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Hey there, crypto adventurers! 🐦 Divly here, your feathery guide to the maze that is cryptocurrency taxes. I know, I know, just hearing the word "taxes" might make you want to fly away. But don't worry, I've got your back! We're going to break down some of the IRS's, ahem, "cryptic" guidelines on crypto taxation into bite-sized nuggets.
As a bonus we'll throw in some handy tax saving tips throughout!
In this guide, we'll break down the following topics:
- When to declare your crypto taxes
- Can the IRS Track My Crypto?
- How is cryptocurrency is taxed
- Capital Gains Tax on Crypto
- Income Tax on Crypto
- Tax treatment of many different crypto transaction types
- Selling Crypto for Cash
- Trading Crypto for Crypto
- Taxation of Stablecoins
- Buying goods & services with crypto
- NFTs
- Margin trading
- Liquidation
- Adding/Removing Liquidity
- Mining
- Staking Rewards
- Airdrops
- Forks
- Rewards
- Trading & Transfer Fees
- Buying Crypto With Cash
- Transferring Crypto Between your own wallet
- Receiving or Gifting Crypto
- Donating Crypto
- How to submit your taxes to the IRS
- How to calculate your crypto taxes
- Using a crypto tax calculator such as Divly
- Filing Manually
- Filing using TurboTax
- How to calculate your crypto taxes
- Pro tips to keep your crypto tax bill as light as a feather
This guide will be updated and maintained regularly to account for changes made by the IRS. Suppose you find any errors or outdated information, it is greatly appreciated that you let us know by sending an email to [email protected] or via our support chat at the bottom right corner of our website.
Mark Your Calendars: Important Dates for 2023
Time flies when you're having fun trading crypto, but let's not forget those important tax dates:
📌 Tax Filing Deadline: April 15, 2024 Make sure you've reported all your crypto activities from January 1, 2023, to December 31, 2023, by this date.
📌 Need More Time? You can request an extension by April 15, 2024, which will give you until October 15, 2024, to file your 2023 taxes.
📌 Quarterly Tax Payments If you're making estimated tax payments, circle these dates on your calendar: April 18, 2023, June 15, 2023, September 15, 2023, and January 16, 2024.
It is also important to remember that the IRS enacts stiff penalties for late filings and payments.
Can the IRS Track My Crypto? You Bet!
Thanks to the American Infrastructure Bill of 2021, digital asset brokers are now required to issue Form 1099s for all crypto transactions starting January 1, 2023.
This is very important because the issuance of a 1099 also reports the transactions to the IRS increasing their oversight of cryptocurrency transactions.
The IRS has also leveraged the use of blockchain analysis and subpoenas to uncover underreporting of cryptocurrency taxes.
How is crypto taxed in the US?
In the United States, the IRS views your cryptocurrency as property in the form of a “digital asset” and it can be subject to either capital gains tax of up to 15% or 20%, or income tax up to 37%. Your level of taxable income will determine where you fall in both tax brackets, with a greater percentage levied to those with higher income.
Capital Gains Tax on Crypto
Calculating Your Capital Gains (or Losses)
To figure out your capital gains tax, you'll need to calculate the gain or loss when you dispose of your crypto. That's just a fancy way of saying when you sell, trade, or use it. You do this by taking the market value of the crypto on the day you got rid of it and subtracting your cost basis.
What's a Cost Basis, You Ask?
Your cost basis is what you paid for the crypto plus any fees you paid to acquire the crypto. (IRS FAQ Q8)
The gain(loss) can then be determined by subtracting your cost basis from the fair market value (price you sold for) of the cryptocurrency on the day of the transaction. (IRS FAQ Q7)
🔍 Capital Gains Example
Alright, let's put all this theory into practice with a real-world example. Imagine you've got the following crypto transactions:
| Type | Amount | Price | Fees |
|---|---|---|---|
| Purchase | 1 BTC | $10,000 | $15 |
| Sale | 1 BTC | $20,000 | - |
Step 1: Calculate Cost Basis
First, let's find out your Bitcoin's cost basis. That's the price you paid for it plus any fees.
Cost Basis = $10,000 (Price) + $15 (Fees)
Cost Basis = $10,015
Step 2: Determine Fair Market Value
The fair market value is what you sold your Bitcoin for, which in this case is $20,000.
Step 3: Calculate Capital Gain or Loss
Now, let's find out how much you gained (or lost, but let's stay positive!).
Capital Gain (or Loss) = $20,000 (Fair Market Value) - $10,015 (Cost Basis)
Capital Gain = $9,985
Short-Term vs. Long-Term: Timing Matters! 📆
If you have been in possession of the crypto you sold for less than 12 months, the gain(loss) will be treated as a short-term capital gain(loss) and be subject to the same tax rates as your taxable income.
| Tax Bracket/Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 - $11,000 | $0 - $22,000 | $0 - $15,700 |
| 12% | $11,001 - $44,725 | $22,001 - $89,450 | $15,701 - $59,850 |
| 22% | $44,726 - $95,375 | $89,451 - $190,750 | $58,851 - $95,350 |
| 24% | $95,376 - $182,100 | $190,751 - $364,200 | $95,351 - $182,100 |
| 32% | $182,101 - $231,250 | $364,201 - $462,500 | $182,101 - $231,250 |
| 35% | $231,251 - $578,125 | $462,501 - $693,750 | $231,251 - $578,100 |
| 37% | $578,126+ | $693,751+ | $578,101+ |
2023 US Federal Tax Brackets, also applies to short-term capital gains
🔍 Capital Gains Example Continued
Let's go back to our example where you bought 1 BTC on January 1, 2023, and sold it on March 1, 2023. Because you sold it within 12 months, your $9,985 gain is considered short-term.
If you had $100,000 in taxable income for 2023 you would be in the 24% income tax bracket and adding $9,985 in cryptocurrency transaction gains would not increase it enough to change your bracket placement.
Cryptocurrency Taxes Paid = 9,985 (Crypto Gains) * 24% (Tax Rate)
=$2,396.40
Long-Term Capital Gains: The Slow and Steady Route 🗓️
Patience is a virtue, especially when it comes to crypto taxes!
If you've held onto your crypto for more than 12 months before selling, you're in for a treat. Your gains (or losses) will be considered long-term, and guess what? The IRS offers more favorable tax rates for long-term capital gains.
Special Note on NFTs
If you're into NFTs, be aware that they could be taxed at a higher rate of 28% if the IRS considers them "collectibles." So, if you're trading digital art or other NFTs, keep this in mind!
| Tax Bracket/Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 - $44,625 | $0 - $89,250 | $0 - $59,750 |
| 15% | $44,626 - $492,300 | $89,251 - $553,850 | $59,751 - $523,750 |
| 20% | $492,301+ | $553,851+ | $523,751+ |
🔍 Capital Gains Example Long-Term
Let’s say you purchased the original 1 BTC on January 1st 2021 rather than 2023 and still sold it November 1st 2023. Your $9,985 gain would now be considered long term and subject to the capital gains tax rate.
Capital Gains Tax Bracket:
With your $100,000 in taxable income you would be in the 15% capital gains tax bracket.
Cryptocurrency Taxes Paid = 9,985 (Crypto Gains) * 15% (Tax Rate)
$1,497.75
Tax Savings:
By holding onto your BTC for over two years instead of just 3 months, you've reduced your crypto tax bill by $898.65. That's almost $900 you get to reinvest into the latest memecoin!
Choosing Your Cost Basis Accounting Method: FIFO vs. Spec ID
Alright, feathered friends, let's talk accounting methods! When it comes to figuring out your cost basis for your crypto transactions, the IRS gives you two options: First-In, First-Out (FIFO), and Specific Identification (Spec ID).
What's FIFO?
FIFO stands for First-In, First-Out. If you go this route, you'll consider the first crypto you bought as the first one you're selling. In other words, you'll use the cost basis of your earliest acquired crypto when calculating your capital gain or loss.
