Understanding Cryptocurrency Taxes: Here’s What You Should Know

2023/02/10 15:23:24

With the growing interest in the crypto industry, governments in several countries are beginning to levy income taxes on their earnings. Generally, crypto assets are taxed in the same way that capital assets are in most countries. This is true in the United States, where the Internal Revenue Service (IRS) considers all digital assets to be capital assets. This means that, like with all other assets, any income generated by digital assets must be reported to the IRS for tax implications.

This article will go over the procedure and rules for virtual currency taxes in the US in 2023 — other countries may have slightly different tax laws. Since the cryptocurrency market is still relatively new and evolving, the taxation rules governing it are also changing. So, it's a good idea to seek assistance from a tax expert when filing your crypto taxes.

Before we begin, we'd like to state unequivocally that KuCoin does not provide financial or tax advice. As a result, none of this should be construed as a recommendation. However, it is important to assist our readers and crypto traders in understanding crypto taxes. Above all, it would be best to refer to a professional tax consultant when filing your crypto taxes.

Crypto Taxation Rules

The dynamic nature of the cryptocurrency market has made the crypto taxation process somewhat complex compared to other capital asset taxation processes. We can also blame it on the fact that the cryptocurrency market is vast and offers numerous avenues for earning money. The IRS must ensure that each method has its own taxation rules to avoid confusion. However, some people may find the rules difficult to understand. We attempted to simplify these rules as much as possible for them.

If you're reading this, you've probably heard of cryptocurrency in the past — many times in the context of it being a replacement for currency. However, the IRS does not regard digital assets as currency, but rather as property. This is why the IRS taxes cryptocurrency in the same way it taxes other assets, such as stock market shares.

There are numerous cryptocurrency-related events, but not all of them are taxable events. The IRS categorizes cryptocurrency income in a variety of ways. However, the taxable rates on all of these categories are divided into two categories: short-term capital gains, also known as income tax, and long-term capital gains tax.

For the average man, all of this may seem a little overwhelming. However, to better understand, let us go through the entire process step by step, starting with understanding events involving cryptocurrencies.

Explore Events Involving Cryptocurrencies

We can categorize cryptocurrency-related events into two types:

  • Taxable Events
  • Non-taxable Events

On the other hand, taxable events are divided into two sub-categories based on the nature of the income. These are both income and capital gains tax events. Let's take a look at the three types of cryptocurrency events listed below.

Cryptocurrency Non-Taxable Events

Buying and Holding Cryptocurrency

This type of taxable event does not necessitate any IRS reporting. The IRS only requires reporting of cryptocurrency income, which can only be generated after you dispose of, sell, trade, or spend the cryptocurrency. Buying and holding cryptocurrency does not subject it to income taxes unless it is sold.

Receiving Crypto as a Gift

If you received a cryptocurrency as a gift, you are not required by law to report it to the IRS. If you decide to sell it or use it to generate income through staking or crypto trading, however, that income will be taxable.

Gifting Crypto Assets

You can transfer cryptocurrencies to the wallets or accounts of friends, family, or others. However, the IRS has some restrictions in place for this event. There is a limit to how much cryptocurrency you can give away without it becoming a taxable event. The IRS has set a limit of $15,000 per recipient.

You can send up to $15,000 in cryptocurrency to a single recipient. If the amount exceeds the threshold for a single person, it is considered a taxable event, and you must file a gift tax return. However, sending $15,000 to multiple recipients will not be considered a taxable event.

Donating Crypto to Non-Profit Organizations

All non-profit organizations listed in the 501(c)(3) section are tax-exempt. If you donate cryptocurrencies to any of these organizations, you can claim a charitable deduction when you file your cryptocurrency taxes.

Transferring Cryptocurrency to Yourself

You can transfer your cryptocurrency between wallets and accounts as many times as you want. It will not make the event taxable unless you buy, sell, or trade out those cryptos.

Creating an NFT (Non-Fungible Token)

You are not required to report an NFT (non-fungible token) to the IRS if you create one unless you made a crypto income on it.

Cryptocurrency Taxable Events

They are classified into two sub-categories.

Capital Gains Events

The following are the cryptocurrencies-related events that will require you to pay a capital gain tax rate:

Selling a Cryptocurrency

Crypto traders engage in cryptocurrency transactions in which they sell coins in exchange for fiat currency. This type of event involving the sale of cryptocurrency is taxable in the eyes of the IRS. This is due to the possibility that the user will profit from the sale and generate income. In such a scenario, these cryptocurrency transactions will be prone to crypto tax implications.

On the flip side, you don't have to pay capital gains tax in case of incurring losses. In fact, you can deduct the loss when filing his taxes.

Conversion of Cryptocurrency

Converting one cryptocurrency into a fiat currency or another altcoin is also a taxable event. According to the IRS, in order to convert a cryptocurrency, you must first sell one and then buy the other.

Due to price fluctuations, the sale of the first cryptocurrency is subject to profit or loss. This cryptocurrency conversion event is taxable as a result of the sale. If you converted your coin for a crypto income, you must report it to the IRS.

Spending Cryptocurrency

It is also a taxable event if you use your virtual currency to purchase a product or service. Since it implies that you will have to sell your cryptocurrency first to convert it to cash and then pay for the product or service, the sale of the cryptocurrency will either generate income or result in a loss.

Both cases will necessitate IRS reporting. As a result, spending virtual currency on goods and services is subject to capital gains tax.

Taxable Income Sources

The following are the cryptocurrencies-related events that are subject to income tax:

Receiving Payments in Cryptocurrencies

If you accept cryptocurrency payments in exchange for goods or services, you must report this cryptocurrency to the IRS as income. It will be taxed at the same rate as income.

