Crypto Taxes in the US: An In-Depth Guide
Crypto taxes in the US are as follows –
You pay short-term or long-term capital gains taxes on selling, spending, swapping or disposing of your crypto and income taxes on crypto you receive as income.
Even though the crypto taxation laws in the US aren’t perfect, they are certainly better than many, if not most, countries.
The following is an in-depth crypto tax guide explaining all the intricacies and nuances you need to know as a US taxpayer, along with some expert tips on utilizing the tax laws to your advantage.
How Does the Internal Revenue Service (IRS) View Cryptocurrency?
The US government doesn’t classify cryptocurrencies as legal tender. But for tax purposes, the IRS treats crypto as property. Hence, the same tax laws apply to crypto that applies to properties.
How is Crypto Taxed in the US?
Depending on the nature of the transaction, crypto taxes in the US can be categorized into – capital gains taxes and income taxes.
Capital Gains Taxes
Whenever you sell, spend, swap or dispose of your crypto and realize a capital gain (profit), you’ll be liable to capital gains taxes.
The tax rates on short-term and long-term capital gains vary. Short-term capital gains (gains incurred from selling an asset within a year of purchase) range from 10-37%, while Long term capital gains (gains incurred from selling an asset after a year of purchase) range from 0-20%.
You can offset your losses against crypto gains or gains made from other asset classes of the current year (or future years). If you have no capital gains, you can use your crypto losses to deduct up to $3000 from your taxable income.
Income Taxes
Crypto received as income or salary is subjected to income tax rates. In other words, anytime you sell your products/services or complete a task to earn crypto, you’ll be liable to income taxes.
So, if you’re a freelancer or employee who receives their salary in crypto, you’ll pay income taxes.
On the other hand, if you’re earning crypto by playing play-to-earn NFT games or completing surveys and tasks like promoting a new project on social media to receive airdrops, you’ll pay income taxes.
There are some exceptions, like hard forks, where you’re not selling products or services or completing tasks, but you must still pay income taxes. Staking and lending rewards are also subjected to income taxes. More on this later.
Income tax rates in the US range from 10% to 37%, depending on which income bracket you fall under.
How to Calculate Crypto Taxes in the US
Calculating crypto taxes is pretty straightforward.
You pay the appropriate capital gain tax rates on your realized gains. How do you calculate your crypto gains? By subtracting the cost basis (acquisition cost) from its selling price or fair market value (FMV).
Cost Basis – Selling Price = Capital Gain (Profit)
Your cost basis would vary depending on which accounting method you use. Hence, your capital gains and their subsequent taxes would vary. The IRS allows you to use any of the following accounting methods – average cost basis, FIFO, LIFO, HIFO and specific identification.
Out of these five, FIFO, or first-in-first-out, accounting method is the most common among taxpayers. It’s when you account for the sale of your cryptocurrencies in the order they came in. Check out our in-depth guide on different accounting methods to know more about this and others.
As for income taxes – the FMV of your crypto (at the time of acquisition) will be your taxable income. After that, you’ll pay the appropriate income tax rates on it.
Remember that you’ll pay double taxes on crypto received as income – once when you receive it (income taxes) and later when you sell or dispose of it (capital gains taxes).
You can calculate your capital gains and all your crypto tax liabilities with Bitcoin.Tax.
Bitcoin.Tax allows you to integrate multiple exchange accounts and wallets, automatically tracking all your transactions and calculating taxes using your preferred accounting method.
Crypto Taxable Events
The following are the most common crypto transactions and their tax consequences.
Selling or Spending Crypto
Selling or spending crypto is a disposal event. Hence, any gains you incur from selling or spending crypto will be subject to capital gains taxes.
Swapping Crypto
Exchanging one crypto for another is also seen as a disposal event. Hence, the same capital gains taxes apply.
Getting Paid in Crypto
If you’re getting paid in crypto for your products or services or if you’re an employee who receives their salary in the form of crypto, you must pay income tax rates on the FMV (at the time of acquisition) of the crypto.
Staking or Lending Rewards
Staking and lending rewards are subjected to income taxes. However, some people argue against it as the creation of new property isn’t taxable under the US tax law. That is what the Jarrett v. United States lawsuit is all about.
On the other hand, adding liquidity to a protocol may also be seen as a disposal event.