How does Spec ID Work?
To choose Spec ID would allow you to choose the specific crypto units (from the same wallet or exchange) you would like to use as your cost basis in your capital gain(loss) calculation.
For all the nitty-gritty, check out the IRS's FAQ page on "Virtual Currency Transactions," specifically Q39 & Q40.
🔍 Example: FIFO in Action
You are looking to sell 3 BTC. But to know what your capital gain will be you'll have to look back at your hypothetical crypto transaction history:
| Type | Date | Amount | Price |
|---|---|---|---|
| Purchase | January 1, 2021 | 30 ETH | $30,000 |
| Purchase | March 1, 2021 | 5 BTC | $255,000 |
| Purchase | April 1, 2021 | 3 BTC | $177,000 |
| Purchase | July 1, 2021 | 10 ETH | $23,000 |
| Sale | April 25, 2023 | 3 BTC | $83,000 |
Step 1: Identify the First Purchase
With FIFO, you'll consider the first BTC you bought as the first ones you're selling. In this case, that would be the 5 BTC you bought on March 1, 2021, for $255,000.
Step 2: Calculate Unit Cost Basis
Unit Cost Basis = $255,000 (Total Cost) / 5 (BTC Amount)
= $51,000 per BTC
Step 3: Calculate Total Cost Basis for the Sale
Cost Basis = 3 BTC (Amount Sold) * $51,000 (Unit Cost Basis)
= $153,000
Step 4: Calculate Capital Gain or Loss
Capital Gain (or Loss) = $83,000 (Sale Price) - $153,000 (Cost Basis)
= -$70,000
🔍 Example: Spec ID in Action
Let's revisit our previous example but give it a Spec ID twist. You still have the same transaction history, but now you get to pick which Bitcoin units you want to sell first.
Step 1: Choose Your Units
You decide to sell the 3 BTC you bought in April 2021 for $177,000. These units have a cost basis of $59,000 each, which is $8,000 more than the ones you bought in March. Choosing the BTC purchased at a greater price creates a larger long-term capital loss.
Step 2: Calculate Unit Cost Basis
Unit Cost Basis = $177,000 (Total Cost) / 3 (BTC Amount)
Unit Cost Basis = $59,000 per BTC
Step 3: Calculate Total Cost Basis for the Sale
Cost Basis = 3 BTC (Amount Sold) * $59,000 (Unit Cost Basis)
Cost Basis = $177,000
Step 4: Calculate Capital Gain or Loss
Capital Gain (or Loss) = $83,000 (Sale Price) - $177,000 (Cost Basis)
Capital Gain (or Loss) = -$94,000
Why Choose Greater Losses?
You might be scratching your feathers and asking, "Why would I want more losses?" Well, if you have big capital gains in other investments, you can offset them with larger capital losses from your crypto. This can help you reduce your overall tax bill.
Spec ID's Other Perks
Similarly, you could use Spec ID to strategically pick units that result in a smaller gain, thereby reducing your tax liability even further.
Can I switch my accounting method choice from year to year?
It is important to note that once you have chosen your preferred accounting method, the IRS will require you to request a change from year to year.
“A taxpayer chooses a method of accounting in the first year the taxpayer reflects the item on a tax return. Once a taxpayer adopts a method of accounting for an item, it cannot change the method, even from an impermissible one, without the Commissioner’s consent.”
Can I offset crypto gains with losses?
Yes! All capital losses can be used to offset against capital gains when determining your net capital gain(loss) for the tax year, whether or not they are in “digital assets”.
What If I Have a Net Gain?
If you still end up with a net gain after offsetting, you'll be subject to the applicable capital gains tax rate. So, make sure to calculate carefully!
What About Net Losses?
If the scales tip the other way and you end up with a net loss (meaning you've offset all your capital gains and still have losses left), you can use those losses to offset your ordinary income for the year.
🔍 Example: Offsetting Losses
Let's dive into an example to see how you can offset your gains and losses across different types of assets. Here's your hypothetical transaction history for 2023:
| Transaction Type | Holding-Period | Gain(Loss) |
|---|---|---|
| Sale of Bitcoin | Short-term | $7,000 |
| Sale of stock | Short-term | ($1,000) |
| Sale of bond | Short-term | ($2,000) |
| Sale of Ethereum | Long-term | $5,000 |
| Sale of real estate | Long-term | ($11,000) |
| Sale of Litecoin | Long-term | ($3,000) |
Step 1: Calculate Net Short-Term and Long-Term Gains/Losses
Net Short-Term Gain(Loss) = $7,000 (Bitcoin) - $1,000 (Stock) - $2,000 (Bond)
Net Short-Term Gain = $4,000
Net Long-Term Gain(Loss) = $5,000 (Ethereum) - $11,000 (Real Estate) - $3,000 (Litecoin)
Net Long-Term Loss= -$9,000
Step 2: Calculate Final Net Gain/Loss
Final Net Gain(Loss) = $4,000 (Net Short-Term Gain) - $9,000 (Net Long-Term Loss)
Net Short-Term Loss= -$5,000
What Can You Do With This Loss?
Since you have no more capital gains to offset, you can use up to $3,000 of this loss to offset your ordinary income. The remaining $2,000 can be carried forward to future years.
Note on Holding Periods:
If you had a net short-term loss of $9,000 and a net long-term gain of $4,000, your final net loss would be considered short-term. The holding period of the overall net gain or loss takes on the holding period that "wins out."
Income tax on Crypto
Let's switch gears and talk about when your crypto earnings become part of your taxable income.
When Does Crypto Count as Income?
Anytime you earn cryptocurrency, whether it's through mining, staking, or receiving it as payment, the IRS will hold its hand out.
You'll need to include the value of these "digital assets" in your taxable income for the year.
Examples of transactions that would result in income tax include:
We will go into more detail on each of these transactions later in the guide.
📝 The 1099 Factor:
Thanks to the American Infrastructure Bill of 2021, you're more likely to get a 1099 form when you earn crypto that needs to be taxed.
However, there are instances when you may not receive one, so it is important to understand the transactions outlined in this guide that could result in taxable income even without the issuance of a 1099. (IRS FAQ Q42)
How Do You Value Your Crypto Income?
The value you report should be the fair market value of the cryptocurrency on the day you received it. That means the day you could access or take possession of the crypto.
Your tax bracket can then be determined by looking at your total income.
| Tax Bracket/Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 - $11,000 | $0 - $22,000 | $0 - $15,700 |
| 12% | $11,001 - $44,725 | $22,001 - $89,450 | $15,701 - $59,850 |
| 22% | $44,726 - $95,375 | $89,451 - $190,750 | $58,851 - $95,350 |
| 24% | $95,376 - $182,100 | $190,751 - $364,200 | $95,351 - $182,100 |
| 32% | $182,101 - $231,250 | $364,201 - $462,500 | $182,101 - $231,250 |
| 35% | $231,251 - $578,125 | $462,501 - $693,750 | $231,251 - $578,100 |
| 37% | $578,126+ | $693,751+ | $578,101+ |
2023 US Federal Tax Brackets, also applies to short-term capital gains
🔍 Example: Airdrop
Let's say you got an airdrop of 1 Bitcoin worth $28,000 in May 2023. You'll need to include this in your taxable income. If you already have $100,000 of other income, adding the $28,000 keeps you in the 24% bracket.
Cryptocurrency Tax Paid = $28,000 * 24%
= $6,720
How Is It Similar to Short-Term Gains?
You might've noticed that this treatment is similar to how short-term capital gains are included in your taxable income. Yep, they both count as ordinary income!
🔍 Example Airdrops Continued: Calculating Total Tax for a Single Filer
Here's how you'd calculate your total tax due for 2023:
First $11,000 at 10%:
$1,100
Next $33,725 at 12%:
$4,047
Next $50,650 at 22%:
$11,143
Remaining $32,625 at 24%:
$7,830
Total Income Tax:
$1,100 (10%) + $4,047 (12%) + $11,143 (22%) + $7,830 (24%)
Total Income Tax = $24,120
And there you have it! Your total tax due for 2023 before any standard or itemized deductions would be $24,120.