Getting Paid in Cryptocurrency

Many businesses have begun to pay their employees in the form of cryptocurrencies. People are increasingly demanding that their salaries be paid in digital assets. If you are one of them and receive a salary in virtual currency, you must also report it to the IRS as income.

Staking Rewards

Cryptocurrencies can be staked to provide liquidity to the network, which rewards the stakers with additional cryptocurrencies. If you have been staking and earning cryptocurrency rewards, you must report it to the IRS. Staking rewards are taxed based on the fair market value of the coins received at the time of receipt.

Some cryptocurrencies include a feature that allows holders to gain interest in the shape of the cryptocurrency after holding it for a certain period of time. The IRS does not treat it as interest but as income.

Earning Crypto from a Hard Fork

Cryptocurrencies received from a hard fork are subject to income tax, but this is dependent on how the received crypto is used when withdrawing from the exchange.

Receiving Cryptocurrency Through Airdrop

To promote their cryptocurrencies, crypto companies will occasionally launch airdrops and giveaways. If you received the cryptocurrency as part of a giveaway or airdrop, it would also be treated as an income tax event.

Cryptocurrency Mining

The rules for cryptocurrency mining are classified based on the type of mining. If you do it as a hobby, every coin you earn from mining is subject to taxes. Mining profits are taxed at the fair market value of the mined coins at the time they are received. However, if you mine cryptocurrency for a living, the IRS will charge you self-employment income tax.

Receiving Incentives

Crypto exchanges, companies, and networks may occasionally reward their users for various reasons, such as referring a friend or reaching a milestone. If you received an incentive in the form of virtual currency, you must report it to the IRS as income.

Short-Term vs. Long-Term Capital Gains Taxes

The IRS has divided the taxable rate on cryptocurrencies into two different rates based on the amount of time the asset was held. It means that the rates are different for those who have held the asset for a short period versus those who have owned it for a longer period.

You will be subject to a short-term gains tax rate if you hold your cryptocurrency for less than 365 days or a year before selling it. Likewise, if you hold your cryptocurrency for more than a year before selling it, you will be subject to a long-term capital gain tax rate. To determine how long you held an asset, you generally count from the day after you acquired it until the day you sold it.

Capital Gain Tax Rates in 2023

If you have a net capital gain, the gain may be taxed at a lower rate than your ordinary income. The term "net capital gain" refers to the amount by which your year's net long-term capital gain exceeds your year's net short-term capital loss. The term "net long-term capital gain" refers to long-term capital gains tax less long-term capital losses, including any carryover from previous years.

The table below shows how big of a percentage in capital gains you would have to pay when filing taxes in the US based on your total taxable income.

Taxable IncomeCrypto Tax Percentage
$41,675 (Single)0%
$83,350 (Married — Joint Filing / Widow(er))0%
$41,676-$459,750 (Single)15%
$83,351-$517,200 (Married — Joint Filing / Widow(er))15%
$55,801-$488,500 (Head of Household)15%
$41,676-$258,600 (Married - Separate Filing)15%
Income Above the Aforementioned Range20%

Crypto Taxation Based on Taxable Income

Paper Forms Required to File Cryptocurrency Taxes

You must file the following tax forms if you made money or lost money with cryptocurrencies in 2022.

  1. Form 8949: For the purpose of crypto tax, it will require you to report all of the taxable crypto transactions you have conducted throughout 2022. All the crypto-related transactions with details about the amount, date, and time of purchase and sale of crypto are reported here.
  2. Schedule D: This section will require reporting of all net capital gains and losses. All short-term and long-term capital gains and losses incurred during a year should be mentioned here.
  3. Schedule 1: You'll need to write down all the money you make from cryptocurrencies, like airdrops and incentives, staking rewards, and so on.
  4. Schedule C: You must fill out this form for any crypto income generated through a self-employed business. Crypto mining income, referred to as "business," will also be reported here. Furthermore, any income generated from crypto-related business activities is reported for crypto tax implications.
  5. Form 1040: It will require information about your crypto tax return.

What Happens if You Don’t Report Cryptocurrency on Your Taxes?

As with all tax evasion in the U.S., evading crypto taxes is a federal offense. Penalties for tax evasion could amount to up to 75% of the tax due, with a maximum of $100,000. In addition to that, they may amount to up to 5 years in jail.

Another thing to note is that U.S.-based crypto exchanges are compelled to share their customer data with the IRS, meaning that you cannot exactly hide your crypto. It is best to follow the word of law and apply standard practices when applying for taxes, as well as make use of tax-loss harvesting to negate your crypto losses and reduce the overall tax burden.

Ease Tax Reporting With KuCoin

Calculating and reporting your crypto tax becomes convenient when you trade with KuCoin, thanks to our partnership with Koinly. The leading cryptocurrency tax platform lets you generate capital gains reports in accordance with local laws prevalent in your country of residence. This service is available for our users based in the U.S., UK, Germany, Austria, and Switzerland.

Learn how to do your taxes with KuCoin and make crypto tax reporting a breeze! As a user-centric exchange, we make it easy and intuitive to export your trade history for your tax reporting.

You can also contact our support team in the live chat located in the right corner of our support center if you have any questions.

Bottom Line

Cryptocurrencies offer numerous ways to generate income, all of which are subject to crypto tax. However, the crypto tax rates are different depending on the time of holding the cryptocurrency. The IRS considers cryptocurrencies like stocks and properties; therefore, it charges a capital gains tax rate.

This guide can give you an idea of short-term and long-term capital gains, and what you might need to do to file a cryptocurrency tax return. On the other hand, hiring a tax professional can make the entire process easier. So, before relying on a single source, conduct additional research and seek advice from professionals. Follow the KuCoin Blog for more amazing tips and tricks. All the best!