The U.S. Cryptocurrency Taxes Specifics - 2023

The tax season 2023 is in the full swing as April 18 approaches — the deadline for U.S. citizens falling under the obligation to declare crypto-related activities. Those who own or are thinking of investing in digital currencies must get familiar with both their domestic regulations and any specific regulations applicable to virtual currencies

Let’s recap some peculiarities concerning taxes for crypto investors in the United States, recent law adjustments, and sum up what crypto holders need to know.

How is Cryptocurrency Taxed in the United States

Cryptocurrency got under the United States Internal Revenue Service's (IRS) attention relatively recently. Starting from 2014, in the U.S., cryptocurrency is treated as property, a "capital asset", and so is subject to capital gain taxes by the IRS.

This means that crypto holders are owing IRS a share of their income from selling, exchanging, trading crypto, or getting crypto payments. Taxation of crypto mining is also the case.

Taxation on crypto gains depends on whether the cryptocurrency was held for investment or used in trade activities. The problem is there’s little guidance for individuals on how to report it, which causes certain complications.  

Since 2016, numerous centralized exchanges including Coinbase and Kraken have been (unwillingly so) obliged to share the client’s personal data whereupon IRS gathers information on citizens’ activity regarding cryptocurrencies to make sure it is reported; or prosecuted in the lack thereof. Hence, the IRS has some tools to pinpoint and penalize the wilful abstention from reporting crypto gains.  

IRS Guidelines for Reporting Crypto Transactions

Cryptocurrency Tax Law Changes 2022 – 2023

2022 incorporated a new definition — “_digital asset_” — to what before IRS used to term “_cryptocurrency_”. As it currently stands for taxpayers filling out the 2022 returns, anything that is kept in digital form on the blockchain – cryptocurrencies, stablecoins, and NFTs – should be reported.

Additionally, the U.S. crypto taxation rates 2023 were adjusted according to the current inflation index. The brackets vary depending on how long have you been holding cryptocurrency before disposing of it. According to IRS.), keeping digital assets for any period equal to 12 months or longer before using them is classified as long-term holdings. Operations with those are eligible for lower tariffs:  

Source: CoinLedger

Any shorter-term holdings disposals comply with the regular income rates. 

Exemptions

The good news for HODLers: not every crypto activity is classified as taxable. Let’s break down the categories. You do not owe anything  

• If you were simply hodling cryptocurrency without trading it or using these funds throughout 2022;
• If you purchased virtual currencies or NFTs with cash;
• If you transferred assets between the wallets belonging to you; gifted assets not exceeding the 16,000 USD equivalent in value; or donated crypto;
• In case you used your crypto as collateral for a loan. 
• The sum locked up in staking pools is also not included, yet, the taxation of crypto staking rewards is on the table.

Taxable Income Types

Apart from buying digital assets in exchange for another cryptocurrency, withdrawing crypto for fiat, making payments using cryptocurrencies, and selling NFTs, you could owe income tax in cases when you earn crypto through P2E games or participate in mining and various types of staking. Casual airdrop rewards and profits from referral programs should also be reported as assessable income.             

Deductions

Since cryptocurrency activity is resulting in both profit and losses, you may be eligible to take a capital loss deduction and reduce assessments —  no greater than $3,000 per season.

In either case, all capital gains need to be reported, regardless of the amount in question. Failure to do so could have serious financial consequences.

Scams, hacking, and fund drains are classified as personal casualty losses and, thus, are not eligible for loss deduction. Crypto loss caused by a coin value decline, according to IRS memo #202302011, does not qualify for deduction as well.  

Last Minute Tips

Intricate record-keeping is essential to accurately calculate the capital gains or losses made with any transactions involving cryptocurrency. It may be a wise decision to file an extension form 4868 and buy more time to reconcile your crypto taxes and reduce stress while figuring out all the nuances.

Dedicated software also comes helpful in consolidating the information across various wallets, exchanges, and platforms in one place and making things easier.

CoinLedger Calculator / Source: CaptainAltcoin

Accounting Methods

For crypto traders, accounting methods for taxes can be especially complex. Cryptocurrency investors need to develop an understanding of these methods and accurately report the gains or losses from crypto transactions each financial year. Different crypto accounting methods help crypto investors calculate the cost basis and capital gain accordingly, including FIFO, LIFO, HIFO, and ETF Accounting.

Furthermore, crypto investors are reminded to consult with professionals if they have any doubts regarding their obligations or seek help with legal tips to reduce taxes. Understanding crypto accounting methods properly is important in staying compliant with local laws and paying the right amount of taxes on crypto trading activities.

Bottom Line

As cryptocurrency grows in popularity and use, it is increasingly important for crypto investors to be aware of the changing laws. Recent law changes have impacted the way crypto is taxed. To make sure you properly report your activities throughout 2022, you must stay up to date on IRS guidelines for reporting cryptocurrency transactions and comply with all existing laws and regulations.

Looking ahead to 2023, new rules are likely to be put into place which will further determine how crypto will be taxed moving forward. As the need for more clear regulation around crypto persists, investors must continue to educate themselves on the ever-changing landscape of cryptocurrency taxation.