Understanding crypto taxes in 2023
- Crypto
Understanding crypto taxes in 2023
Cryptocurrency has taken the financial world by storm, offering an exciting opportunity for investors and digital enthusiasts. But with great potential comes great responsibility, especially when it comes to taxes. In this guide, we will unravel the complex world of cryptocurrency taxes, shedding light on the 2022 and 2023 IRS rules, tax rates, and everything you need to know to stay compliant.
How Is Cryptocurrency Taxed? (2022 and 2023 IRS Rules)
When you make money on crypto, Uncle Sam’s going to want a piece. It’s not the most exciting part of crypto investing, but if you do invest in a digital currency, you need to know how taxes on crypto work. Although cryptocurrencies are still new, the IRS is working hard to enforce crypto tax compliance.
There are quite a few ways that you can end up owing taxes on crypto, and even trading one cryptocurrency for another can be a taxable event. You also need to pay taxes if you realize a gain on other digital assets, such as non-fungible tokens (NFTs). If you don’t keep accurate records, it can be hard to piece together your gains and losses at tax time. And, if you don’t pay your crypto taxes — even if it’s an honest mistake — you could end up paying costly penalties.
Do you pay taxes on crypto in the USA?
You’re required to pay taxes on crypto. The IRS classifies cryptocurrency as property, and cryptocurrency transactions are taxable by law just like transactions related to any other property.
Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain. For example, if you buy $1,000 of crypto and sell it later for $1,500, you would need to report and pay taxes on the profit of $500. If you dispose of cryptocurrency and recognize a loss, you can deduct that on your taxes.
Buying crypto on its own isn’t a taxable event. You can buy and hold cryptocurrency without any taxes, even if the value increases. There needs to be a taxable event first, such as selling the cryptocurrency.
The IRS has been taking steps to ensure that crypto investors pay their taxes. Tax filers must answer a question on Form 1040 asking if they had any type of transaction related to a digital asset during the year. Crypto exchanges are required to file a 1099-K for clients who have more than 200 transactions and more than $20,000 in trading during the year.
Crypto tax rates for 2022
Cryptocurrency tax rates depend on your income, tax filing status, and the length of time you owned your crypto before selling it. If you owned it for 365 days or less, then you pay short-term gains taxes, which are equal to income taxes. If you owned it for longer, then you pay long-term gains taxes.
Here are the cryptocurrency tax rates on long-term gains for the 2022 tax year:
|
TAX RATE |
SINGLE | MARRIED FILING JOINTLY |
HEAD OF HOUSEHOLD |
|---|---|---|---|
|
0% |
$0-$41,675 | $0-$83,350 |
$0-$55,800 |
| 15% | $41,676-$459,750 | $83,351-$517,200 |
$55,801-$488,500 |
| 20% | >$459,750 | >$517,200 |
>$488,500 |
Short-term gains are taxed as ordinary income. Here are the crypto tax brackets for the 2022 tax year on these short-term gains:
| TAX RATE | SINGLE | MARRIED FILING JOINTLY | HEAD OF HOUSEHOLD |
|---|---|---|---|
| 10% | $0-$10,275 | $0-$20,550 | $0-$14,650 |
| 12% | $10,276-$41,775 | $20,551-$83,550 | $14,651-$55,900 |
| 22% | $41,776-$89,075 | $83,551-$178,150 | $55,901-$89,050 |
| 24% | $89,076-$170,050 | $178,151-$340,100 | $89,051-$170,050 |
| 32% | $170,051-$215,950 | $340,101-$431,900 | $170,051-$215,950 |
| 35% | $215,951-$539,900 | $431,901-$647,850 | $215,951-$539,900 |
| 37% | >$539,900 | >$647,850 | >$539,900 |
You can choose to sell older coins first to pay the lower long-term gains tax rates. Imagine you’ve been regularly buying Bitcoin (BTC) for the past two years, and now you’ve decided to sell some. By selling Bitcoin you’ve had for more than a year, it will be considered a long-term gain, and you’ll pay a lower crypto tax rate on it.
