liability partnerships. In addition, partnership agreements can be very flexible to allow for specific profit or loss allocations as well as capital contribution between partners. Regardless of type, what all partnerships have in common is that they are a business activity entered into by two or more people.
Earnings from a partnership are reported on a Form 1065, from which each partner receives a Schedule K-1 with his allocation of partnership income to be reported directly on each partner’s individual income tax return. Due to the tax reporting complexities of partnerships, it is recommended that you seek a tax adviser.
An S-Corporation provides a tax benefit in providing pass-through taxation of income and avoiding the double taxation to which C-Corporations are subject to. An S-Corporation can be a multi-member LLC that has chosen to be taxed as an S-Corporation or otherwise a C-Corporation that has chosen S-status.
Earnings from an S-Corporation are reported on a Form 1120-S, from which each shareholder receives a Schedule K-1 with his allocation of S-Corporation income to be reported directly on each partner’s individual income tax return. Due to the tax reporting complexities of S-Corporations, it is recommended that you seek a tax adviser.
A C-Corporation is a separate legal entity that exists to generate profit for its shareholders. Shareholders’ individual assets are protected as liability is limited to investment in the C-Corporation. Raising capital and transferring ownership is easy with a C-Corporation, but earnings of the C-Corporation are taxed once at the corporate level (currently at a flat 21%) and again when distributed to shareholders in the form of dividends.
Earnings from a C-Corporation are reported on a Form 1120 and income tax must be paid. This income may also be subject to estimated tax payments. Due to the tax reporting complexities of C-Corporations, it is recommended that you seek a tax adviser.
Crypto Income for Employees & Contractors
Getting paid in crypto as an employee or independent contractor is no different than getting paid in USD. The crypto is taxable at its fair market value as it is considered compensation for your services. It is also critical to track this crypto upon receipt with a tool such as accointing as it will be subject to capital gains tax upon final disposition, based on its increase or decrease in value.
If you are an employee and you get paid in crypto, the value of any coins received as compensation will be reported on the appropriate boxes of your Form W-2. All you have to do is report your Form W-2 the same as any other W-2 Form.
As an independent contractor you will receive a 1099-NEC from each payer who paid you 00 or more for services in the tax year. If you were paid in crypto, the value of these coins would be included on box 1 of your 1099. All you have to do is report this the same as any other 1099-NEC.
While the reporting of any taxable income will be included on your W-2 or 1099, you should keep track of these coins as when you dispose of them they will be subject to capital gains tax. The tax basis of these coins will be the value reported as taxable compensation for the coins, so you would only pay capital gains tax on any further appreciation when you dispose of them.
Purchasing Crypto with Fiat (USD)
The purchase of crypto (or any other digital asset similar to cryptocurrencies, such as NFTs) with fiat is not a taxable event. This is true whether the crypto is purchased through a bank account or a credit card transaction.
Holding a crypto or digital asset is not taxable. You would not trigger a taxable event until you sell, trade, burn or otherwise dispose of the asset. If you are earning income (rewards, staking, yield, etc) on this asset, that income is taxable as ordinary income.
If you only purchased crypto with fiat you don’t have to report anything on your tax return – you don’t even have to check the box according to the IRS FAQs, question #5.
Soft Forks & Certain Protocol Upgrades
Forks or protocol upgrades are not taxable if they do not result in the taxpayer receiving new coins or tokens. Regardless of the term used for the update, the IRS FAQs Question 30 addresses this by stating that “Because soft forks do not result in you receiving new cryptocurrency, you will be in the same position you were in prior to the soft fork, meaning that the soft fork will not result in any income to you.”
The transfer of crypto to your own wallet (whether a hot or cold wallet) or account at an exchange, is not a taxable transaction. Careful – some tax reports provided by exchanges assume that transfers out are taxable as they do not know you are transferring crypto to yourself. Be careful and don’t use an exchange tax report (unless it’s a 1099-B or 1099-MISC) without verifying its accuracy by connecting to accointing.
Borrowing and Lending
The IRS has not yet made a clear statement on how crypto loans are treated for tax purposes.
