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Cryptocurrency is no longer the new investment asset on the block, and that means income derived from crypto is getting plenty of attention from the IRS in 2023.
Unfortunately, the crypto tax rules remain a bit complicated. The IRS clearly states that crypto may be subject to either income taxes or capital gains taxes, depending on how you use it.
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How Is Cryptocurrency Taxed?
First off, you don’t owe taxes on crypto if you’re merely “hodling,” as aficionados would say. But if you’ve gained any income from crypto this year—either from staking, lending or selling—you may owe taxes on the proceeds.
The IRS treats all cryptocurrencies as capital assets, and that means you owe capital gains taxes when they’re sold at a profit. This is exactly what happens when you sell more traditional securities, like stocks or funds, for a gain.
Let’s say you bought $1,000 in Ethereum and then sold the coins later for $1,600. You’ll need to report that $600 capital gain on your taxes. The taxes you owe depend on the length of time you held your coins.
If you held your ETH for one year or less, the $600 profit would be taxed as a short-term capital gain. Short-term capital gains are taxed the same as regular income—and that means your adjusted gross income (AGI) determines the tax rate you pay.
Federal income tax brackets top out at a rate of 37%. To be in the top bracket for 2023, you would need to make $578,126 or more as a single filer.
2023 Federal Income Tax Brackets
| Tax rate | Single | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | Taxable income of $0 to $11,000 | Taxable income of $0 to $22,000 | Taxable income of $0 to $11,000 | Taxable income of $0 to $15,700 |
| 12% | $11,001 to $44,725 | $22,001 to $89,450 | $11,001 to $44,725 | $15,701 to $59,850 |
| 22% | $44,726 to $95,375 | $89,451 to $190,750 | $44,726 to $95,375 | $59,851 to $95,350 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 | $95,376 to $182,100 | $95,351 to $182,100 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 | $182,101 to $231,250 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 | $231,251 to $346,875 | $231,251 to $578,100 |
| 37% | $578,126 or more | $693,751 or more | $346,876 or more | $578,101 or more |
If you held your ETH for one year or more before you sold them for a profit, you would qualify for the long-term capital gains rate. For many filers, this rate is lower than regular income taxes, although it depends on your AGI.
2023 Long-Term Capital Gains Tax Rates
| Tax filing status | 0% rate | 15% rate | 20% rate |
|---|---|---|---|
| Single | Taxable income of up to $44,625 | $44,625 to $492,300 | Over $492,300 |
| Married filing jointly | Taxable income of up to $89,250 | $89,250 to $553,850 | Over $553,850 |
| Married filing separately | Taxable income of up to $44,625 | $44,625 to $276,900 | Over $276,900 |
| Head of household | Taxable income of up to $59,750 | $59,750 to $523,050 | Over $523,050 |
Taxes on Crypto Payments, Staking and Mining
If you earn cryptocurrency from mining, receive it as a promotion or get it as payment for goods or services, it counts as regular taxable income. You owe tax on the entire value of the crypto on the day you receive it, at your marginal income tax rate.
Any cryptocurrency earned through yield-earning products like staking is also considered to be regular taxable income.
If you hold cryptocurrency from any of these activities, and either spend or sell it later for more than its value when you first received it, you owe short- or long-term capital gains taxes on the profits, based on how long you’ve held it.
Money Lost on Crypto May Count as a Capital Loss
When you sell an investment asset for a loss, you can deduct some of your loss from your taxes. If you sold crypto for less than you paid for it, you can also claim a capital loss, and use it to offset other income taxes.
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How to File Your Crypto Taxes in 2023
It’s never too early to get organized with your crypto taxes. The standard Form 1040 tax return now asks whether you engaged in any virtual currency transactions during the year.
The IRS also made changes to Form 1040 and began including the question: “At any time during 2022, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
While buying cryptocurrency alone isn’t a taxable event, the sale of a cryptocurrency qualifies as a taxable transaction.
Keep Records
You must keep track of all your cryptocurrency transactions, including how much you paid for crypto, how long you held it, and how much you sold it for, as well as receipts for each transaction. You’ll also need to note the fair market value of the cryptocurrency when it was used or sold.
While your crypto exchange may provide a 1099-B reporting your crypto transactions to both the IRS and you, it may not record the cost basis or the original amount you paid for your crypto if you transfer coins between offline cold wallets and your account.