Crypto tax rates for 2023
Here are the long-term cryptocurrency tax rates that will apply when you file your 2023 tax return:
| TAX RATE | SINGLE | MARRIED FILING JOINTLY | HEAD OF HOUSEHOLD |
|---|---|---|---|
| 0% | $0-$44,625 | $0-$89,250 | $0-$59,750 |
| 15% | $44,626-$492,300 | $89,251-$553,850 | $59,751-$523,050 |
| 20% | >$492,300 | >$553,850 | >$523,050 |
As previously noted, the IRS taxes short-term crypto gains as ordinary income. Here are the 2023 income tax rates that will apply to gains on crypto you held for 365 days or less:
| TAX RATE | SINGLE | MARRIED FILING JOINTLY | HEAD OF HOUSEHOLD |
|---|---|---|---|
| 10% | $0-$11,000 | $0-$22,000 | $0-$15,700 |
| 12% | $11,001-$44,725 | $22,001-$89,450 | $15,701-$59,850 |
| 22% | $44,726-$95,375 | $89,451-$190,750 | $59,851-$95,350 |
| 24% | $95,376-$182,100 | $190,751-$364,200 | $95,351-$182,100 |
| 32% | $182,101-$231,250 | $364,201-$462,500 | $182,101-$231,250 |
| 35% | $231,251-$578,125 | $462,501-$693,750 | $231,251-$578,100 |
| 37% | >$578,125 | >$693,750 | >$578,100 |
How to determine if you owe crypto taxes
You owe crypto taxes if you spend your crypto and it has increased in value from when you bought it. Here are the different types of taxable events for cryptocurrency transactions:
- Selling cryptocurrency for a fiat currency
- Using cryptocurrency to purchase goods or services
- Trading different types of cryptocurrency
These are only taxable events if the value of your crypto has gone up. To determine if you owe crypto taxes, you need the cost basis, which is the total amount you paid to acquire your crypto. Then you compare that to the sales price or proceeds when you used the crypto.
Let’s say you previously bought one Bitcoin for $20,000. Here are examples of taxable events:
- If you sell one Bitcoin for $50,000, you’d report $30,000 in gains.
- If you use one Bitcoin to purchase a $45,000 car, you’d report $25,000 in gains.
- If you trade one Bitcoin for $60,000 of another cryptocurrency, you’d report $40,000 in gains.
Trades between coins are where crypto taxes get complicated. A crypto trade is a taxable event. If you trade one cryptocurrency for another, you’re required to report any gains in U.S. dollars on your tax return.
Every time you trade cryptocurrencies, you need to keep track of how much you gained or lost in U.S. dollars. That way, you can accurately report your crypto gains or losses. If you’d rather keep it simple, cryptocurrency stocks could make it easier to track gains and losses compared to buying and selling specific coins.
NFT taxes work the same way as crypto taxes. If you realize a gain from selling an NFT, then you owe taxes on those gains. Keep in mind that if you mint an NFT and pay a gas fee in crypto, this is considered purchasing a service with your crypto, meaning it’s a taxable event. If the value of the cryptocurrency that you used for the gas fee has increased since you bought it, then you would owe taxes on the amount of the gains.
In conclusion, understanding crypto taxes in 2023 is crucial for every cryptocurrency investor. As the IRS continues to refine its regulations and enforcement, it’s important to stay informed and maintain accurate records of your crypto transactions. Whether you’re a seasoned crypto trader or a newcomer to the world of digital assets, complying with tax laws ensures a smoother and more secure crypto investment journey.
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For more in-depth information on cryptocurrency taxes and expert advice, you can refer to these sources:
- Forbes – Cryptocurrency Taxes
- TokenTax – Tax Rates for Cryptocurrency
- CoinDesk – Consensus Magazine Tax Guide 2023
- IMF – Crypto Poses Significant Tax Problems
- The Motley Fool – Crypto Taxes and Financials
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