One unique aspect of crypto loans is the use of crypto-to-crypto swaps to facilitate them. For example, using ETH as collateral for a lending platform may result in the receipt of a different type of cryptocurrency, such as cETH. The IRS has previously stated that crypto-to-crypto swaps are a taxable event, but it’s not clear whether this would apply to this type of loan. As a result, some investors choose to take a conservative approach and report these loans as taxable events, while others may opt for a more aggressive approach and not report them at all.
Finally, it’s worth noting that while the IRS has not provided guidance either on whether crypto loan interest payments are tax-deductible, it’s likely that they will be treated similarly to traditional loans. Interest payments made by businesses may be considered a tax-deductible business expense, while those made for personal reasons are typically not tax-deductible.
The term DeFi is used to describe the ecosystem of blockchains, coins, tokens and decentralized apps (dApps) that operate to provide services to users in a peer-to-peer manner by utilizing smart contracts. There is no difference between taxation of DeFi transactions and CeFi (centralized finance – anything done via an exchange or broker) transactions.
Gas fees related to the acquisition of an asset are part of your cost basis. Gas fees that cannot be directly associated with the acquisition of a crypto asset are not technically deductible under the current guidance, though a case can be made that they are in fact a deductible cost to acquire your assets. If you have incurred significant gas fees, it is recommended to find a tax advisor to help you navigate this.
Liquidity Pools Taxation
While the IRS has yet to issue any guidance specifically on liquidity pool transactions, we can infer the answer by looking at each transaction:
- When you exchange a coin, token or pair for a liquidity pool token (LP token) this is a taxable event. Your gain or loss is based on the gain or loss in the coins or tokens given up for the LP token. Your tax basis is the original cost of those coins and the proceeds are based on the fair market value of the LP tokens acquired.
- The rewards are taxable upon control based on the value of the coins, the same as mining, staking or any other type of income.
- When you trade the LP tokens back for the original tokens, this is also another taxable event similar to the first transaction. You must report your gain or loss based on the tax basis of the LP tokens relative to the fair market value of the coins or tokens received back when you make the trade.
An argument can be made that this is more of a deposit, as the taxpayer expects to receive his original coins back. But sustaining impermanent losses, the opportunity cost of investing in a liquidity pool due to changes in asset prices, is nearly 100% certain. While impermanent losses are not tax deductible, they do demonstrate that the taxpayer does not retain control of his original coins, which could make a further case for these transactions being taxable.
NFT stands for non-fungible token, which means that each one of these tokens is unique and no two of them are exactly alike. This is in contrast to what most of us think of as cryptocurrencies, such as BTC or ETH, which are fungible tokens, meaning each BTC and each ETH is exactly like the other. An NFT is essentially a one of a kind token on the blockchain, to which you can embed any type of digital media file such as a picture, song or movie.
NFTs are tokens that run on top of a smart contract layer 1 blockchain, such as Ethereum, Solana or Cardano. Think of the layer 1 blockchain as an operating system such as iOS or Android, while the NFTs are tokens launched on each particular operating system. In order to purchase these NFTs, users must generally use the coin of that blockchain – this means that if you want to buy an NFT on Ethereum you will need some ETH to purchase the NFT. Transaction fees for NFTs also generally use the coin of the blockchain that the NFT collection is on.
Taxation of NFTs works exactly the same as other crypto taxation. NFTs are taxed as property, and gains or losses from the disposition of NFTs are reported on Form 8949. Each NFT is considered a different asset for tax purposes.
The purchase of an NFT is generally a nontaxable event as you are acquiring an asset. If you purchase the NFT with a cryptocurrency such as ETH or SOL (as it is commonly done on Open Sea and Magic Eden), you will have a taxable gain or loss from the disposition of the cryptocurrency used to purchase the NFT > this works exactly the same as if you are trading one crypto asset for another.
If you receive an airdrop of an NFT or token, you must recognize this as income based on the fair market value of the NFT or token received. If you earn tokens from staking, this is taxed the same as staking any other coins – you recognize as income based on the fair market value of the tokens at the time of receipt.
The above principles apply to purchasers, traders and investors of NFTs, not to creators. While there is no guidance for creators of NFTs, there is no doubt that an NFT creator is creating property, is in a trade or business, and as such has a much different set of taxation principles guiding their path. If you are an NFT creator and have a business, you should refer to the Trade or Business section and consult a professional.
