In 2023, the IRS treats cryptocurrencies as property for tax purposes, meaning that when you sell, trade, or use them as payment, you realize capital gains or losses.
If you hold a cryptocurrency for over a year before selling, it may be subject to long-term capital gains tax rates, which can be significantly lower than short-term rates that apply if held for less than a year.
Trading cryptocurrencies on different exchanges may trigger tax implications, especially if the trades result in realized gains or losses that need to be reported annually.
Crypto-to-crypto trades are also taxable events.
For example, exchanging Bitcoin for Ethereum is treated as selling Bitcoin and buying Ethereum, both of which require reporting.
Many taxpayers underestimate the importance of keeping accurate records.
The IRS requires detailed transaction records, including dates, amounts, and prices to calculate gains or losses accurately.
The IRS has begun sending "educational letters" to taxpayers who may have failed to report virtual currency transactions.
This is part of a broader push for compliance in the cryptocurrency space.
Some states impose their own tax rules for cryptocurrency that can differ significantly from federal regulations.
Knowing the state tax implications is vital for proper compliance.
Losses from crypto trading can offset gains from other sources, like stocks, helping to reduce your overall tax liability.
This loss harvesting can be a strategic move to manage tax obligations.
Miners are considered to have taxable income, based on the fair market value of the cryptocurrency when it is mined.
This income is treated as ordinary income, not capital gains.
The "like-kind exchange" rule that applies to real estate does not apply to cryptocurrency trading, so you cannot defer taxes on trades through like-kind exchange provisions.
If you receive cryptocurrency as payment for goods or services, its fair market value at receipt time is considered taxable income, impacting both income and self-employment taxes.
Some jurisdictions have introduced pilot projects for integrating blockchain technology into tax collection systems, potentially making cryptocurrency transactions easier to track in the future.
International transactions can complicate tax matters.
For instance, if you trade cryptocurrencies with a foreign exchange, you may have additional reporting requirements, including foreign bank account reporting if thresholds are met.
The Infrastructure Investment and Jobs Act contained provisions related to crypto reporting that could affect how brokerages handle tax reporting in the future.
Taxpayers may need to fill out Form 8949 to report sales and exchanges of cryptocurrency, which requires detailed information about each transaction, including the cost basis and sales price.
In the US, failing to report cryptocurrency transactions can lead to significant penalties.
The IRS treats crypto misreporting similarly to underreporting income, which carries severe consequences.
Certain jurisdictions have discussed, or even begun implementing, tax incentives for blockchain innovation, which may lead to more favorable conditions for crypto investors and traders in those areas.
With the rise of decentralized finance (DeFi), tax implications of staking and yield farming may lead to increased scrutiny as profits generated from these activities can be complex to report.
In some regions, cryptocurrency donations to charitable organizations may offer tax benefits, allowing donors to avoid capital gains tax while claiming a deduction for the fair market value of the donated assets.
As a result of recent regulatory changes, taxpayers increasingly need to report cryptocurrency holdings on their tax returns, with some jurisdictions requiring that holders report on forms even if no transactions occurred during the year.