Understanding what’s going on in crypto markets at any given time can be a challenge in and of itself. Understanding the tax implications that come with certain activities can be even tougher.

In this article, we’ll take a look at the most up-to-date crypto tax implications as we approach the end of the 2023 tax year.

Cryptocurrency Tax Implications

Although crypto is still relatively new, the IRS is enforcing compliance with respect to taxable events. The IRS classifies cryptocurrency as property, meaning individuals are required to pay taxes on crypto transactions as they are with transactions related to other property. Taxes are due when a sale, trade of one cryptocurrency for another, or disposal in any way causes a gain to be recognized.

Selling crypto in exchange for a fiat currency or using crypto to purchase a good or service may create tax implications if the value of the crypto has increased. Fiat currency is a government-issued currency that is not backed by a physical commodity (i.e. gold or silver), but rather by the government that issued it. Most coin and paper currencies used throughout the world are fiat (including the U.S. Dollar, the Euro, the British Pound, and the Indian Rupee).

Buying crypto is not a taxable event. Neither is buying and holding a cryptocurrency whose value increases. When filing taxes, the IRS now requires individuals to answer a question on Form 1040 detailing if they had any transaction related to a digital asset during the previous year. At the end of the year, crypto exchanges are required to file a 1099-K for their clients with more than 200 transactions and greater than $20,000 in trading during the previous year.

If an individual fails to report a crypto-taxable event, interest, penalties, and in some cases criminal charges may materialize if the IRS performs an audit.

Taxable Income and Capital Gains

Cryptocurrency tax rates depend on multiple factors including an individual’s income, tax filing status, and the length of time they owned the crypto before a sale. When a gain is realized after selling or disposing of a crypto, an individual must pay taxes on the amount of the gain.

If it was owned for 365 days or less, short-term gains tax would be paid (and these gains are taxed as ordinary income). If it was owned for longer than a year, long-term gains tax would be paid.

Each and every time an individual trades a cryptocurrency, they need to keep track of how much was gained or lost in U.S. dollars. Crypto gains and losses are reported on Form 8949. Crypto is taxed like stocks and other types of property, and the tax rates for crypto gains are the same as capital gains taxes for stocks.

If an individual sells crypto for less than they paid for it, it can be claimed as a capital loss and used to offset other income taxes.

It is important to note that non-fungible tokens (NFT) taxes work the exact same way as crypto taxes. If an individual realizes a gain from selling an NFT, taxes are owed on those gains.

Long-Term Crypto Tax Rates for 2023

Short-Term Crypto Tax Rates for 2023

Crypto Income – Fair Market Value

There are certain scenarios where crypto may provide income without an individual actually selling a cryptocurrency. The most common examples of this are:

• Receiving crypto as payment for providing a service
• Mining crypto and earning rewards
• Staking crypto and earning rewards
• Lending crypto and receiving interest payments

In these cases, crypto income is taxed as ordinary income at its fair market value on the date that the individual receives it. Fair market value (FMV) is defined as an asset’s estimated value if it were sold today in the current market.

Have More Crypto Questions?

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This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor.