Wondering if you need to report your crypto activities on your 2023 tax return? As the April 15 deadline approaches, it’s crucial to understand the IRS’s requirements for disclosing cryptocurrency transactions. Michelle Legge, Head of Crypto Tax Education at Koinly breaks down what you need to know for the 2023 financial year.
Do you need to report your crypto this year?
Yes and no. If all you’re doing is holding, then this generally does not need to be reported. But, if you’ve sold, traded or spent crypto or earned income from crypto between January 1 and December 31 of the last tax year – that is, 2023, then this activity needs to be reported in your annual income tax return. Also, if you do end up with a tax bill, remember that both the reporting and payment deadline for your 2023 activity is April 15, 2024.
Made a crypto profit and thinking of skipping that part on your tax return? Don’t. The IRS is staffed up with private-sector crypto experts and can trace crypto transactions through exchanges that perform KYC checks. We also know that the IRS has compelled crypto exchanges like Coinbase and Kraken to share user data in the past And don’t forget, tax evasion and tax fraud are both federal offenses in the US – with penalties of up to $100,000 in fines or 5 years in prison.
Which IRS forms do you need for crypto reporting?
When filing your annual tax return, you’ll need to include your crypto transactions. Unfortunately, you’ll need a few other forms to do so. In short:
- 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?
2023 wasn’t your greatest trading year? You won’t pay taxes on crypto losses and can even use them to decrease your gains tax through ‘tax loss harvesting’
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?
DeFi is advancing quickly, and it seems the IRS is still trying to catch up, particularly with understanding the tax implications of various DeFi activities, like lending and staking. You’ll pay either no tax, Income Tax, or Capital Gains Tax on your DeFi transactions depending on a bunch of factors. At a basic level, the tax you’ll pay depends on whether you’re seen to be ‘earning’ crypto or ‘disposing’ of crypto based on the current guidance.
Remember, earning crypto is any time you receive new coins or tokens as a result of your transactions. This would cover many DeFi transactions. Meanwhile, when you’re trading, selling, or spending tokens on DeFi platforms, potentially including liquidity pool tokens – this would be subject to Capital Gains Tax.
It is important to discuss your DeFi transactions with an accountant as there is no formal guidance from the IRS just yet.
What about airdrops?
2023 was a huge year for scoring free crypto such as Arbitrum’s massive ARB token drop. To stick it out through the bear market, tons of blockchain projects dished out heaps of free native tokens to their loyal users through airdrops. But as always, there is no such thing as a free lunch in the eye of the IRS.
According to their guidelines, Airdrops – including airdrops as a result of a hard fork are taxed as income – so you’ll pay Income Tax on your freely gained crypto. To figure out how much Income Tax you need to pay, calculate the fair market value of your airdropped crypto on the day you receive it and apply your income tax rate. The bad news keeps on coming because when you later dispose of a crypto asset you received through an airdrop – you’ll also pay Capital Gains Tax.
How are NFTs taxed this year?
As of March 2023, the IRS has clarified its position on NFT taxes. Previously, NFTs were taxed like other crypto assets, facing short-term or long-term Capital Gains Tax upon selling or swapping. Now, they might be considered collectibles, and subject to the 28% collectibles Capital Gains Tax rate.
Yet, not all NFTs fit the collectible category. The IRS will assess NFTs on a case-by-case basis using a “look-through analysis” to decide their status. This means examining the NFT’s underlying asset to determine if it’s a collectible, affecting its tax rate.
If your NFT isn’t a collectible, standard Capital Gains Tax rates of up to 20% apply. Note that NFT creators might pay Income Tax on sales, different from buyers or traders. For NFT transactions, remember: selling or trading might incur a 28% tax for collectibles, no tax for buying with fiat, and Income Tax for creators selling their NFTs.
Can you do anything to reduce the amount of crypto tax you pay this year? “You can’t outright avoid crypto tax in the US – not without breaking the law and facing some harsh penalties! But you can reduce your crypto tax bill with some tax tips.
- 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?
There’s no getting around it, crypto tax is complex. Absolutely every transaction needs to be recorded, values need to be understood in US dollars, short and long-term periods need to be factored in, and you also need to know when to apply capital gains or income tax. It’s higher-grade stuff. That is why crypto tax calculators like Koinly are so important. Not only do they save hours of manual work – but they also help investors get their calculations right. Use a tool like Koinly to import all of your crypto transactions into one place, usually via seamless automatic imports.
Then, Koinly and similar software can calculate and categorize your gains and losses for any financial year. Once the totals are in, simply download pre-filled IRS tax forms to reference in your final submission. A good crypto tax calculator like Koinly should also integrate with popular tax filing tools like TurboTax and TaxAct to make filing easier.
What if you can’t make the deadline?
Are you going to miss the IRS tax deadline in April? Panicking about how to get your taxes filed without fines or penalties? There’s a lifeline for you yet! You can get an automatic tax extension by filing Form 4868. This generally extends your due date by 6 months to October 15. Extensions must be filed prior to the April 15 tax deadline.
So if you know you’re going to file late due to needing more time to go over your
paperwork, file for an extension before the deadline. However, you can unfortunately not delay paying any tax due with an extension. If your payment is later than the deadline, the IRS will charge interest on the unpaid balance. So you should always pay on time, even if you file an extension.
For more in-depth guidance and specific instructions on each point, Koinly’s
cryptocurrency tax guide is an invaluable resource. Check it out here to ensure you’re fully prepared for this tax season.
About Koinly
Founded in 2018, Koinly is a cryptocurrency calculator used by over 1 million crypto investors in over 20 countries. Koinly integrates with 850+ exchanges, blockchains, and wallets to give investors an easy and accurate way to track their crypto transactions in one place. From here, Koinly calculates the total capital gains and income an investor has derived from their crypto in any financial year.