IRS NFT Updates
The IRS recently updated its Form 1040 to include NFTs in 2022. The 2022 Form 1040 changes the term “virtual currency” to the broader “digital assets,” and the instructions explicitly refer to NFTs, stating that: “Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.”
Unlike commonly believed by many, cryptocurrency transactions are very rarely private and anonymous. Anyone with a blockchain explorer such as blockchain.com can see all your transactions. Even wallets without KYC, must transact with accounts that are KYC’d at some point, providing the link to the taxpayer’s identity. The use of a mixing service can actually cause more harm than good, as anyone linked to a mixing service is likely to be highly scrutinized when attempting to cash out due to these services’ illicit use. Tools such as Chainalysis are able to provide data to track down many of these transactions on the blockchain.
Cryptocurrency is not private, and gains from trading cryptocurrency are taxable subject to capital gains taxes just like cryptocurrency income is taxable as ordinary income. Just because the income is not reported on a Form 1099 it does not mean that it is not taxable. The IRS has been collecting data, and it is always best to report and be safe than sorry. Remember, willful tax evasion is a criminal offense.
Most individual taxpayers will file their tax return on a calendar year basis. Taxpayers who file based on a fiscal year should pay special attention to report their crypto gains and income for the correct tax year. For more information on tax years, refer to the IRS or consult with your tax adviser.
The deadline to file a tax return in the USA depends on the taxpayer and tax year adopted. The deadline for most taxpayers to file their individual tax return is April 15. Sometimes due to holidays and/or weekends, this gets extended by a few days, such as 2023 in which the deadline is on April 18, 2023.
Taxpayers are generally allowed to extend their time to file by 6 months by filing an automatic extension, Form 4868 for individuals or Form 7004 for businesses. Below are the general due dates for those with a calendar tax year:
Form 1040 due April 15, 6 month extension available to October 15
Form 1065 due March 15, 6 month extension available to September 15
Form 1120 due March 15, 6 month extension available to September 15
Form 1120-S due March 15, 6 month extension available to September 15
Form 1041 due April 15, 5 ½ month extension available to September 30
*The due date will be different for any fiscal year taxpayers. Certain filers have different extension times, refer to the IRS instructions.
Payments & Penalties
Taxpayers should be aware that filing dates are not the same as payment due dates to avoid penalties and interest. You should generally pay quarterly estimated tax payments for any income (such as crypto) on which there is no tax withholding.
Generally taxpayers are required to pay taxes as they earn income throughout the year. If the income is in the form of wages and salary this is done through withholding (that you see on your Form W-2). When the income comes from self-employment, business earnings, or investment income (such as crypto income), since there is no withholding on this income, taxpayers are required to make quarterly estimated tax payments to cover for any tax due, with any balance being due at the unextended time of filing your tax return. If you extend your tax return, you must also estimate the payment due and pay with Form 4868, along with any first quarter estimated tax payments for the new tax year.
Due dates for estimated tax payments for individual taxpayers (filing Form 1040) are:
You must make sure to file your extension (and / or tax return) on time. The failure to file penalty is 5% of the unpaid taxes for each month, while failure to pay penalty is 0.5% of the unpaid taxes for each month. Interest is charged on penalties – refer to the IRS guidance on penalties for more information.
To avoid filing penalties, make sure to file your tax return, or extension by the unextended deadline.
To avoid underpayment penalties, you must make sure that your total quarterly payments meet one of the two criteria below (with the balance being paid by the unextended due date – April 18 in 2022):
- 90% of taxpayer’s total expected tax for the current year, or
- 100% of the total tax shown on the taxpayer’s prior-year return
Please refer to the IRS guidance as if your adjusted gross income is over 50,000 (5,000 in for married filing separately taxpayers), you may have to use 110% for the second criteria. Guidance on estimated tax payments for corporations is available through the instructions for Form 1120-W.
Tax Authority in the USA
In the United States, the Constitution of the United States is the source of all laws in the U.S., whether tax or non-tax laws. The sixteenth amendment, ratified in 1913, gave Congress the right to impose a Federal income tax. In 1939, the Internal Revenue Code was organized (reorganized in 1954 and further amended in 1986). The Internal Revenue Code is the main source of tax law in the United States.
The IRS is an agency of the Department of the Treasury and serves to enforce and collect taxes by administering the US Internal Revenue Code. It issues administrative guidance such as regulations, rulings, revenue procedures and notices.