When adding liquidity or lending crypto, some protocols provide an alternative token representing your contribution. Even though technically, you’re still in possession of your crypto, the IRS may see this as a disposal event.
Mining Crypto
Crypto mining is treated the same as getting paid in crypto. Therefore, mining rewards are also subject to income taxes.
Airdrops & Hard forks
Airdrops and hard forks are subject to income taxes. You must pay income tax rates on the FMV of your airdropped or hard fork tokens.
Tax-Free Crypto Transactions
The following are some crypto transactions that are either tax-free or tax-deductible.
Gifting Crypto
Gifting crypto is tax-free. However, if your total gift amount exceeds $16,000 in the 2022 financial year ($17,000 for 2023), you must report your crypto gifts on Form 709. You still don’t have to pay taxes, but you must report them.
There is also a lifetime limit on how much you can gift – $12.06m in 2022. Once you exhaust this limit, you’ll be subjected to 40% gift taxes on crypto gifts that exceed your yearly limit.
On the flip side, receiving a crypto gift is also tax-free. However, calculating the cost basis of your gifted crypto can be a little too complicated for US taxpayers. Check out our in-depth guide on crypto gift taxes to know more.
Crypto Donations
Crypto donations to 501(c)3 status charities are not only tax-free but also tax-deductible, meaning you can deduct the donated amount from your total taxable income.
Buying and Holding Crypto
Buying or holding crypto is not a taxable event in the US. Hence, it’s tax-free.
Transferring Crypto Between Personal Wallets
Transferring crypto between personal wallets is not considered a disposal event since you still possess your assets. Hence, it’s tax-free to move your crypto assets around different wallets.
How to Avoid Crypto Taxes in the US
The IRS is cracking down on everyone who has been avoiding their crypto taxes in the US. The last thing you would want is a crypto tax audit.
Plus, most, if not all, exchanges in the US report to the IRS, meaning the IRS can identify and track your transactions and find out if you’re avoiding taxes. Tax evasions have severe consequences, from hefty penalties to criminal prosecution.
So, you should pay your taxes accurately and honestly.
Although you can’t entirely avoid all your crypto taxes, there are some strategies you can use to reduce them.
Firstly, utilize the tax breaks that the government provides.
Long-term capital gains tax rates are far less than short-term capital gains tax rates. Plus, if your total income, including your crypto gains, is less than $41,675 (in 2022), you’ll pay no capital gains tax on long-term gains.
So, focus on HODLing your crypto assets, or at least wait a year before selling them. Of course, none of this applies if you’re a day trader or swing trader.
You can also utilize crypto gifts and donations.
As we discussed, gifting and receiving crypto is tax-free in the US. So, you can gift crypto to your spouse and reduce your tax liability while keeping the crypto within the family. Or you can donate crypto to a registered charity to deduct from your taxable income.
Utilize tax-loss harvesting and the absence of the wash sale rule in crypto.
Tax-loss harvesting is when you purposefully sell assets sitting at a loss to harvest losses that you can use to offset gains and reduce your tax bill. In most cases, the wash sales rule prevents taxpayers from selling an asset, realizing a loss and quickly buying it back.
In the US, however, the wash sale rule doesn’t apply to crypto. This is a huge loophole in the taxation law that you can utilize for now, but probably, not for long. Check out our detailed guide on crypto wash sales rules to know more.
Consider putting your crypto assets in crypto IRAs and crypto charitable remainder trust to receive more tax benefits and deductions.
Lastly, you can consult a tax professional who can customize a strategy tailored to your unique situation.
How to Report Crypto Taxes in the US
The financial year in the US runs from 1st January to 31st December. The tax deadline for reporting your gains, losses and income is usually 15th April. However, for the financial year 2022, the tax deadline is not 15th April 2023 since it’s a weekend. Instead, it’s 17th April 2023.
You must report all disposals (gains and losses) on Schedule D (Form 1040) and Form 8949, while crypto income must be reported on Schedule 1 (Form 1040) or Schedule C (Form 1040).
As for filing your crypto taxes in the US, you can do it through the post office or online, using websites like TurboTax and TaxAct. You can make the entire process by integrating TurboTax and TaxAct with Bitcoin.Tax.
Bitcoin.Tax will automatically track all your transactions, calculate taxes and create a tax report for you.