If you’re pondering whether you must declare your crypto transactions in your 2023 tax submission, it’s essential to familiarize yourself with the IRS’s reporting rules before the April 15 deadline. Michelle Legge, the Crypto Tax Education Head at Koinly, provides an insightful explanation of the necessary information for the 2023 fiscal year.
Do you need to report your crypto this year?
If you merely held crypto during the last tax year (2023), there’s usually no need to report this in your income tax return. However, if you bought, sold, exchanged, or earned income from cryptocurrencies between January 1 and December 31, 2023, these transactions must be reported in your annual tax filing. Additionally, keep in mind that any resulting tax liability, along with the corresponding report and payment, is due by April 15, 2024.
If you’ve made a profit from cryptocurrencies and are considering leaving it off your tax return, think again. The IRS now has a team of crypto specialists and can track down your transactions through exchanges that conduct know-your-customer (KYC) checks. Previously, crypto exchanges like Coinbase and Kraken have been forced to hand over user data to the IRS. Keep in mind that tax evasion and tax fraud are serious federal offenses in the US, with penalties including fines up to $100,000 or imprisonment for five years.
Which IRS forms do you need for crypto reporting?
During the process of submitting your yearly tax report, it is essential to disclose your cryptocurrency transactions. Regrettably, you will have to complete some additional forms for this purpose. Simply put:
- Report crypto disposals, capital gains, and losses on: Form Schedule D (1040) and Form 8949.
- Report crypto income on: Form Schedule 1 (1040) or Form Schedule C (1040).
- You can do this with paper forms, or through a tax app like TurboTax or TaxAct.
What if I only made crypto losses?
If 2023 didn’t yield your best results in cryptocurrency trading for you, take comfort: you have the opportunity to offset those losses against any capital gains you may have realized through a technique called “tax loss harvesting.” This means that not only will you not have to pay taxes on your crypto losses, but you can actually use them to lower the tax liability on your profitable trades.
Here’s how to handle different scenarios:
- In a crypto downturn with stock market profits? Offset your stock gains with your crypto losses to reduce your total tax bill.
- Only have crypto losses? You can deduct up to $3,000 from your income, carrying over any excess losses to future years.
- Thinking ahead with potential future gains? Consider saving your losses to offset those future gains, lowering your future tax obligations.
How is DeFi taxed this year?
The world of Decentralized Finance (DeFi) is progressing at a rapid pace, while the IRS appears to be playing catch-up, particularly in terms of clarifying the tax implications associated with various DeFi activities, such as lending and staking. When it comes to taxation for your DeFi transactions, you may not owe any tax, Income Tax, or Capital Gains Tax, depending on several factors. The tax liability hinges on whether your actions are considered earning crypto or disposing of crypto according to the current interpretation.
Earning cryptocurrency occurs whenever new coins or tokens are added to your holdings due to transactions. This encompasses various Decentralized Finance (DeFi) transactions. On the other hand, when you sell, trade, or utilize tokens on DeFi platforms – which could also include liquidity pool tokens – those actions may be subject to Capital Gains Tax.
Discussing your Decentralized Finance (DeFi) transactions with an accountant is recommended, since the Internal Revenue Service (IRS) has not issued clear instructions on reporting these types of financial activities at present.
What about airdrops?
In 2023, there were numerous opportunities to obtain free crypto, including Arbitrum’s significant ARB token distribution. During this time, many blockchain projects rewarded their dedicated users with generous airdrops to help them endure the market downturn. However, it is essential to remember that, from the perspective of the IRS, there is no true freebie.
Based on the given instructions,
How are NFTs taxed this year?
Starting from March 2023, the IRS has made it clear that taxes for Non-Fungible Tokens (NFTs) may differ from those for other crypto assets. Earlier tax regulations applied short-term or long-term Capital Gains Tax when selling or exchanging NFTs. However, recent clarifications suggest NFTs could now be classified as collectibles and be subject to a higher 28% Capital Gains Tax rate instead.