These administrative pronouncements are official interpretations of the tax law by the IRS. An example of such an administrative pronouncement is Notice 2014-21, which was released by the IRS in 2014 along the Virtual Currency FAQs. They state that “For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.” As there is no crypto tax law in the Internal Revenue Code, the above indicates that taxation of crypto is based on property transactions tax law.
Tax Authority Stance – TLDR
Since the release of the 2014 guidance by the IRS, the Service has been actively going after the under-reporting of crypto taxes. The IRS initially started by issuing a series of John Doe Summons to exchanges such as Coinbase to obtain taxpayer information. Due to the limited guidance, lack of an information reporting system and challenges with data, reporting and enforcement still proves difficult, which is why the Treasury Department is working on implementing an information reporting system to more easily enforce tax reporting by requiring all exchanges to issue Forms 1099-DA. Unfortunately this system is still a couple of calendar years away from impacting taxpayers.
The only interest of the IRS with crypto is to ensure the reporting of any gains and income. A taxpayer who properly keeps track of their records, calculates their gains correctly by connecting to a platform like accointing and files their crypto taxes properly, will be in a very good position should the service inquire on their tax return. Until the information reporting system is implemented, under audit the IRS also has to use crypto tax software to calculate a taxpayer’s gains.
Your short-term capital gains will be taxed at your ordinary tax rate which depending on your income will range from 10% to 37%. Your long-term capital gains will be taxed at 0%, 15% or 20%, depending on your income. The tax brackets for 2022 are as follows:
Ordinary Income Tax Rates
Long-term Capital Gain Rates
Other Applicable Taxes
Certain high-income taxpayers could have to pay a tax of 3.8% of any investment income in addition to the income taxes. You should also consider the state that you live in and how they tax capital gains, whether they have better rates for long-term gains over short-terms, or any exclusions.
As mentioned above, you should always consider state income taxes on top of federal income taxes. Most states tax crypto capital gains and income the same as the IRS. While most have not commented on taxation of digital assets, they generally tax the same income as the IRS, and make modifications to this income as prescribed by their own laws. Absent any exclusions of crypto gains or income, these are also taxable for any states that impose a state income tax.
Please note that each state has different adjustments to income or capital gains. Furthermore, some states such as Florida, Nevada or Texas have no state income tax at all. Below are the highest tax rates for each state as well as a direct link to your state’s tax department. Most states tax capital gains at the same rates as ordinary income.
Alabama: 5.0% https://revenue.alabama.gov/
Alaska: No state income tax https://www.tax.alaska.gov/
Arizona: 4.5% https://azdor.gov/
Arkansas: 4.9% 4.9% https://www.dfa.arkansas.gov/income-tax/
Colorado: 4.4% https://www.colorado.gov/tax
Connecticut: 6.99% https://www.ct.gov/drs/site/default.asp
Delaware: 6.6% https://revenue.delaware.gov/
Florida: No state income tax https://floridarevenue.com/
Georgia: 5.75% https://dor.georgia.gov/
Hawaii: 11% https://tax.hawaii.gov/
Idaho: 6.0% https://tax.idaho.gov/
Illinois: 4.95% https://www2.illinois.gov/tax/
Indiana: 3.23% https://www.in.gov/dor/
Iowa: 8.53% https://tax.iowa.gov/
Kansas: 5.7% https://www.ksrevenue.org/
Kentucky: 5% https://revenue.ky.gov/
Louisiana: 4.25% https://revenue.louisiana.gov/
Maine: 7.15% https://www.maine.gov/revenue/
Maryland: 5.75% https://taxes.marylandtaxes.gov/
Massachusetts: 5.00% https://www.mass.gov/orgs/department-of-revenue
Michigan: 4.25% https://www.michigan.gov/taxes/
Minnesota: 9.85% https://www.revenue.state.mn.us/
Mississippi: 5% https://www.dor.ms.gov/
Missouri: 5.4% https://dor.mo.gov/
Montana: 6.75% https://mtrevenue.gov/
Nebraska: 6.84% https://www.revenue.nebraska.gov/
Nevada: No state income tax https://tax.nv.gov/
New Hampshire: 5% on interest and dividends only https://www.revenue.nh.gov/
New Jersey: 10.75% https://www.state.nj.us/treasury/taxation/
New Mexico: 5.9% https://www.tax.newmexico.gov/
New York: 10.90% https://www.tax.ny.gov/
North Carolina: 4.99% https://www.dornc.com/
North Dakota: 2.9% https://www.nd.gov/tax/
