As the crypto world continues to evolve and gain popularity, more and more people are concerned about crypto taxes in the United States. Cryptocurrencies are becoming more and more attractive due to their decentralized nature, borderless transactions, and potential for substantial gains. However, for many, the tax implications of buying, selling, or even holding these digital assets remain a problem. With the Internal Revenue Service (IRS) actively seeking to collect revenue from crypto transactions, it's essential for crypto users to understand the tax obligations they face.
The significant rise of cryptocurrencies has left both investors and tax authorities dealing with the specifics of how to tax these digital assets. In this article from Notum, we will delve into the realm of crypto taxes in the USA, explore the crypto tax rate, and factors affecting crypto taxes, find out about taxes in 2023, and learn how to possibly reduce them.
How Is Crypto Taxed in the USA?
In the United States, cryptocurrency taxation is pretty specific and mostly is about capital gains and losses. The Internal Revenue Service (IRS) classifies cryptocurrencies as property, not currency, and this classification has several implications for taxation. For example, when you sell or exchange crypto, the tax treatment depends on whether it's a short-term or long-term capital gain. Short-term gains realized on holdings of less than one year are subject to regular income tax rates, while long-term gains (on assets held for more than one year) are typically taxed at more favorable rates.
Additionally, each crypto transaction is subject to information reporting to the IRS. Taxpayers are required to report their crypto activities on their tax returns, including details like the date, cost, fair market value at the time of the transaction, and the resulting gain or loss. The failure to report can result in penalties and potential audits. That's why it's important for crypto users to maintain accurate records of their transactions to facilitate proper reporting.
What Is the Crypto Tax Rate?
The crypto tax rate in the United States is subject to various factors and depends on your crypto transactions. As mentioned, the Internal Revenue Service treats cryptocurrencies as property, which means that tax obligations mainly revolve around capital gains and losses. Thus, you should pay attention to these key aspects of the crypto tax rate:
- Short-Term Capital Gains. If you hold a crypto for less than one year before selling or exchanging it, any profit you make is considered a short-term capital gain. These gains are taxed at your regular income tax rate, which can range from 10% to 37%, depending on your overall income.
- Long-Term Capital Gains. Holding crypto for over one year qualifies it as a long-term capital gain. Long-term gains are generally taxed at more favorable rates from 0% to 20%, depending on your income.
- Reporting and Compliance. The IRS has been taking steps to ensure compliance, including requiring taxpayers to disclose their crypto activities on their tax returns. Failing to report can result in legal consequences.
- Crypto-to-Crypto Transactions. Cryptocurrency-to-cryptocurrency transactions are also taxable, and you should report any gains or losses when you convert one crypto into another.
- Mining and Airdrops. Income generated from mining and airdrops is generally taxable as ordinary income, and you should report the fair market value of the coins you receive at the time of receipt.
As you may see, the USA crypto tax rate can vary depending on specific circumstances, including your income, the duration of crypto holdings, and the nature of your transactions.
What Can Affect Your Crypto Taxes?
At the moment, there are several factors that may affect your cryptocurrency taxes in the USA. If you are aware and follow them, you will not have any problems with IRS regulations. Pay attention to these key moments that can influence your crypto tax obligations:
- Holding Period. Cryptocurrency gains are categorized as short-term or long-term, each with its own tax rate. Short-term gains are typically taxed at your regular income tax rate, while long-term gains benefit from lower tax rates.
- Income Level. Your overall income determines the tax rate for your capital gains. Higher-income crypto users may be subject to higher tax rates, especially for short-term gains.
- Transaction Type. Different crypto transactions lead to different tax consequences. Selling, exchanging, or using crypto for purchases all have specific tax treatments. Even crypto-to-crypto exchanges are taxable events and need to be reported.
- Mining and Staking. Income earned from cryptocurrency mining or staking is considered ordinary income and is subject to income tax. The fair market value of mined or staked coins at the time of receipt is used to calculate the taxable income.
- Losses and Deductions. Crypto losses can offset gains and reduce your overall tax liability. That's why it's important to accurately track and report losses to take advantage of potential deductions.
- Tax Reporting. Failing to report crypto transactions or underreporting income can result in penalties and audits.