🔍 Example Airdrop Simplified Method
If you're not a fan of juggling numbers, here's a simplified way to calculate your taxes using a bracket like the one below:
| Taxable Income | Taxes Owed |
|---|---|
| $11,000 or less | 10% of taxable income |
| $11,001 - $44,725 | $1,100 plus 12% of amount over $11,000 |
| $44,726 - $95,375 | $5,147 plus 22% of amount over $44,725 |
| $95,376 - $182,100 | $16,290 plus 24% of amount over $95,375 |
| $182,101 - $231,250 | $37,104 plus 32% of amount over $182,100 |
| $231,251 - $578,125 | $52,832 plus 35% of amount over $231,250 |
| $578,126+ | $174,238.25 plus 37% of amount over $578,125 |
Let's continue with our example where you had a total income of $128,000:
Total Income Tax:
= $16,290 (Base tax for income over $95,375) + [( $128,000 - $95,375) * 24%]
= $16,290 + $7,830
Total Income Tax = $24,120
Tax Treatment of Different Cryptocurrency Transactions
🎯 Capital Gains Tax 🎯
| Transaction Type | Tax Event | Divly Label |
|---|---|---|
| Selling for Cash | Capital Gains Tax | 💰 Sell |
| Trade Crypto for Crypto | Capital Gains Tax | 🔄 Trade |
| Spend Crypto (Purchase Goods & Services) | Capital Gains Tax | 🛒 Goods & Services |
| Buying, Selling, or Trading NFT’s | Capital Gains Tax | 🔄 Trade |
| Margin Trading | Capital Gains Tax | 📈 Realized Profit or Realized Loss |
| Futures Trading | Capital Gains Tax | 📈 Realized Profit or Realized Loss |
| Liquidity Pools | Capital Gains Tax | 🔄 Trade |
🍀 Income Tax🍀
| Transaction Type | Tax Event | Divly Label |
|---|---|---|
| Mining | Income Tax | ⛏️ Mining |
| Staking | Income Tax | 🏦 Staking reward |
| Receiving Airdropped Tokens | Income Tax | 🎁 Airdrop |
| Receiving Crypto as Payment | Income Tax | 💼 Income |
| Hard Fork | Income Tax | 🍴 Fork |
| Rewards | Income Tax | 🌟 Rewards |
🌈 No Tax 🌈
| Transaction Type | Tax Event | Divly Label |
|---|---|---|
| Buy Crypto with Cash | None | 💵 Buy |
| Transfer Crypto Between your Wallets | None | ↔️ Transfer |
| Gifting Crypto | None | 🎁 Gifted Away |
| Holding Crypto | None | - |
| Minting/Creating NFT | None | 🎨 Deposit |
| Soft Fork | None | 🎨Deposit |
| Donate Crypto | None | ❤️ Donation |
| Lost or Stolen Crypto | None | 🚫 Lost/Stolen |
Selling Crypto for Cash or Fiat
Anytime you exchange your cryptocurrency for cash, you will need to pay capital gains tax on the gain or loss generated from the sale. (IRS FAQ Q4)
🔍 Example: Selling Crypto
Suppose you bought $500 worth of Bitcoin in January of 2021 and are now selling that Bitcoin for $700 in March of 2023. You would recognize a long-term capital gain of $200 on this exchange.
To find out how much you gained, you would subtract the purchase price from the sale price.
Gain/Loss = $700 (Sale Price) - $500 (Purchase Price)
= $200
Trading Crypto for Crypto
Whenever you exchange one cryptocurrency for another you will be subject to capital gains tax. You'll need to pay capital gains tax on any gain you make from the crypto you're giving up.
The cost basis (acquisition cost) of the newly acquired cryptocurrency will be the value of the cryptocurrency given up at the time of exchange.
🔍 Example: Trade
Imagine you bought $600 worth of Bitcoin in January 2023. Come March 2023, that Bitcoin is now worth $800, and you decide to trade it for $800 worth of Ethereum. Your original cost basis for the Bitcoin is $600, and its current value is $800. So, you'll need to recognize a $200 short-term gain on this trade.
Gain Loss = $800 (Current Value) - $600 (Original Cost)
= $200
🛑 Am I also taxed on trading stablecoins?
🔍 Example: Stablecoin Trade
You bought 100 USTD (stablecoin pegged to USD) for $1,000 in January 2021. In May 2023, you want to exchange it for $1,000 worth of Bitcoin.
In May 2023, the value of the 100 USTD is still $1,000 and there will be no gain or loss generated from exchanging your USTD for Bitcoin. The newly acquired Bitcoin will have the $1,000 cost basis.
Gain/Loss = $1,000 (Current Value) - $1,000 (Original Cost)
= $0
So, when it comes to stablecoins, things usually stay, well, stable! But remember, always keep track of your transactions just in case.
Spending Crypto on Goods & Services
Spending your cryptocurrency on any good or service will trigger capital gains tax because the IRS views this transaction as if you are selling your crypto for cash to then purchase goods or services.
Therefore, you can treat your capital gains calculations just as you would selling your crypto for cash.
The gain(loss) is calculated by subtracting the acquisition cost of the cryptocurrency used to purchase the good or service from its value on the day of the transaction. (IRS FAQ Q15-Q18)
🔍 Example: Purchasing a Couch
Let's say you bought $300 worth of Bitcoin in January 2023. By April 2023, that Bitcoin has grown to $800 in value. You decide to use it to buy a new couch for your living room.
Well, you've just made a $500 short-term gain on that transaction!
Gain (Loss) = $800 (Sale Price) - $300 (Purchase Price)
= $500
NFTs
What is an NFT?
NFTs are non-fungible tokens. These are unique digital identifiers that cannot be copied or divided, unlike other fungible cryptocurrencies like Bitcoin or Ethereum.
While two Bitcoin from the same blockchain would be interchangeable, two NFTs from the same blockchain would not be even if they looked identical. NFTs allow for the sale and transfer of digital assets, usually digital artworks.
Selling/Trading NFTs
To sell or trade a purchased NFT is treated just the same as selling or trading any other cryptocurrency and therefore subject to capital gains tax.
🔍 How to Calculate NFT trading tax:
To figure out your capital gain or loss, you'll need to subtract the original cost of the NFT (its cost basis) from its value at the time you sell or trade it.
🔍 Example: Selling an NFT
You bought an NFT for $10,000 in August 2019. Fast forward to March 2023, and you decide to sell that NFT for $15,000.
Since you didn't pay any transaction fees when you bought it, your cost basis is simply the original $10,000 purchase price. That means you've got a long-term capital gain of $5,000!
Long-Term Capital Gain = $15,000 (Sale Price) - $10,000 (Purchase Price)
= $5,000
According to the IRS’s Look-through analysis your NFT may be considered a collectible, in this case your NFTs will be subject to a 28% capital gains tax.
Buying an NFT With Crypto
Buying an NFT with another cryptocurrency is seen as just another crypto to crypto trade, so you’ll have to pay taxes on it.
You’ll have to pay taxes over the gain(loss) generated from the cryptocurrency being exchanged for the NFT. The cost basis (acquisition cost) in the NFT will be the fair market value of the crypto used to purchase the NFT.
🔍 Example: Purchasing an NFT with USD
Let's say you bought an NFT for $30,000 in May 2020. By February 2023, the value of that NFT has soared to $50,000. You decide to trade it for 2 Bitcoins, each worth $25,000 at the time.
Your long-term capital gain on this trade would be $20,000.
Long-Term Capital Gain = $50,000 (Sale Price) - $30,000 (Purchase Price)
= $20,000
And don't forget, the cost basis for your new Bitcoins will be the $50,000 you traded the NFT for. Each individual Bitcoin will have a cost basis of $25,000.