Ohio: 3.99% https://www.tax.ohio.gov/
Oregon: 9.9% https://www.oregon.gov/DOR/Pages/index.aspx
Pennsylvania: 3.07% https://www.revenue.pa.gov/Pages/default.aspx
Rhode Island: 5.99% https://www.tax.ri.gov/
South Carolina: 7% https://dor.sc.gov/
South Dakota: No state income tax https://dor.sd.gov/
Tennessee: No state income tax https://www.tn.gov/revenue.html
Texas: No state income tax https://comptroller.texas.gov/taxes/
Utah: 4.95% https://tax.utah.gov/
Vermont: 8.75% https://tax.vermont.gov/
Virginia: 5.75% https://www.tax.virginia.gov/
Washington: 7.0% on capital gains only https://dor.wa.gov/
West Virginia: 6.5% https://tax.wv.gov/
Wisconsin: 7.65% https://www.revenue.wi.gov/Pages/default.aspx
Wyoming: No state income tax https://revenue.wyo.gov/
DC: 10.75% https://otr.cfo.dc.gov/
Use of Tax Losses
TLDR: All capital losses can offset all capital gains.
Short-term losses will first offset short-term gains while long-term losses get applied against long-term gains first. You then add your net short-term gain (or loss) with your net long-term gain (or loss) to come up with your overall capital gain or loss. If you have a net gain, it will be taxed depending on what makes up that gain (short-term or long-term). If you have a net loss, you will be able to deduct up to ,000 of the loss against your ordinary income, and the excess will be carried forward to future years indefinitely retaining its short or long-term character.
Keep your accointing tax report and all other reports since these are the files that contain your full crypto tax picture for the year. Beyond this keep all other records such as:
- Hot or cold crypto wallet addresses containing crypto transactions
- Other records, such as transaction history files from exchanges (and wallets)
- Bank statements or other records showing the deposits and withdrawals of fiat currency
- Transaction history containing all of the following information:
- Type of crypto asset
- Date of every transaction
- Type of transaction
- Units of crypto and value in USD at the time of the transaction
- Cumulative total of assets
The IRS answered this question in Crypto FAQs question #46:
“The Internal Revenue Code and regulations require taxpayers to maintain records that are sufficient to establish the positions taken on tax returns. You should therefore maintain, for example, records documenting receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.”
Each taxpayer should report their gains and losses and income for the tax year on their yearly income tax return. Below is a summary of the main tax forms that individual taxpayers will encounter when reporting crypto:
- Form 1040 is the U.S. Individual Income Tax return that every U.S. individual taxpayer has to file annually. It adds all income from supplemental schedules and summarizes your tax, payments and refund or balance due.
- Form 8949 is used to report all trades, sales and exchanges of property, such as cryptocurrency and digital assets. You should report any trades or sales on Form 8949, Part 1 or 2 depending on whether short or long-term, and check box A, B or C (D, E or F if long-term) depending on whether you receive a 1099-B or not. While the form asks for details of every trade, taxpayers are allowed to summarize information and provide an attachment with the same information. Accointing provides you with a 8949 sample which shows you which section of the Form 8949 your trades should be reported on.
- Schedule D takes all forms 8949 in the return, as well as other gains and nets them together to calculate your net capital gain or loss, includible as part of your taxable income.
- Schedule 1 is used to report other income without a specific spot elsewhere such as staking, hard forks or other crypto income, which should be reported on line 8z. If your income is from a trade or business (such as a mining business), report on the appropriate schedule or form as discussed in the Entity Choices section above.
- Form 8960 calculates the net investment income tax (3.8%) on your net investment income – this is only applicable to taxpayers with modified adjusted gross income of 50,000 for married filing jointly or qualifying widow(er) taxpayers, 25,000 married filing separately or 00,000 single or head of household filers.
- Form 6781 is applicable to any section 1256 regulated futures contracts.
- Form 4868 is used to report casualty losses and theft.
- Schedule A is used for itemized deductions, such as charitable contributions. However, if your noncash donations exceed 00, then you will need to file Form 8283.
