Divly’s Complete Guide to Declaring Crypto Taxes in the US (2023)

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
• 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 Suppose you find any errors or outdated information, it is greatly appreciated that you let us know by sending an email to [email protected] or via our support chat at the bottom right corner of our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

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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!

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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?

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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)

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

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+

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.

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.

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

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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

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!

Tax Treatment of Different Cryptocurrency Transactions

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🎯 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)

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.

🛑 Am I also taxed on trading stablecoins?

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)

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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)

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.

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).

If you pay any transaction fees on the disposal of your cryptocurrency, the fees can be used to offset proceeds from the disposal.

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.

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.

Non-Taxable Events

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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.

1. 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.
   

2. 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.

3. 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)

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

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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:

• Form 1040

• Form 8949

• Schedule D

• Schedule 1

Some additional forms you may need in special circumstances are:

• Schedule C

• Schedule SE

• Schedule A

• Form 8283

• 709 Gift Tax Return

• FBAR

• Form 8938 (under FACTA)

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:

1. Download your TurboTax Online (Gain/Loss) report from your Divly account.

2. Log into your TurboTax Online account.

3. Go to the Federal tab, select the Wages & Income section.

4. Go to Investments and Savings, Show more, at Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B) select Start.

5. On page Did you have investment income in 2023?, select Yes, then Continue.

6. On page Let’s import your tax info, select Enter a different way.

7. On page OK, let’s start with one investment type, select Cryptocurrency, then Continue.

8. On page Select your crypto experience, select Upload it from my computer, then Continue.

9. 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.

10. 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.

11. Compare the totals reported in TurboTax with the totals reported on your Divly Tax Report.

12. If there is a small difference this is okay because TurboTax rounds numbers.

13. 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”.

1. Download your Divly Tax Report report from your Divly account.

2. Log into your TurboTax Online account.

3. Go to the Federal tab, select the Wages & Income section.

4. Go to Less Common Income and at Miscellaneous Income, 1099-A, 1099-C, select Start.

5. Under the Miscellaneous Income tab, Show more, at Other reportable income select Start.

6. On page Any Other Taxable Income? select Yes.

7. 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.

8. Ex. "Crypto income", "Crypto airdrop", "Crypto mining".

9. For Amount enter the Total Amount from the income section of your Divly Tax Report and select Continue.

10. Review the reported information on page Other Miscellaneous Income Summary.

11. If everything looks correct, select “Done” and your are done reporting your crypto income.

Claiming Deductions:

1. Log into your TurboTax Online account.

2. Go to the Federal tab, select the Deductions & Credits section.

3. Go to Other Deductions and Credits, Show more, and at Tax Preparation Fees select Start.

4. You will be sent to page Tax preparation fees won’t affect your returns

   • 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.

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:

• Dates of acquisition and disposal

• Value when acquired

• Value when sold

• Any and all transfers/transactions from all of your wallets and exchanges

• Fees associated with any transactions

• Any gains and losses on transactions

• 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!

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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.