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How to report crypto on taxes in 2023
Find out your crypto tax implications and how to stay compliant.
As more Americans own cryptocurrency, it’s essential to know how the IRS views it and how it’s taxed. Here’s a comprehensive guide on crypto tax rules in the US and how you should report your crypto activity on your taxes this year.
1. Determine if you owe crypto taxes
Since the IRS treats cryptocurrency as property, you owe crypto taxes when you have a taxable event from your crypto activity. You generally incur capital gains and losses when you:
- Pay for goods or services with crypto.
- Sell crypto for fiat currency, like the US dollar.
- Exchange one crypto for another cryptocurrency.
- Earn crypto as income.
So if you didn’t make any sales or earn crypto income, you wouldn’t owe crypto taxes. Just because you bought crypto last year doesn’t mean you necessarily have to report it on your taxes. It’s only a crypto transaction if you have a taxable event.
You won’t owe crypto taxes if you:
- Bought crypto only.
- Held crypto in a wallet or account.
- Transferred crypto between wallets you own or control.
- Earned crypto from staking, lending or yield farming and didn’t sell said crypto.
2. Keep track of taxable events
To calculate your crypto tax bill, track every single crypto transaction you make throughout the tax year and keep detailed records of the following information:
- Amount and currency of the coin or token
- Fiat value of the coin or token when you purchased it
- Date of purchase
- Fiat value of the coin or token at the time of trade or sale
- Date of sale
Most exchanges keep this information in your transaction history. So if you buy and sell cryptocurrency from one platform exclusively, you might be able to use its integrated tax report to calculate your gains and losses.
But if you use multiple exchanges or have several different wallets, one platform’s generated tax reports won’t be accurate for you. Since exchanges can’t keep track of your crypto activity on other platforms, if you bought or sold cryptocurrency on another exchange or from a different wallet, your crypto activity will be missing critical data when tax time rolls around.
Instead, maintain your own CSV file of the data from all your exchanges and wallets. Or you can use a crypto tax software to import all your transactions from different platforms into one centralized database.
3. Calculate your capital gains and losses
To calculate your crypto gains and losses, take the Fair Market Value (the price your coin or token would currently sell for) and subject the Cost Basis (what you paid for the crypto, including fees).
For instance, let’s say you bought 1 Ethereum for $2,000; your cost basis is $2,000. If you sell it when it’s worth $2,500, your Fair Market Value would be $2,500.
Your realized capital gain would be calculated by $2,500 (Fair Market Value) – $2,000 (cost basis) = $500 gain.
If you purchase crypto several times throughout the year at different prices, you also need to pick an accounting method to help you decide which coin you’re selling first. A few common costing methods include:
- FIFO. First-in-first-out means you sell your crypto in the same order you acquired it.
- LIFO. Last-in-first-out is the opposite of FIFO, so you sell the last coin you acquired and work backward.
- HIFO. Highest-in-first-out means you sell the coins with the highest purchase price first.
Say you have the following transactions:
- On January 1, 2021, you buy 1 LTC for $130.
- On February 1, 2021, you buy 1 LTC for $140.
- On March 1, 2021, you buy 1 LTC for $170.
- On April 1, 2021, you sell 1 LTC for $200.
That means in April, you triggered a taxable event. To calculate your capital gain or loss, you would subtract your cost basis of 1 Litecoin from your Fair Market Value or the selling price.
Using the FIFO costing method, you would use $130 as your cost basis — how much you paid for your first Litecoin. So $200 (selling price) – $130 (cost basis) = $70 in capital gains.
On the other hand, if you opt for the LIFO costing method, you would use the purchase price of the last Litecoin you acquired. So your calculation would be $200 (selling price) – $170 (cost basis) = $30 in capital gains.
In this example, using LIFO instead of FIFO would save you $40 in capital gains ($70 – $40) and lower your tax liability.
Please keep in mind that once you choose either FIFO, LIFO or HIFO, you have to continue to use this accounting method each year that follows. In other words, you cannot use FIFO one year and then HIFO the next. Because of this, it’s important to carefully consider which accounting method you’d like to use.
Short-term or long-term gains and losses
Another variable to estimating your crypto taxes is determining whether you have a short-term or long-term gain, which fall into different tax brackets. Short-term capital gains are for the cryptocurrency you’ve owned for one year or less, whereas long-term gains are for the crypto you’ve held for longer than a year.
And while most crypto investors prefer gains over losses, you can still make losses work in your favor through tax-loss harvesting — or using your losses to offset gains.
For example, suppose you have the following short- and long-term gains and losses in 2022:
- Short-term gain = $1,000
- Short-term loss = $10,000
- Long-term gain = $5,000
- Long-term loss = $2,500
For 2022, you would have a short-term loss of $9,000 ($1,000 – $10,000) and a long-term gain of $2,500 ($5,000 – $2,500). Together, your total gains and losses would show a net loss of $6,500 ($9,000 – $2,500), eliminating your long-term capital gains of $2,500 for 2022.
Since the IRS allows you to deduct $3,000 (or $1,500 if you’re married filing separately) in capital losses from your ordinary income in 2022, you can claim the $3,000 deduction and carry over the other $3,500 in excess losses into the following years, which can help reduce future capital gains.
And if you don’t have any unrealized losses yet, several crypto tax software, like Accointing and Taxbit, have built-in tools to help you quickly identify opportunities to sell a coin or token at a loss to help you offset your capital gains throughout the year.
4. Complete your tax forms
There are numerous IRS tax forms you must fill out based on your crypto activity. Several tax forms include:
- Form 8949. Report your capital gains and losses on Form 8949, including all your taxable transactions.
- Schedule D. Use Form 8949 to report your net capital gains and losses on Schedule D.
- Schedule C. Fill out this form if you’re self-employed or have earned crypto as a business.
- Schedule SE. Self-employed individuals will also need this form to calculate Social Security and Medicare taxes owed from crypto income.
- Schedule 1. Include Schedule 1 in your tax return if you earned crypto income from airdrops, forks bonuses, liquidity pools or have other crypto wages.
- Schedule B. For investors who’ve earned staking income or interest rewards, you will likely need a Schedule B.
For help filling out your relevant tax forms, consider using a professional crypto CPA or a crypto tax software.
Compare crypto tax software
Use the table below to browse crypto tax software that help track your crypto transactions and generate a personalized tax report. Compare prices and features, such as included IRS tax forms, transaction limits and tax-loss harvesting tools.
While you are legally required to report your crypto gains, losses and income to the IRS, it can be complex and tedious to track every crypto transaction for the entire tax year and then manually calculate your capital gains and losses.
To help simplify and streamline the process, consider a crypto tax software designed to help automate crypto tax reporting. Crypto tax software, like Koinly and Taxbit, integrates directly with exchanges and wallets to track your crypto activity, handles all the computations and auto-generates your necessary tax reports.
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