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Filing Crypto Taxes: The Complete Guide for 2023

Introduction

The meteoric rise of cryptocurrencies like Bitcoin and Ethereum has seen crypto go mainstream. An estimated 16% of adult Americans have invested in, traded, or used cryptocurrencies. However, confusion reigns when tax season rolls around. Surveys show more than half of crypto traders are unaware of how crypto transactions impact their taxes.

Not reporting your crypto activity can lead to penalties, interest, and audit risks with the IRS cracking down. This comprehensive guide covers everything you need to know about crypto and your taxes to stay compliant and avoid issues.

 

Some key points we’ll cover: – Determining which crypto transactions must be reported – Tax forms, rates and calculations – Reducing your crypto tax liability – Step-by-step filing with popular software – Key dates and deadlines for tax season

Understanding the nuances of crypto taxation will ensure you file properly, maximize deductions, and avoid expensive mistakes down the road.

Do You Need To Report Crypto Activity on Your Taxes?

Knowing which transactions require reporting is the starting point for filing your crypto taxes correctly.

In the eyes of the IRS, cryptocurrency is treated as property, like real estate or stocks. Any sale, trade, or exchange for goods/services is a taxable event. This even includes trading one crypto for another, for example Bitcoin for Ethereum.

Here are the most common taxable crypto events:

  • Trading cryptocurrency for fiat currency like dollars
  • Using crypto to purchase goods and services
  • Trading one crypto for another (crypto-to-crypto trades)
  • Earning cryptocurrency from mining, staking, airdrops, or as income

Conversely, the following non-taxable events do not require reporting:

  • Buying cryptocurrency with fiat currency
  • Transferring crypto between your own wallets
  • Gifting crypto to other individuals
  • Inheriting cryptocurrency assets

Taxable Cryptocurrencies

The IRS defines cryptocurrency as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value”.

This means all cryptocurrency transactions are taxable, including well-established coins like:

  • Bitcoin
  • Ethereum
  • Litecoin
  • Ripple XRP

As well as less common cryptos such as:

  • AAVE
  • Chainlink
  • Polkadot
  • Stellar Lumens

Transactions involving stablecoins like Tether or USD Coin which are pegged to fiat currency prices are also subject to capital gains tax and must be reported.

De Minimis Tax Exception

Selling small amounts of cryptocurrency can qualify for the de minimis tax exemption in some cases. This waives capital gains tax on personal asset sales under $600.

So if you sold $500 worth of crypto in 2022, it would not need to be reported. However, be aware that limits can vary by state.

Now that we’ve covered which crypto transactions require tax reporting, let’s examine the specific forms and procedures for reporting them…

Cryptocurrency Tax Forms and Reporting

In America, capital assets like cryptocurrency get reported on Form 8949 and Schedule D.

Form 8949 – Sales and Other Dispositions of Capital Assets

Form 8949 provides the nuts and bolts details of your crypto transactions, organizing them by short and long term. This includes:

  • Date acquired
  • Date sold
  • Sales proceeds
  • Cost basis
  • Gain/loss

Cost basis refers to the original value of your cryptocurrency when acquired. This is necessary to calculate any capital gains or losses upon sale.

For example, if you purchased 1 ETH at $1,000 and later sold it for $2,000, your cost basis would be $1,000. This results in a $1,000 capital gain.

All short-term transactions get grouped under Part I, while long-term activity falls under Part II.

Schedule D – Capital Gains and Losses

The totals from Form 8949 for short-term gains/losses then carry over to Schedule D.

Here you report the combined totals, which ultimately flow into Form 1040 to factor into your adjusted gross income for the year.

Calculating Cryptocurrency Taxes

In basic terms, crypto taxes are calculated on capital gains realized when digital currencies are sold at a profit.