- Form 8283 is for noncash donations of over 00, including donations of crypto.
- Schedule C is used to report the profit or loss from a trade or business whether a sole proprietorship or a single-member LLC.
- Schedule E is used to report any rental or royalty income, as well as any income from a pass-through business tax return.
- Form 4797 is used to report the sales or abandonment of business or investment property.
- Schedule SE is used to report self-employment taxes on income from self-employment. This is a tax of 15.3% which consists of 12.4% for social security and 2.9% for Medicare. Self-employed individuals pay this on their income to compensate for the lack of social security and Medicare taxes of also 15.3% which are split by the employee and employer in an employment relationship.
Tax Information Reporting
Form 1099-MISC reports “miscellaneous” types of income that do not fit into other categories, such as rents, royalties and other income. This form is issued by exchanges to taxpayers earning over 00 of crypto income for the year on their platform by staking, earning rewards, etc. A copy of this form is sent to the IRS and state authorities, so you want to report your Forms 1099-MISC exactly as reported to you.
This income will be included in your accointing tax report as part of your ‘Taxable Income’ for the year, so be sure to back out the amount already reported on the 1099-MISC from the total you report with accointing to avoid double reporting.
1099-B & Basis Issues
Form 1099-B reports gains and losses from taxable stocks and securities exchanges. Similarly to Form 1099-MISC, brokers and exchanges issue these to customers and provide a copy to tax authorities, so you want to report your Form 1099-B as issued to you. A ‘crypto’ version of this form, the 1099-DA, will be released in 2023 for use in future tax years.
But what happens when the Form 1099-B is not accurately reported, as is often the case for any issued for cryptocurrency? Crypto traders generally transfer large amounts of crypto back and forth between different crypto exchanges, therefore, absent perfect coordination by the exchanges, the tax basis reported on a 1099 will be missing if the crypto was purchased at another exchange. Taxpayers should ensure to have accurate records when adjusting their basis reported on a 1099-B and understand how to make such adjustment on form 8949.
Form 1099-K is generally used to report credit card payments to businesses or self-employed individuals. A Form 1099-K does not report gains or losses, it reports gross proceeds and can therefore not be used to report your crypto taxes. You should not report a 1099-K for crypto trading as issued, but you should pay special attention to report gains from that exchange correctly. A copy is also filed with the government, so not reporting any gains or losses from the exchange might trigger an audit.
The Form 1099-K should generally not be used to report crypto transactions. This form is filed by a payment settlement entity for payments made in settlement of reportable payment transactions. The form was meant to report gross credit card sales by businesses – not crypto trades by individuals. This form has been erroneously used due to the lack of guidance in the industry.
Report of Foreign Bank and Financial Accounts (FBAR) Filing
Currently, there is no requirement to file an FBAR for digital assets held in a foreign exchange, however, this will likely change in the near future. The Financial Crimes Enforcement Network (FinCEN), tasked with safeguarding the financial system from money laundering and enforcing FBAR reporting, clarified in FinCEN Notice 2020-2 that “the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR.” They do state that “FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.”
There are certain cases where a foreign account could meet the definition of a reportable account under current regulations, such as if the wallet holds traditional assets, such as US dollars, or if the assets are held in an investment fund or any collective scheme. If you are unsure of whether you should report, you should seek the advice of a professional as the penalties for not filing an FBAR can be steep.
If you do need to file an FBAR, you can use accointing’s daily balance report to identify the day with the highest balance (in USD) at each exchange and wallet.
IRS Letters – CP2000
If you’ve received a CP2000 notice from the Internal Revenue Service (IRS), it means there’s a discrepancy between the information reported to the agency and the information on your tax forms like W-2, 1099, and K-1. To avoid these notices in the future, make sure to accurately report all taxable income on your forms.
Reading the notice carefully and taking the time to understand its impact on your tax return is crucial. If you need more time to respond, you can request an extension. If you agree with the proposed changes, sign the response form with both signatures if you filed jointly. If you disagree, fill out the response form with a signed statement and supporting documentation. Don’t miss the response deadline – if you don’t respond, further actions may be taken. If you’re not sure how to proceed, consider seeking the advice of a tax advisor.
The information contained in this guide, including any supplemental materials, is for general information purposes and does not constitute financial, investment, legal or tax advice. The present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.