- Crypto Gifts and Inheritance. Gifting or inheriting cryptocurrency can have tax implications. The giver and receiver may be subject to gift taxes or inheritance taxes, depending on the value and circumstances.
- State Taxes. State tax regulations can vary, and some states may have specific rules for crypto taxation. It's important to understand the tax laws in your specific state and consult with a tax professional if needed.
Crypto Taxes in the USA in 2023
If you want to know the approximate cryptocurrency tax rate in 2023, you should once again pay attention to short- or long-term capital gains. However, as you remember, taxes on cryptocurrency largely depend on the taxpayer’s salary. As known, short-term capital gains have a higher percentage of taxation from 10 to 37%. The table below will help you understand Federal income tax brackets:
Long-term capital gains have more favorable tax conditions from 0 to 20%:
Can You Reduce Crypto Taxes?
There are several ways to reduce cryptocurrency taxes in the USA. One effective approach is to hold your cryptocurrencies for over one year to qualify for the more favorable long-term capital gains tax rates. By doing so, you can benefit from lower tax rates, with the maximum long-term capital gains rate at 20%.
Another method is to compensate gains with capital losses. If you've experienced losses from other crypto investments, you can use these losses to reduce the taxable gains. Accurate record-keeping is vital in this regard. Additionally, consider using tax-advantaged accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s, to hold your crypto investments.
Depending on the type of account and contributions made, you can defer or potentially decrease taxes on your crypto gains. Finally, gifting cryptocurrency to family members or charitable donations can be a tax-efficient way to transfer assets and reduce your tax liability. However, before implementing any of these strategies, it's important to consult with a tax professional with current tax laws in your state of residence. Besides, crypto users can “engage in tax loss harvesting, utilize specialized cryptocurrency tax software such as TokenTax, contribute crypto through donations, prioritize long-term capital gains, and execute sales in years of reduced income.” – TokenTax.
What Crypto Transactions Are Taxable?
In the United States, the Internal Revenue Service (IRS) considers cryptocurrency transactions to be taxable events in several circumstances. The main taxable cryptocurrency transactions in 2023 are:
- Crypto Sales. When you sell or exchange crypto for fiat currency or for another crypto, you usually initiate a taxable event. Profits made from buying and selling cryptocurrencies are typically subject to capital gains tax.
- Crypto Purchases. Using crypto to purchase goods or services is also taxable. If you had sold the crypto and then used the proceeds to make the purchase, you need to calculate the capital gains or losses for these transactions.
- Crypto Income. Cryptocurrency received as payment for goods or services is generally taxable as ordinary income. This includes income from mining, staking, and airdrops.
- Gifts and Donations. If you give crypto as a gift, the giver is generally not subject to tax. However, the gift recipient may be liable for taxes when they sell or exchange the gifted cryptocurrency. Crypto donations to charities may be tax-deductible, but there are specific rules and reporting requirements.
- DAOs. When a DAO generates income or capital gains, the tax will depend on your jurisdiction's laws. In some cases, DAO members may be individually responsible for reporting and paying taxes on their share of the income.
- DeFi. Earnings from DeFi activities like yield farming, liquidity provision, and lending are typically considered income and are subject to taxation.
- Lost or Stolen Crypto. In some countries, losses due to theft or loss of cryptocurrencies may be deductible. However, proving the loss can be a complex process, and not all jurisdictions allow such deductions.
- Moving Crypto Between Wallets. Transferring cryptocurrencies between your own wallets is usually not a taxable event. However, converting the crypto to fiat currency or exchanging tokens for another crypto may trigger a tax event.
Regardless of how long you have been using cryptocurrency, it is important to monitor taxes and government changes in this area. As the world of digital funds continues to develop, more and more new rules and restrictions appear that are important to know before buying, trading, or gifting cryptocurrency.
If you are familiar with the laws and pay taxes on cryptocurrency correctly and on time, this area may still be safe and beneficial for you. However, if you are careless about cryptocurrency taxation in the US, you may face fines and state inspections, which will lead to a lot of unwanted problems. Therefore, don't forget to stay informed about the latest developments in tax law and employ effective tax reduction strategies while maintaining accurate records.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.