Let’s break this formula down step-by-step…

Capital Gains = Selling Price – Cost Basis

As a simple example:

  • Greg purchased 2 ETH at $2,000 per coin
  • His cost basis is $4,000 total
  • 1 year later he sold 1 ETH for $3,000 when prices increased
  • Greg’s capital gain is:
    • Selling Price = $3,000
    • Less Cost Basis of $2,000
    • = $1,000 capital gain

The type of capital gain then depends on the holding period:

Short-Term vs Long-Term Capital Gains Tax Rates

Short-term crypto gains apply to assets held less than a year before selling. These are taxed as ordinary income at your marginal rate:

Tax Bracket Short Term Rate
10%-12% 10%-12%
22%-24% 22%-24%
32%-35% 32%-35%

For long-term gains on crypto held over a year, preferential rates apply based on income:

Taxable Income Long Term Rate
Up to $44,625 0%
$44,626 to $461,700 15%
Over $461,701 20%

As shown, holding crypto over a year before selling can potentially qualify you for significantly lower capital gains tax rates.

Tax Implications of Crypto Staking Rewards

With certain cryptocurrencies like Cosmos and Tezos, you can earn staking rewards for holding funds on blockchain networks to validate transactions.

The IRS categorizes staking rewards and crypto mining earned as ordinary taxable income equal to the fair market value on the day received.

For tax purposes, this income gets reported even if unclaimed, meaning it’s not necessarily when rewards are withdrawn or transferred. Speak with a crypto tax professional to determine the optimal timing for claiming staking income.

Crypto Tax Calculator Methods

To determine capital gains or losses, you need to identify the cost basis, which isn’t always straightforward when handling multiple cryptocurrency purchases and sales.

Cryptocurrency tax calculators and software can track cost basis across all transactions using one of two primary methods:

1. First-In, First-Out (FIFO)

The FIFO accounting method assumes the first coins you purchased are the first sold, oldest to newest.

Buys

  • 0.5 BTC on January 1, 2022 for $10,000
  • 0.25 BTC on June 1, 2022 for $20,000

Sells

  • 0.1 BTC on July 1, 2022 for $9,000

FIFO would calculate cost basis on the initial January 1 purchase for earnings of $1,000.

2. Last-In, First-Out (LIFO)

The last-in, first-out (LIFO) method assumes that your most recent crypto purchase is sold first.

Buys

  • 0.5 BTC on January 1, 2022 for $10,000
  • 0.25 BTC on June 1, 2022 for $20,000

Sells

  • 0.1 BTC on July 1, 2022 for $9,000

LIFO would base cost on the June 1 price for a loss of $1,000.

Determine which methodology makes most sense for your crypto transactions. While the IRS allows FILO or LIFO, standard guidance is to use FIFO.

Crypto Tax Software

The complexities of tracking cost basis across potentially thousands of crypto transactions makes DIY reporting extremely difficult. This is where cryptocurrency tax software comes in very handy.

Leading crypto tax solutions like CoinTracking or CryptoTrader.Taxes can import your transaction history from all connected exchanges and wallets. These platforms can accurately identify taxable events, provide audit trails, and generate required tax forms.

Top features of cryptocurrency tax software includes:

  • Direct connections to exchanges via API
  • Automated transaction import
  • FIFO/LIFO cost basis accounting
  • Built-in capital gains/losses tax calculator
  • Form 8949 and other tax forms
  • Tax-loss harvesting tools
  • Multi-user dashboard
  • Expert support staff

Using crypto tax software alleviates massive headaches for traders by eliminating manual calculation errors and missed taxable events. Pricing scales based on number of transactions needed, but plans start around $50 to handle most retail traders.

Tax Loss Harvesting with Cryptocurrency

Tax-loss harvesting involves strategically selling investments at a loss to offset capital gains tax. This technique can be used to minimize taxable income from cryptocurrency profits.

The mechanics involve selling coins currently trading below your purchase price at a loss, while immediately buying back the crypto or repurchasing a similar asset.