Buying an NFT with Cash/Fiat
Buying an NFT with just cash is not a taxable event.
🔍 What Happens Next?:
All you've done is set the stage for future capital gains or losses by establishing your cost basis for your “digital asset”. Your cost basis is simply the amount you paid for the NFT, plus any transaction fees you might have incurred during the purchase.
Minting/Creating an NFT
🤔 The Great Debate:
The IRS hasn't given clear guidelines on how to report the sale of an NFT you've created. So, opinions are split.
1️⃣ Income Approach:
One approach is to treat the sale as income, just like you would if you sold a painting or performed a service. You'd add the sale price to your ordinary income and pay taxes based on your tax bracket.
🔍 Example: NFT Sale Income
You're an artist and sell an NFT of your artwork for $5,000.
Add this $5,000 to your ordinary income.
2️⃣ Capital Gains Approach:
The other opinion is that you should treat the sale as a capital gain. In this case, your cost basis would be whatever you spent to create the NFT, which could be zero if you didn't have any costs.
🔍 Example: NFT Sale Income 2
You are an artist and you created an NFT of your artwork in 2021. In 2023, you sell your NFT for $5,000.
Your cost basis for your NFT is $0 and your sale proceeds are $5,000, creating a long-term capital gain of $5,000.
Gain/Loss = $5,000 (Sale Price) - $0 (Cost Basis)
= $5,000
What about costs incurred to mint an NFT?
Any costs paid in crypto to create an NFT are subject to capital gains tax on the disposal of the crypto. The newly minted NFT gets a cost basis equal to the value of the crypto used to acquire it.
🔍 Example: Minting an NFT with minting costs
Let's say you're an artist and it costs you 0.3 Bitcoin to mint an NFT. You originally bought that 0.3 BTC for $6,000 back in 2020.
Fast forward to 2023, and that 0.3 BTC is now worth $7,500. You'll need to report a long-term capital gain of $1,500 on the disposal of this Bitcoin.
Capital Gain (Loss) = $7,500 (Current Value of 0.3 BTC) - $6,000 (Original Cost of 0.3 BTC)
= $1,500
Trade or Business?
If you're minting NFTs like there's no tomorrow and it starts to look more like a trade or business than a hobby, you might also have to consider self-employment taxes. That means filing Schedules C and SE.
Taxation of Crypto Margin Trading
The IRS has yet to release a formal statement as to how to approach the taxation of margin trading with cryptocurrencies, however, there seems to be a general consensus to treat it as a capital gain(loss) transaction.
When trading cryptocurrency on margin, there is no tax event when you buy crypto with your borrowed funds, only upon closing the position or liquidation. The tax reporting will differ depending on whether you have a gain or a loss.
🧮 Interest and Fees
Got some fees or interest payments from your margin trading escapades? Good news! You can subtract those from your capital gains or losses.
🔍 Example: Margin Trading Gain
You buy $3,000 worth of BTC using leverage in an exchange in May 2020. Fast forward to May 2023, and that BTC is now worth a cool $5,000. You decide to sell and close your position.
Capital Gain (Loss) = $5,000 (Value of BTC in 2023) - $3,000 (Amount Borrowed)
= $2,000
After paying back the $3,000 you borrowed, you're left with a long-term gain of $2,000.
📝 Reporting on Form 8949: You'll report this $2,000 gain as a capital gain on your Form 8949. And because you used borrowed funds, your cost basis in the asset is $0.
🔍 Example: Margin Trading Loss
Let's flip the script. You borrowed $3,000 to buy BTC in May 2020. Fast forward to May 2023, and your BTC is worth a not-so-cool $2,000. You decide to sell and close your position.
Capital Gain (Loss) = $2,000 (Value of BTC in 2023) - $3,000 (Amount Borrowed)
= -$1,000
📝 Reporting on Form 8949: In this less-than-ideal scenario, you'd report the proceeds from the sale as $0 on your Form 8949. Your cost basis would be the loss you incurred, which is $1,000.
🔍 Example: Deduction of Interest on Margin Trading
Remember that $2,000 gain from our first margin trading example? Well, let's say you had to pay $100 in interest. How does that affect your taxes?
1️⃣ Interest as Part of the Trade:
If the interest is charged as part of the overall trade, you subtract the $100 interest paid from the $2,000 gain, leaving you with an overall $1,900 capital gain.
2️⃣ Interest Charged Separately:
If the interest is a separate charge, you can deduct it as an investment interest expense on Form 4952 and Schedule A. This comes into play when you're deciding whether to itemize your deductions.
Liquidation
You might find yourself in a situation where your assets are forcibly liquidated.
Even if you're not the one pulling the trigger, a forced liquidation is still a tax event. You'll need to report any capital gains or losses that come from the liquidation of your crypto assets.
This is true whether or not you actually receive any proceeds from the liquidation.
🔍 Example: Liquidation
You made a $3,000 BTC investment back in May 2020. Fast forward to May 2023, and that BTC is now worth only $500. Your lender says "enough is enough" and liquidates your BTC.
Capital Gain (Loss) = $500 (Value of BTC in 2023) - $3,000 (Initial Investment)
= -$2,500
You have now incurred and must report a long-term capital loss of $2,500.
Crypto Futures Trading: The Future is Now (and Taxable)
Crypto futures trading is another transaction that the IRS has yet to give clear directions for. The general consensus is to treat it like you would crypto margin trading.
The 60/40 Rule:
The only difference in calculations that could arise is with the IRS’s 60/40 rule regarding futures trading.
Under Section 1256 of the Internal Revenue Code, futures transactions on a regulated exchange can automatically designate 60% of their capital gain(loss) as long-term and 40% as short-term, regardless of the actual holding period.
Adding/Removing Liquidity 🌊
So, you're thinking about dipping your toes into liquidity pools.
The IRS hasn't given us a lifeguard-approved guide yet, but the general consensus is to take the conservative approach and treat it like a crypto-to-crypto trade.
Calculating gains when you enter or exit a Liquidity Pool
When you swap your cryptocurrency for a Liquidity Pool (LP) token, you'll need to calculate your gain or loss.Your gain will be equal to the difference in value of the trade and the acquisition cost of the crypto traded away.
Furthermore, any rewards you receive for offering your liquidity should be included into your ordinary income, subject to income tax.
🔍 Example: Entering a Liquidity Pool
In March 2023, let's assume you purchased 0.1 BTC for $500 and acquired 1000 USDT for $1000. Come April, you decide to deposit your cryptocurrencies into a BTC/USDT liquidity pool.
Step 1: Enter the Liquidity Pool
At this point, your 0.1 BTC has grown in value to worth $1000 USD. Hence, you deposit $1000 worth of BTC along with $1000 worth of USDT into the liquidity pool. In return for your deposit, you receive an LP (Liquidity Provider) token.
Step 2: Calculate Capital Gain or Loss
This transaction is considered a capital gain, as you've traded your BTC and USDT for an LP token.
Capital Gain (Loss) = $2000 (Sale Price of BTC and USDT) - $500 (Acquisition Cost of BTC) - $1000 (Acquisition Cost of USDT)
= $500
🔍 Example: Liquidity Pool Rewards
Now that you’ve contributed 0.1 BTC and 1000 USDT to the pool, you can start earning rewards. Say you earn $50 worth of rewards.
This must be reported as income and included in your ordinary income for the 2023 tax year.
🔍 Example Exiting a Liquidity Pool
By the time you leave the pool a month later you are able to withdraw $2750 worth of crypto, 0.05 BTC and 1375 USDT. You exchange your LP token for the new BTC and USDT and incur a $750 Short-term Capital gain.
By entering and exiting a pool you now have to report a $750 short-term gain.
Although this initially seems like a success (other than the need to pay taxes), you may actually have been better off never entering the pool in the first place. This is due to impermanent loss.