Not every NFT can be classified as a collectible. The IRS will evaluate each NFT individually based on its essential characteristics using a “look-through analysis.” By examining the asset that underlies an NFT, the IRS determines if it qualifies as a collectible, which in turn influences its tax rate.
if your NFT doesn’t qualify as a collectible, the standard Capital Gains Tax rate of up to 20% will apply. However, it’s important to note that creators of NFTs may be subject to Income Tax on their sales. For transactions involving NFTs, keep in mind that selling or trading may result in a tax of 28%, while buying with fiat currency incurs no tax, and creators selling their own NFTs are responsible for paying Income Tax.
Is there any way to lessen the crypto taxes I have to pay this year?
In the United States, it’s illegal and risky to try and completely bypass crypto taxes! However, you can minimize your crypto tax liability with some clever tax strategies.
- HODLing Pays Off: Keep your crypto for over a year to snag lower long-term Capital Gains Tax rates.
- Smart Deductions: Look beyond the standard deduction. Think about child tax credits, medical and 401k deductions, or even deducting your Koinly plan if you’re self-employed.
- CGT Allowance Know-How: Earn under $44,626? You can skip Capital Gains Tax.
- Offsetting is Key: Match your capital losses against gains. Got more losses? Use them to reduce your ordinary income up to $3,000, or save them for later.
- Harvest Losses: Spot unrealized losses? Sell and rebuy your crypto to lower your tax bill— just make sure you don’t get caught out by the economic substance test.
- Gifts and Donations: Gift under $17,000 tax-free or donate to a 501(c)3 charity for a deduction. Donating big? Remember the IRS forms and possibly a qualified appraisal.
- IRA Investments: Think long-term and tax-free by putting crypto into your IRA.
- Community Investments: Put money into opportunity zone funds for tax savings and to help your community. Stay invested for 5+ years for extra benefits.
- Cost Basis Choices: Spec ID allows for FIFO, LIFO, and HIFO… pick the best method to minimize your taxes.
Where can you get help with your crypto tax return?
Inevitably, dealing with crypto taxes is intricate and demands meticulous attention. Every single transaction necessitates recording, converting values into US dollars for precise calculation, and accounting for both short-term and long-term capital gains or income tax. It’s a sophisticated endeavor that can be perplexing for many. Fortunately, tools like Koinly exist to simplify this process. By importing all your crypto transactions automatically, these calculators streamline the task, ensuring accurate calculations and saving you valuable time.
After that, software such as Koinly can help calculate and classify your cryptocurrency gains and losses for any given year. Once the figures are ready, you can easily download IRS tax forms that have already been filled out as a guide for your final tax submission. A reliable crypto tax calculator like Koinly should also be able to connect with commonly used tax filing platforms such as TurboTax and TaxAct to simplify the filing process.
What if you can’t make the deadline?
If you’re worried about missing the IRS tax deadline in April and facing fines or penalties, don’t panic! You still have a chance to save the day by filing Form 4868 for an automatic tax extension. This usually gives you an extra 6 months, until October 15, to complete your tax return. However, remember that extensions need to be requested before the April 15 deadline.
So if you know you’re going to file late due to needing more time to go over your
When it comes to paperwork, don’t forget to apply for an extension before the deadline if needed. However, it’s important to note that requesting an extension does not grant you extra time to pay any taxes owed. If your payment is past due, the Internal Revenue Service (IRS) will impose interest on the outstanding balance. Hence, it’s essential to meet the payment deadline even when filing for an extension.
For more in-depth guidance and specific instructions on each point, Koinly’s
A cryptocurrency tax guide is a valuable tool to help you prepare for the upcoming tax season. I recommend taking a look at it right here.
About Koinly
Established in 2018, Koinly functions as a cryptocurrency tracking tool for over 1 million investors globally. With compatibility with more than 850 exchanges, blockchains, and wallets, Koinly simplifies the process of managing crypto transactions for users by bringing all their data into one convenient platform. Through this service, Koinly calculates the overall capital gains and income derived from cryptocurrency investments during any given fiscal year.
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2024-04-11 10:13