Let’s examine a hypothetical Bitcoin tax-loss harvesting scenario:

  • Purchased 2 BTC in 2021 at $55,000
  • Bitcoin price drops to $30,000 in June 2022
  • Taxpayer sells 1 BTC to realize a $25,000 loss
  • Immediately rebuys 1 BTC to maintain market exposure

This $25,000 loss can offset previous crypto capital gains or up to $3,000 of ordinary income. Carrying over this loss also defers tax liabilities to future years when gains are realized.

One critical caveat is that wash sale rules disallow claiming a loss if buying back “substantially identical” crypto within 30 days after the sale. So the asset being repurchased must be sufficiently different, meaning Bitcoin for Ethereum would be permissible.

Tax-loss harvesting takes careful planning and should be coordinated with your crypto tax professional to avoid missteps and ensure implementation aligns with regulations. But strategically realizing losses represents one way crypto investors can minimize capital gains tax exposure.

Filing Your Crypto Taxes with TurboTax

TurboTax by Intuit is one of the most widely used online tax filing solutions by Americans to prepare and file their own returns. The platform can handle crypto transaction reporting across a variety of tiers.

However, one downside is that TurboTax does not offer direct import connections with leading cryptocurrency exchanges at the moment. So transactions must instead get added manually year-by-year.

Here is how cryptocurrency reporting works with TurboTax’s various tiers:

  • Deluxe: Manual entry of up to 20 crypto transactions
  • Premier: Manual entry of up to 100 transactions
  • Self-Employed: Manual input of up to 500 transactions

Therefore TurboTax Premier or Self-Employed would be best suited for most crypto investors. Just expect to put in legwork compiling transaction history to input manually.

Upsides are that TurboTax offers robust guidance on crypto taxation with an army of CPAs and enrolled agents to optimize filing. Crypto Sales get reported in the Income and Expenses section.

Capital losses can also get carried forward across years to keep deferring tax liabilities. So check prior years returns for crypto-related losses still available if your holdings declined in value.

Other Popular Crypto and Bitcoin Tax Software

Beyond the TurboTax option, many dedicated cryptocurrency tax platforms have emerged to serve traders and investors:

CoinTracker – Top-rated crypto tax calculator syncs with leading exchanges to auto-import all transactions. CoinTracker generates required tax forms and optimizes for deductions. Prices from $49.

CoinLedger – Tax prep designed specifically for crypto supports over 500 coins. Direct connections available for major exchanges & wallets.transaction limits. Pricing starts at $79 per user.

CryptoTrader.Tax – Imports all trades automatically from connected platforms. Optimized tax reporting summaries with guaranteed support from CPAs on staff. Packages from $49 up to unlimited transactions.

ZenLedger – Tax software with portfolio tracking creates custom tax reports including mining income, gifts, and lost coins. Check compliance in real-time while importing latest trades. Pricing from $79 to $399 per year.

These platforms represent excellent end-to-end solutions for automating cryptocurrency tax preparation while taking maximum deductions legally. Most offer some level of free tier before needing to upgrade based on transaction volume.

Final Thoughts on Crypto Taxes

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Key Takeaways: – The IRS treats crypto as taxable property subject to capital gains – Trading, selling, converting coins, mining, and more triggers tax liability – Maintain thorough transaction records with precise cost basis data – Crypto tax software best way to import data and generate needed IRS forms – Tax loss harvesting reduces liability while Wash Sales rule limits losses claimed

Failing to pay taxes on cryptocurrency profits can lead to stiff penalties of up to 75% of taxes owed as well as interest accruals. The latest IRS warning letters clearly signal this remains an enforcement priority going forward.

So take reporting seriously and consider leveraging crypto tax solutions that seamlessly integrate with leading exchanges to eliminate manual effort. TurboTax works as a manual alternative, but lacks exchange connectivity at this stage.

No investors enjoy paying taxes. But taking advantage of preferential capital gains rates and cascading losses across tax years can help mitigate obligations. Partner with a crypto specialist to explore additional ways to optimize obligated levies if holdings are substantial.

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