Value without entering the pool = $2750 (0.1 BTC) + $1000 (1000 USDT)
= $3750
Value after entering and exiting the pool = $1375 (0.05 BTC) + $1375 (1375 USDT) $1375 +$50 (Liquidity Rewards)
= $2800
Loss compared to not entering the pool $3750 - $2800
= $950
Not only that, but because you traded into and out of the pool you’ll also have to pay taxes on your $500 and $750 capital gains.
Taxation of Crypto Mining
Mining for cryptocurrency results in earned income that must be reported as ordinary income and subsequently subject to income tax.
The value you report should be the market value of the cryptocurrency on the day you receive it. This value also becomes your cost basis for any future capital gains calculations.
🔍 Example: Mining
Let's say you mine $400 worth of Bitcoin in March 2023. That $400 gets added to your ordinary income for the year.
This is also the cost basis (acquisition cost) of your newly acquired cryptocurrency for calculating gains or losses going forward.
Is It a Business or a Hobby?
If your mining operations are more than just a weekend hobby, you could be running a trade or business. That means you might also be subject to self-employment taxes. In that case, you'll need to file Schedules C and SE to report your mining income
Taxation of Staking Rewards
Ever wondered how to treat those staking rewards come tax time? Untill recently it was unclear whether staking rewards were taxed. One couple decided to fight the tax they paid, and actually got refunded.
🔍 The Jarrett Case:
there has been controversy over the topic. Most notably, the Jarrett Case where a couple argued that their staking rewards were "newly created property" and shouldn't be considered income.
The case was dismissed after the IRS issued them a refund.
However, it seems clear that the IRS was not happy with this outcome. In 2023 they confirmed that your staking rewards are seen as taxable income. You should declare the value of your staking rewards at the time you gain access to them.
Taxation of Airdropped Tokens
Did you catch some free tokens falling from the crypto sky? Thats taxable.
How are Airdrops Taxed? If you receive an airdrop, you'll need to add the value of those tokens to your ordinary income at the time you gain access to them. This amount then joins the rest of your taxable income to determine your tax rate and how much you owe.
What about the Cost Basis of my Received Airdrop Tokens
The value you report as ordinar y income also becomes the cost basis for these airdropped tokens. So, if you decide to sell or trade them later, you'll use this value to calculate any gains or losses.
🔍 Example: Airdrops
Let's say you're blessed with an absurd airdrop of 2 Bitcoin worth $45,000 in January 2023.
You'll need to include this windfall in your ordinary income for the year.
Receiving Crypto As Payment
How is receiving payment in crypto taxed?
Receiving cryptocurrency as a form of payment like salary or compensation is treated by the IRS just like getting paid in USD.
The value of the cryptocurrency on the day you receive it gets added to your ordinary income (IRS FAQ Q9, Q12)
🔍 Example: Crypto Payment
Your quarterly salary is $50,000, amounting in a yearly salary of $200,000. You elect to receive your compensation in the form of Bitcoin. On your tax return, you are required to include the $200,000 total compensation value to your ordinary income for the tax year.
What about the Cost Basis of my received crypto? (IRS FAQ Q13)
If your quarterly salary is $50,000 but you are paid in Bitcoin each time, then the amount of Bitcoin you receive each quarter fluctuates. However, each quarter your cost basis for Bitcoin goes up by $50,000.
Reporting and Forms:
Any compensation you receive in return for performing a service as an independent contractor is considered self-employment income and will subject you to self-employment taxes.
In this case you will have to file Schedules C and SE. (IRS FAQ Q10)
Taxation of Hard Forks
How is receiving crypto from a hardfork taxed?
If a hard fork leads to an airdrop of new tokens, you'll need to report the value of those tokens as ordinary income on the day you receive them. (IRS FAQ Q22-Q24).
Yes, that required 3 of the IRS’s FAQ questions.
What about the Cost Basis of my received crypto?
The value you report as ordinary income also becomes your cost basis for these new tokens.
So, if you decide to sell or trade them later, you'll use this value to calculate any gains or losses. (IRS FAQ Q25)
No 1099? No Problem:
Even if you don't receive a 1099 form for this transaction, you're still required to report it on your tax return.
🔍 Example: Hard Fork
Imagine a hard fork in May 2023 results in you getting an airdrop of 1 of the latest Bitcoin spin-offs worth $28,000. You'll need to include this $28,000 in your ordinary income for 2023.
Rewards
How are rewards from “learn-to-earn” programs taxed?
In any instance where you earn cryptocurrency as a reward, such as through a “learn-to-earn”, “engage-to-earn”, or “play-to-earn” platform, these rewards are subject to income tax just as any other crypto income
The value of the crypto on the day you receive it gets added to your ordinary income.
Fees
The two categories of fees you may encounter while engaging in cryptocurrency transactions are transaction fees and transfer fees.
The IRS has only given explicit guidance on transaction fees paid with fiat (IRS FAQ Q8).
The tax treatment of other transaction fees paid in crypto or any transfer fees incurred have not been explicitly outlined by the IRS but the most practical approaches can be inferred and have been outlined below.
Transaction Fees
Any fee incurred in conjunction with the acquisition or disposal of your cryptocurrency would be considered a transaction fee. Whether or not you pay this fee in fiat or crypto will affect its tax treatment.
Paying transaction fees with cash (fiat)
The IRS is clear that when acquiring crypto, any fees paid with “real currency” in conjunction with the acquisition can be added to the cost basis (acquisition cost) of those cryptocurrency units (IRS FAQ Q8).
🔍 Example: Buying Crypto with a Fee
You purchase 1 Bitcoin for $20,000 and incur a $200 fee to complete the transaction. The fee is paid in fiat and will be added to the acquisition cost of the newly acquired BTC.
Cost Basis = $20,000 (Price of Bitcoin) + $200 (Transaction Fee)
= $20,200
If you pay any transaction fees on the disposal of your cryptocurrency, the fees can be used to offset proceeds from the disposal.
🔍 Example: Selling Crypto with a Fee
Fast forward two years, and your Bitcoin is now worth $40,000! You decide to sell it and cash in on those gains. But hold on, there's a $200 fee for this transaction too. This fee can be subtracted from your total sale proceeds.
Total Sale Proceeds = $40,000 (Sale Price) - $200 (Transaction Fee)
= $39,800
🔍 Example: Lowering your taxes with fees
The impact of transaction fees on capital gains can be substantial. Let's understand how accounting for fees can influence the tax implications.
Firstly, consider the scenario without accounting for fees:
Capital Gain without Fees = $40,000 (Sale Price) - $20,000 (Original Price)
= $20,000
Now, let's adjust our calculations to account for the fees involved:
Capital Gain with Fees = $39,800 (Adjusted Sale Proceeds) - $20,200 (New Cost Basis)
= $19,600
By considering these fees, we can determine the tax savings:
Tax Savings = $20,000 (Capital Gain w/o Fees) - $19,600 (Capital Gain w/ Fees)
= $400
The inclusion of fees can lead to tangible tax savings, demonstrating the importance of accurate record-keeping and comprehensive calculations.
Paying transaction fees with crypto
Just like fees paid in fiat, fees paid in crypto can be used to adjust your acquisition costs and lower your sale proceeds.
When you use crypto to pay for these fees, it's considered a disposal of that crypto. That means you'll have to pay taxes on any gains made.
🔍 Example: Crypto Fees
Let's say you bought 1 Ethereum (ETH) for $2,000 a while back. Now, you're selling some other crypto and decide to pay the transaction fee in ETH. The fee is 0.01 ETH, and the current value of ETH is $3,000.
First, let's find out the cost basis for the 0.01 ETH you're using to pay the fee:
Cost Basis = $2,000 (Original Cost of 1 ETH) * 0.01 (Quantity of ETH fee)
= $20
Now, the current value of the 0.01 ETH you're using to pay the fee is:
Current Value = $3,000 (Market Value of 1 ETH) * 0.01 (Quantity of ETH fee)
= $30
So, you have a capital gain on the ETH used to pay the fee:
Capital Gain = $30 (Current Value) - $20 (Cost Basis)
= $10
You'll need to report this $10 capital gain on your taxes.
