Crypto Taxes in 2023: Tax Rules for Bitcoin and Others
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Cryptocurrency is taxable if you sell it for a profit, or earn it as income. You report your transactions in U.S. dollars, which generally means converting the value of your cryptocurrency to dollars when you buy, sell, mine, earn or use it.
Here’s how crypto taxes work:
1. When your crypto is taxed depends on how you got it
If you sell cryptocurrency for a profit, you're taxed on the difference between your purchase price and the proceeds of the sale. Note that this doesn't only mean selling crypto for cash; it also includes exchanging one crypto directly for another and using crypto to pay for goods or services.
But exactly how crypto taxes are calculated depends on your specific circumstances. Here's how it boils down:
If you acquired crypto from mining or as payment for goods or services, that value is taxable immediately, like earned income. You don't wait to sell, trade or use it before settling up with the IRS.
If you disposed of or used cryptocurrency by cashing it on an exchange, buying goods and services or trading it for another cryptocurrency, you will owe taxes if the realized value is greater than the price at which you acquired the crypto. You may have a capital gain that’s taxable at either short-term or long-term rates.
Brian Harris, tax attorney at Fogarty Mueller Harris, PLLC in Tampa, Florida, says buying and selling crypto creates some of the same tax consequences as more traditional assets, such as real estate or stock.
"The value ... goes up and down, and then if you sell or exchange that property, then you have capital gain or loss, depending on how that value has moved," Harris says.
» Need help? The right cryptocurrency tax software can do all the tax prep for you.
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2. Two factors determine your tax rate
If you’re paying taxes on the profit you made buying and selling crypto, your rate depends on:
How long you owned it before selling. If you owned crypto for one year or less before selling it, you’ll face higher rates — between 10% and 37%. If you owned the crypto for more than a year, your rates will be between 0% and 20%.
Your total income for the year. The highest tax rates apply to those with the largest incomes.
» Find out more about tax rates and crypto
3. The IRS has the paperwork you’ll need
The onus remains largely on individuals to keep track of their gains and losses. As a reminder, the IRS has added a question to tax return forms asking filers about their crypto activity :
“At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?" the most recent tax return form reads.
To make sure you stay on the right side of the rules, keep careful records.
You'll need records of the fair market value of your crypto when you mined it or bought it, as well as records of its fair market value when you used it or sold it.
A Form 1099-K might be issued if you’re transacting more than $20,000 in payments and 200 transactions a year. But both conditions have to be met, and many people may not be using Bitcoin or other cryptocurrencies 200 times in a year. Whether you cross these thresholds or not, however, you still owe tax on any gains.
While popular tax software can import stock trades from brokerages, this feature is not as common with crypto platforms. You may need special software to bridge that gap. If you only have a few dozen trades, however, you can record your trades by hand.
» Calculate your crypto profit or loss
4. You can write off crypto losses
Many cryptocurrency prices took a nosedive in 2022. If you have losses on Bitcoin or any other cryptocurrency, make sure you declare them on your tax return and see if you can reduce your tax liability — a process called tax-loss harvesting. The process for deducting capital losses on Bitcoin or other digital assets is just like the one used on losses from stock or bond sales. The maximum amount you can write off in one year is $3,000.
» Read more: Here's a primer on tax evasion vs. tax avoidance
5. Failure to report cryptocurrency can be costly
Privacy is a prominent feature of many cryptocurrencies, but that doesn’t mean crypto traders are wrapped in a shield of invisibility. The IRS uses multiple methods to keep tabs on the industry. For example, it’s gained information about tens of thousands of users of popular crypto exchanges by issuing subpoenas to the companies that run them.
While not paying taxes on your gains might be an honest mistake, don’t expect the IRS to take pity.
Harris said the IRS may not have the resources to come after every person who fails to disclose cryptocurrency transactions. But "that doesn’t mean that people should not report those transactions because they don’t think the IRS is going to find out about it," he says.
If you “carelessly, recklessly or intentionally” ignore tax rules or regulations, which include reporting gains and losses on cryptocurrency trades, you’ll face fines in addition to taxes. If you don’t pay your penalty on time, you’ll be charged interest. Getting caught underreporting investment earnings has other potential downsides, such as increasing the chances you face a full-on audit.
If you’re doing your taxes and realize you don’t have the money to pay what you owe, you can apply for a repayment plan with the IRS. You’ll pay interest, but you’ll avoid the penalties that come with underreporting income, filing taxes late or not filing your taxes at all.
Author Andy Rosen owned Bitcoin at the time of publication.