Tools like Koinly and Cointracker connect to exchanges and crypto wallets to track your crypto transactions and complete the forms you need to file your cryptocurrency taxes.
Fill Out Tax Forms
Once you have a record of your crypto transactions, you’ll need to fill out certain tax forms depending on how you used your crypto. Here are some examples of forms that you may need to complete.
- Form 1040. This is the standard form you’ll use to file annual income taxes. On the form, there’s a line to report your total gains or losses from crypto.
- Form 1099-NEC. If you earn crypto by mining it, it’s considered taxable income and you might need to fill out this form.
- Form 8949. This form logs every purchase or sale of crypto as an investment. This should include the amount of crypto, the date and price you bought, the date and price you sold, and your gain or loss for each transaction.
- Schedule C. If you received coins from mining, you need to disclose whether you received them as a business or as a hobby. If you’re running a crypto mining business, you may owe self-employment taxes if your income exceeds your expenses for the year.
- Schedule D. This form summarizes your total capital gains and capital losses from all investments, including crypto.
- Schedule SE. You might use this form if you earned any crypto income through self-employment.
File Your Taxes
If you keep records in software like Koinly or CoinTracker, you can connect them with your online tax software of choice. Then use the online tax software to file your overall state and federal tax returns.
For those looking for one-stop services, TokenTax provides a full suite of accounting services to track and prepare both your crypto and regular taxes.
Consider Hiring a Professional
Preparing for cryptocurrency taxes can be complicated, especially since the laws surrounding them are constantly evolving.
If you’ve made a substantial income from cryptocurrency, it may be worth hiring a certified public accountant (CPA) who specializes in this type of tax work, so you don’t have the IRS chasing you down later.
How To Minimize Crypto Taxes
- Hold crypto long-term. If you hold a crypto investment for at least one year before selling, your gains qualify for the preferential long-term capital gains rate.
- Offset gains with losses. As with any investment, you can take advantage of crypto gains by also claiming losses on other investments during the year. This process is known as tax-loss harvesting, and the maximum you can write off in a year is $3,000.
- Time selling your crypto. If you have the luxury of time on your side, you can always try to wait out a lower tax rate.
- Claim mining expenses. While it might seem like a low-cost activity, in theory, crypto mining comes with considerable expenses, including computers, servers, electricity, and internet service provider charges. If you are a crypto miner, you can deduct these costs against your mining income, though the amount you’ll be able to deduct will depend on whether you categorize your operation as a business.
- Consider retirement investments. If you invest in crypto using a retirement plan like a traditional individual retirement account (IRA) or Roth IRA, you can defer or avoid investment gains entirely, though it’s not as easy as investing through a normal brokerage account.
- Charitable giving. If you don’t need all of the profit from your crypto investment, you can decrease your tax burden by donating at least some of your crypto to charity. You’ll get a deduction worth the fair market value of your crypto at the time of donation.
What Happens If You Don’t Report Cryptocurrency on Taxes?
If you don’t report a crypto-taxable event, you could incur interest, penalties, or even criminal charges if the IRS audits you. You may also even receive a letter from the IRS if youfailed to report income and pay taxes on crypto, or do not report your transactions properly.
Cryptocurrency Taxes FAQs
Where do I report cryptocurrency on my taxes?
The IRS treats crypto as “property,” which means you’ll need to report certain crypto transactions on your taxes. You’ll even be asked on the main form, Form 1040, whether you received, sold, sent, exchanged, or otherwise acquired “any financial interest in any virtual currency.”
Overall, the type of crypto-taxable event determines any additional form that you may need to complete and how you’ll report that crypto activity.
How can I report crypto staking rewards on my taxes?
You can report staking rewards as “other income” on Form 1040. If you own your own crypto business, then you’ll need to fill out Schedule C.
What tax forms do you need for crypto?
The type of activity will determine which form you may or may not need. Forms that are often used in crypto-tax filings may include: Form 1040, Form 8949, Schedule C, Schedule D, and Schedule SE.
Do I have to report crypto losses on my taxes?
You don’t pay capital gains on crypto losses. But you shouldn’t just chalk it down to a bad investment, as you can offset your losses against your gain on your tax bill.
