As the waters of the cryptocurrency market grow more crowded, the sharks of the IRS are circling. Taxing crypto can be murky waters, as the IRS classifies it as a capital asset and must determine whether it is subject to income or capital gains taxes based on its use.
Simply holding onto crypto, or “hodling” as some call it, won’t incur any taxes. However, if you’ve earned income from staking, lending, or selling cryptocurrency, you may be required to pay taxes on those earnings. Just like with traditional securities, such as stocks or funds, capital gains taxes are owed when crypto is sold for a profit.
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For example, let’s say you bought $1,000 worth of Bitcoin and later sold it for $1,600, resulting in a $600 capital gain. The amount of taxes owed depends on how long you held the coins. If you held the Bitcoin for a year or less, the profit would be taxed as a short-term capital gain, based on your adjusted gross income (AGI) and taxed at your regular income tax rate.
However, if you held the Bitcoin for a year or more before selling it for a profit, it would be considered a long-term capital gain and may be taxed at a lower rate than regular income tax, depending on your AGI. If you receive cryptocurrency as payment for goods or services, as a promotion, or through mining, it is considered regular taxable income and must be taxed at the value of the cryptocurrency on the day it was received at your marginal income tax rate.
Any cryptocurrency earned through yield-earning products like staking is also considered taxable income. If you sell or spend this cryptocurrency later for more than its value at the time it was received, you may owe short- or long-term capital gains taxes on the profits, depending on how long you have held it.
To make sure you get the most out of your crypto investments, it’s essential to keep track of all transactions, including the amount paid, length of time held, and sale price, as well as fair market values. To help you track and file your crypto taxes.
When filing your taxes, you’ll need to complete various forms depending on your crypto activity, including Form 1040, 1099-NEC, 8949, Schedule C, Schedule D, and Schedule SE.
To minimize your crypto taxes, consider holding onto your crypto long-term, offsetting gains with losses, timing your sales, claiming mining expenses, investing in retirement plans, and making charitable donations.
Don’t ignore your crypto taxes! Failure to report crypto-taxable events could result in interest, penalties, and even criminal charges if audited by the IRS. Swim safely and avoid getting bitten by the tax sharks by filing properly in 2023.