Transfer Fees
Any fees you may incur to transfer your cryptocurrency from one wallet to another are likely going to have no tax benefit, as your crypto holdings would likely be viewed by the IRS as a personal investment.
Additionally, if you pay any transaction fees with crypto, any gain(loss) associated with its disposal will be subject to capital gains tax.
🔍 Example: Taxation of Transfer Fees
Let's say you have $80,000 worth of Bitcoin and you want to move it from Wallet A to Wallet B. To do this, you pay a fee of 0.05 BTC, worth $2,000. Assuming each individual BTC was acquired for $20,000 then, the cost basis of the fee is as follows:
First, we calculate the cost basis for the fee:
Cost Basis for Fee = $20,000 (Acquisition Cost per BTC) * 0.05 (Fee in BTC)
= $1,000
Next, you should then find the difference between the value of 0.05 BTC and its acquisition cost.
Capital Gain (or Loss) = $2,000 (Fee Value) - $1,000 (Cost Basis)
= $1,000
Non-Taxable Events
Not every crypto transaction has tax strings attached. Let's talk about those moments when you can give Uncle Sam the slip!
Buying Crypto with Cash
Buying new cryptocurrency tokens with cash, even using electronic platforms such as PayPal or Venmo, will not trigger any taxes.
However, remember to always keep good records of your transactions for accurate reporting of capital gains(losses) from sales in the future.
Also be aware that if your only crypto transactions for the year consist of buying new crypto with cash, you do NOT have to answer "yes" to the question on whether you have received/sold/sent crypto on form 1040. (IRS FAQ Q5 & 5a)
Transfer Crypto Between Your Wallets
When transferring cryptocurrency between wallets or accounts that you own, you are not required to pay any taxes on the transaction. (IRS FAQ Q38)
But Wait, What About Fees?
Ah, the catch! If you pay transfer fees in crypto, that's considered a disposal, and you'll need to pay capital gains tax on any gain (or report a loss) on the change in value of the cryptocurrency used to pay the fee.
So, while the transfer itself is tax-free, the fee isn't.
Gifting Crypto
Thinking about sharing some of your crypto nest egg as a gift? Well, you're in luck because gifting crypto can be a tax-free event!
The Basics of Gifting: If you gift crypto and its value is below the annual gift limit—$17,000 for 2023—you're in the clear! No taxes and no need to file a 709 gift tax return.
If you're feeling extra generous and the value of the crypto you're gifting exceeds $17,000, you'll need to file a gift tax return.
But don't panic! You won't necessarily owe any taxes as long as you haven't hit your lifetime gift limit. ($12.92 million for 2023). Just keep in mind that any amount over $17,000 will nibble away at that lifetime limit.
Receiving a Crypto Gift
Good news for gift recipients! If you're on the receiving end of a crypto gift, you generally won't owe any taxes on it.(IRS FAQ Q31).
Determining Your Cost Basis
Your cost basis (or acquisition cost) of the gifted crypto depends on a couple of scenarios:
Value of Gift ≥ Donor's Cost Basis:
If the value of the gifted crypto at the time of the gift is greater than or equal to the donor's cost basis, you simply inherit the donor's cost basis.
If the donor also paid any gift taxes, that gets added to your cost basis.
You also inherit the donor's holding period. This will determine whether you have short-term or long-term capital gains (or losses) when you eventually sell or trade the crypto.
Value of Gift < Donor's Cost Basis:
If the value of the gifted crypto at the time of the gift is less than the donor's cost basis, your cost basis will depend on the outcome when you dispose of the crypto.
Specifically, what the sale price is relative to the donor’s cost basis and the fair market value at the time of receipt.
There are three scenarios here.
Whether the sale price of the cryptocurrency is larger than both the donor’s cost basis and the value at the time it was received
Whether the sale price of the cryptocurrency is lower than the value at the time the crypto was received and lower than the donor’s cost basis.
Or whether the sale price of the cryptocurrency is between the value at the time the crypto was received and the donor’s cost basis.
-
Sale Price > Donor's Cost Basis & Gift Value:
If the sale price of the crypto is higher than both the donor's cost basis and the value at the time you received it, you'll take on the donor's cost basis. -
Sale Price < Donor's Cost Basis & Gift Value: If the sale price is lower than both the value at the time you received the gift and the donor's cost basis, your cost basis becomes the value of the crypto when you received it.
-
Sale Price Between Donor's Cost Basis & Gift Value: If the sale price falls between the donor's cost basis and the value at the time you received the gift, you won't recognize any capital gains or losses.
Having these regulations set out by the IRS is seen as a way to prevent sharing capital losses among friends.
If the donor has no supporting documentation for the gift’s cost basis, then it’s cost basis is zero. (IRS FAQ Q32)
🔍 Example: Gifting
Let's say Max buys 1 Bitcoin for $20,000. Three years later, he gifts this BTC to Sally when it's worth $15,000. A year after that, Sally decides to sell the BTC under three different scenarios:
1. BTC is now worth $25,000: Sally takes Max's cost basis of $20,000, as the sale price is higher than the donor's cost basis. She will recognize a long-term capital gain of $5,000.
Capital Gain = $25,000 (Sale Price) - $20,000 (Max's Cost Basis)
= $5,000
2. BTC is now worth $10,000: This value is lower than both the value at the time Sally received it and Max's cost basis. Sally assumes a cost basis of $15,000, resulting in a long-term capital loss of $5,000.
Capital Loss = $10,000 (Sale Price) - $15,000 (Value when Sally received)
= -$5,000
3. BTC is now worth $18,000: Sally won't recognize any capital gains or losses. The selling price is between Max's cost basis and the value at the time of the gift.
Holding Crypto
As long as you are simply holding your cryptocurrency, you do not have to pay any taxes on its change in value.
Only when you dispose of it (sell, trade, spend) do you have to report any gains(losses) from its change in value.
Soft Fork
Because soft forks do not result in the creation of any new cryptocurrency, there are no tax consequences from a soft fork. (IRS FAQ Q30)
Donating Crypto
Donating your cryptocurrency to a 501(c)3 status charity in the U.S. is not only a kind-hearted move but also a smart tax play! You can deduct the donation and avoid any capital gains tax upon disposal.
How Much Can I Deduct?
How much you can deduct depends on how long you’ve held the crypto you are donating. (IRS FAQ Q34)
Held for Over aYear
If you've held onto your crypto for more than a year, you can deduct its value on the day you make the donation.
Held for a Year or Less: In this case, your deduction is the lesser of your cost basis (what you originally paid for the crypto) or its value at the time you donate it.
Reporting: What's Required? 📝🔍
Crypto donations are considered non-cash contributions by the IRS. So, if you're donating more than $500 worth of crypto, you'll need to file Form 8283.
Donating over $5,000? You'll also need to include a qualified appraisal with Form 8283. (IRS FAQ Q37)
Submitting your crypto taxes to the IRS
How to calculate your crypto taxes
Before we get into filing, let's determine the options available to you to calculate your taxes.
Option 1: Manual Calculation
The DIY route. Armed with spreadsheets and a calculator, you painstakingly tally up all your transactions, capital gains, and losses.
You fill out the IRS Form 8949 and Schedule D by hand, possibly even delving into Schedule 1 for additional income and adjustments.
Let's be real; it's a Herculean task. If you have a straightforward portfolio and plenty of time, it might work for you. But if your transaction history looks like a tangled web, maybe skip this one.
Option 2: Hiring an Accountant
You decide to bring in a pro—a certified accountant experienced in the nuances of crypto taxes.
They'll sift through your transaction history and fill out all the requisite forms for you.
The upside? You can sit back and relax. The downside? It can get costly, and you'll need to ensure your accountant is up to date with the ever-evolving crypto tax regulations.
More than just letting you relax, accountants can provide you with a number of other benefits.
They can meticulously review your transactions for inconsistencies and offer strategic financial advice—nuances that a software solution may not be programmed to detect.
Accountants may also be a good choice for very complex financial transactions where a tax calculator might require some hands-on work.
However, the financial aspect can't be ignored. Accountants may charge anywhere from $150 to $500 per hour. Prices can change depending on how complex your transactions are. Especially for advanced crypto transactions, this can get costly.
If your portfolio is complex with numerous transactions, these hours can also add up fast, leading to a hefty bill and considerable time.
Option 3: Using a Crypto Tax Calculator
Cryptocurrency tax calculators can help save you time and money.
These digital platforms are designed to make the complex world of crypto taxation more accessible and manageable. First, let's talk about the advantages of using a tax calculator in general.
As an example of how a cryptocurrency tax calculator can help you, Divly provides compatibility with most platforms.
Divly allows you to import transactions from hundreds of platforms by simply connecting your wallet/exchange or uploading your transaction history file via an API.
Divly will also provide you with the required files, such as Form 8949 and Schedule D to report to the IRS. For those using TurboTax, Divly will provide you with an export you can upload directly to them.
The cost relative to an accountant is also significantly cheaper. While an accountant can start at $150 an hour, tax software such as Divly will be available at a significantly lower price for any number of transactions.
The process of connecting your wallets or uploading your transaction history files will also save you significant time over manual calculations or calculations via your accountant.
For a full overview of how Divly can help you with your taxes, check out our features page!
How to File Crypto taxes Manually
Knowing which forms you need to fill out for the IRS is key for making sure you have correctly submitted your cryptocurrency taxes for the year.
The most common forms you will need to fill out to correctly report your crypto taxes are:
Some additional forms you may need in special circumstances are:
Form 1040
Every individual taxpayer in the US has to file a Form 1040 with the IRS. With the updated 2023 Form 1040, the IRS has included a section for "Digital Assets" reporting where you have to check yes or no to receiving, selling, or otherwise disposing of digital assets during the year.
Note: You do NOT have to check yes if your only cryptocurrency transactions for the year included purchasing or holding crypto.
Form 8949
If you had any capital gains(losses) during the year related to your cryptocurrency, you must file Form 8949 with the IRS.
You need to provide information regarding the sale or disposal of your crypto, separated into short-term and long-term holding periods. This information can include the date acquired, date sold/disposed of, sale proceeds, cost basis, and the gain(loss).
Ensuring you are filling out all the relevant information can get tricky, so Divly is here to help and will provide you with a completed Form 8949 related to all of your crypto gain(loss) transactions after you have imported all of your cryptocurrency transaction data for the year.
Remember that if you are filing manually and you have other capital gain(loss) transactions during the year that need to be reported, you need to add these to your Form 8949.
Schedule D
If you had any capital gains(losses) during the year related to your cryptocurrency, you must file Schedule D with the IRS. Schedule D will ask for the totals from your Form 8949 and produce your total short-term and long-term gains(losses).
Divly will also provide you with a completed Schedule D related to all of your crypto capital gain(loss) transactions for the year.
Remember that if you are filing manually and have other capital gain or loss transactions during the year, they need to be reported on your Form 8949. After adding them, you will also need to update your Schedule D with the new net gain or loss.
Schedule 1
If you received any cryptocurrency in the form of income during the year, you must file Schedule 1 with the IRS. You enter the total amount of your crypto income reported for the year on line 8z, "Other income."
Schedule C
If any of your cryptocurrency activities relating to the earning of crypto income rose to the level of a trade or business during the year, you must file Schedule C with the IRS.
All of your crypto income related to activities such as mining crypto or receiving crypto in return for services as an independent contractor must be reported on Schedule C as profit or loss from your business (sole-proprietorship).
Consult with your tax advisor on whether or not this applies to you and for additional help filling out your Schedule C.
Schedule SE
Suppose any of your cryptocurrency activities relating to the earning of crypto income rose to the level of a trade or business during the year and you file a Schedule C.
In that case, you may also have to file Schedule SE with the IRS. This form reports the self-employment taxes on any income you have received from self-employment activities such as mining crypto or receiving crypto in return for services as an independent contractor.
Consult with your tax advisor on whether or not this applies to you and for additional help filling out your Schedule SE.
Schedule A
If you choose to itemize your deductions for the tax year, you must file Schedule A with the IRS. Itemized deductions involving your cryptocurrency could include donating crypto as a charitable contribution. You would need to report the amount of your deduction on Schedule A.
Consult with your tax advisor on whether taking the standard versus itemized deduction is best for you.
Form 8283
If you have any charitable cryptocurrency donations over $500, you must file Form 8283 with the IRS.
You will need to provide information regarding your charitable contribution, including the name and address of the donee organization, the date of the contribution, the date the donor acquired the contribution, the donor's cost basis, and the current value of the contribution.
Consult with your tax advisor on filling out the details of your Form 8283.
709 Gift Tax Return
If you gave cryptocurrency as a gift with a value of over $17,000 (for 2023) at the time of the gift, you must file a 709 gift tax return with the IRS.
You may not be paying any taxes on your gift, but you must report the value of your gift to document the decrease in your lifetime gift tax exclusion limit.
Consult with your tax advisor on filling out the details of your 709 Gift Tax Return.
FBAR
The FBAR is reported separately from your federal tax return in order to inform the Treasury Department of certain foreign financial accounts.
According to the Financial Crimes Enforcement Network (FinCEN) 2020 notice, you will only have to include cryptocurrency on an FBAR if you hold cryptocurrency in a foreign account that also holds other reportable assets%20Form%20114.-,Who%20Must%20File,-A%20U.S) as well.
Form 8939
Under the Foreign Account Tax Compliance Act (FATCA), Form 8938 is used to report all of your foreign financial assets to the IRS.
There is currently no explicit IRS guidance on whether or not your cryptocurrency held in foreign accounts would qualify, but if the total value of your foreign financial assets exceeds the minimum threshold and it includes cryptocurrency, it will need to be reported on Form 8939.
Once you have accurately filled out all your required forms, you can attach them to your filled-out Form 1040 and mail it all to the IRS, and you are done!
Filing Crypto Taxes with TurboTax Online
In order to import your cryptocurrency tax information into your TurboTax account , you will need to have a “Premium” subscription or higher.
It is possible to use TurboTax to report your crypto taxes without the help of DIvly and our reports, however the crypto exchange integration for figuring your crypto gains(losses) is much more limited than Divly’s, as TurboTax supports fewer exchanges.
Divly can also help ensure accuracy in your crypto tax calculations you are reporting as the calculations can become very tricky the more you trade.
Reporting Crypto Capital Gains(Losses) on TurboTax:
-
Download your TurboTax Online (Gain/Loss) report from your Divly account.
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Log into your TurboTax Online account.
-
Go to the Federal tab, select the Wages & Income section.
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Go to Investments and Savings, Show more, at Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B) select Start.
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On page Did you have investment income in 2023?, select Yes, then Continue.
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On page Let’s import your tax info, select Enter a different way.
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On page OK, let’s start with one investment type, select Cryptocurrency, then Continue.
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On page Select your crypto experience, select Upload it from my computer, then Continue.
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On page What’s the name of the crypto service you used?, select Other on the drop down menu, and enter Divly under Name, then select Gain/Loss or 1099-B under CSV Type, finally select Continue.
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On page Go ahead and upload your crypto CSV file, upload your downloaded TurboTax Online (Gain/Loss) report from your Divly account, then select Review then Continue.
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Compare the totals reported in TurboTax with the totals reported on your Divly Tax Report.
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If there is a small difference this is okay because TurboTax rounds numbers.
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If everything looks correct, select Confirm then Next and you are done reporting your crypto gains(losses).
Reporting Crypto Income on TurboTax
You need to report your crypto income separate from your capital gain(losses) in TurboTax. To do this you will need the income numbers from your Divly “Complete Tax Report”.
-
Download your Divly Tax Report report from your Divly account.
-
Log into your TurboTax Online account.
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Go to the Federal tab, select the Wages & Income section.
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Go to Less Common Income and at Miscellaneous Income, 1099-A, 1099-C, select Start.
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Under the Miscellaneous Income tab, Show more, at Other reportable income select Start.
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On page Any Other Taxable Income? select Yes.
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On page Other Taxable Income, for Description you can enter anything relevant to your crypto investments - you do not have to break down your crypto income into its different sources if you have many, you can just report the total income number.
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Ex. "Crypto income", "Crypto airdrop", "Crypto mining".
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For Amount enter the Total Amount from the income section of your Divly Tax Report and select Continue.
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Review the reported information on page Other Miscellaneous Income Summary.
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If everything looks correct, select “Done” and your are done reporting your crypto income.
Claiming Deductions:
-
Log into your TurboTax Online account.
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Go to the Federal tab, select the Deductions & Credits section.
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Go to Other Deductions and Credits, Show more, and at Tax Preparation Fees select Start.
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You will be sent to page Tax preparation fees won’t affect your returns
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This is because unless you are self-employed you can not deduct these expenses on your return.
- If you are self-employed, select Enter my expenses.
- On page How much did you spend on tax preparation in 2022? enter your Divly subscription cost.
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For charitable contributions
You can use the free ItsDeductible program from TurboTax to track all of your charitable contributions throughout the year. Then all you have to do is import your donations from ItsDeductiable when going to report your taxes for the year.
To manually enter your crypto charitable contributions you can follow TurboTax’s instructions here.
Note: Anywhere you click “Start”, you may be prompted with “Revisit” if you have already begun filling out these sections for the tax year.
Other Helpful Crypto Tax Tips
How can I lower my cryptocurrency taxes?
Holding
As long as you are holding onto your cryptocurrency assets you are not paying any taxes on their fluctuation in value.
Holding your crypto for longer periods of time will also result in more favorable tax rates upon disposal, as outlined in the example outlined earlier in this guide.
Understand your tax bracket
Having an understanding of the capital gains tax bracket you will fall into based on your level of income can guide you on how much capital gains you may or may not want to recognize in a given tax year.
With short-term capital gains being taxed as ordinary income, increases in your income from short-term capital gains could be the difference between being in a higher or lower income tax bracket.
If you decide to hold onto your crypto you could avoid the increase in taxable income while also potentially turning that short-term gain into a long-term gain with more favorable rates in the future.
Take advantage of your losses
If you have any cryptocurrency capital losses for the year they can help offset all other capital gains (crypto related or not) you may have for the year.
You can also purposely sell crypto at a loss to lower your profits.
If you have no more capital gains to offset, remember you can use up to $3,000 of losses a year (filing single) to offset your ordinary income and carry forward any remaining losses into future years until you use up all of your losses.
You can even look into the potential advantage of not using all $3,000 in one year to save it for a year with more capital gains or higher income you may be anticipating.
Utilize wash sales while you still can
Currently, your cryptocurrency transactions are not subject to the wash-sale rules applied to other investments like stocks and bonds. This allows you to sell your crypto at a loss and buy it right back and still recognize the loss on your tax return to offset your other gains. In this scenario you are able to take advantage of the loss while still maintaining practically the same position in your crypto investment.
However, in Biden’s fiscal 2024 budget proposal he has called for the change in this tax treatment to match that of your stock and bond investments, so you may only be able to take advantage of this tax break for one more tax year (2023).
Gift your crypto
If you think you might want to give some of your cryptocurrency holding to your family or friends, think about gifting rather than selling it to them. Not only will you not have to recognize any capital gains on the transaction, but the person you want to give it to won’t have to recognize it as income.
Make charitable contributions
Making charitable contributions to qualified organizations can create a deduction on your taxes.
Research your best cost basis method
The IRS allows you to choose which accounting method you would like to employ when figuring the cost basis of the cryptocurrency you are disposing of.
As we outlined in this guide, there are two different methods you could choose from with differing tax implications. So make sure you understand the differences and which method would work best for you and your situation.
Invest crypto in tax-deferred accounts
Investing your cryptocurrency into a tax-deferred retirement account like a traditional IRA or a roth-IRA can provide large tax benefits.
Investing your crypto into a traditional IRA can create tax deductions upon investment into the account. Although you will still pay income taxes upon withdrawal, your applicable tax rate could have significantly decreased by your retirement.
Investing your crypto in a roth-IRA will allow you to make withdrawals tax-free while your investment also grows tax-free in the account. (However, no deduction upon investment into the account).
Both of these situations are subject to limits and conditions of course but it would be worth it to look into the benefits they could have for your individual crypto tax situation.
Deduction for using Divly
Unfortunately tax preparation fees are no longer allowed by the IRS as a miscellaneous deduction for the individual taxpayer. However, if you are self-employed and filing a Schedule C you may still be able to claim them as a deduction.
What records should I keep?
It is very important to keep good records of all your cryptocurrency transactions in order to substantiate all of your claims to the IRS should they feel the need to audit any part of your return related to cryptocurrency.
A list of key transaction records to keep could be as follows:
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Dates of acquisition and disposal
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Value when acquired
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Value when sold
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Any and all transfers/transactions from all of your wallets and exchanges
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Fees associated with any transactions
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Any gains and losses on transactions
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The type of transaction it is and all parties involved
IRS FAQ Q46 offers a good list of digital asset records to keep as well.
The IRS can audit any return filed within the last 3 years and back even longer depending on certain circumstances. With this in mind, it is always a good idea to hold onto all of your records and periodically download any online records from your crypto exchanges.
If you frequently use your cryptocurrency to purchase goods and services, essentially using it like cash, remember that each transaction is still subject to capital gains tax. Having a good system of keeping track of all of these transactions will be important to accurately reporting your crypto taxes.
What Should You Know About the Net Investment Income Tax?
Since many of your cryptocurrency transactions are capital gain transactions in the eyes of the IRS, it is beneficial to know that you could be liable for an additional tax on your investment income (which includes capital gains). This additional Net Investment Income Tax of 3.8% will be applied to the lesser of your net investment income or the amount by which your adjusted gross income exceeds a certain limit.
What if Your Crypto is Lost or Stolen?
Due to the Tax Cuts and Jobs Act in effect from 2018-2025, you can no longer deduct your personal casualty and theft losses unless it is caused by a federally declared disaster. This would include any lost or stolen cryptocurrency unfortunately.
Casualty losses could include losing access to your wallet or sending any of your crypto to the wrong address. Theft losses could include having your exchange hacked or having any of your crypto stolen from your wallet.
Do State Taxes Apply to Crypto?
It is important to note that when filing your taxes in the United States it is likely you will have to file a state tax return as well, only a few states do not have any income tax.
The tax rates for each state vary, some being progressive and some having a flat rate. Each state also differs on what all is included in your income and what deductions you might be allowed or not allowed to take.
With all this being said, make sure to look up your state’s rules and regulations surrounding their income tax requirements when calculating your cryptocurrency taxes.
How to Cross-check Your Crypto Reports?
For all transaction information imported to various tax preparation software through signing into your exchange, always look to see what forms you may have received from your exchanges (1099-B, 1099-MISC, gain and loss report) and check that any imported data matches what was reported to you.
For any questions regarding the IRS’s stance on your cryptocurrency transactions and tax implications, refer to their FAQ page for lots of helpful information.
As you can see, there are lots of cryptocurrency transactions that can get very detailed and tricky which is why Divly is here to help!
Any tax-related information provided by us is not tax advice, financial advice, accounting advice or legal advice and cannot be used by you or any other party for the purpose of avoiding tax penalties. You should seek the advice of a tax professional regarding your particular circumstances. We make no claims, promises, or warranties about the accuracy of the information provided herein. Everything included herein is our opinion and not a statement of fact.
