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Crypto taxes: major milestones of 2023 and forecast for 2024

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Crypto taxes: major milestones of 2023 and forecast for 2024

Taxes and cryptocurrency remain a pretty intricate topic. Here, we will explore the current state of crypto tax and what investors can expect in 2024.

In the crypto world, simply holding on to your digital assets, often called ‘HODLing’ by the community, does not incur any tax obligations in almost every jurisdiction.

However, any profit derived from crypto-related activities, including lending, staking, or selling, could potentially result in some taxation.

How is crypto taxed?

In the U.S., the Internal Revenue Service (IRS) categorizes all cryptocurrencies as capital assets, meaning that capital gains tax applies to profits made from selling them.

For instance, if you were to invest $100 in Ethereum (ETH) and later sell it for $150, you would be required to report the $50 profit, also known as capital gain, on your tax return.

The applicable tax rate would depend on how long you held onto your ETH. For instance, if you owned the cryptocurrency for 12 months or less, the IRS would consider your $50 profit a short-term capital gain.

The IRS treats such short-term gains from crypto in the same way it treats your regular income, whose rates are based on your adjusted gross income (AGI). In that case, it will be subjected to a tax rate ranging from 10% to 37%.

However, if you realize the gains in more than 12 months, the IRS will subject the $50 to a maximum tax rate of 20%.

In other jurisdictions, the long-term tax rates vary, from 0% in Belgium, Germany, and Switzerland to 39% in New Zealand, 35% in Cuba and Mexico, and 46% in Iceland.

Crypto earnings are taxable, whether obtained through mining, airdrops, promotions, trading, staking, lending, or payment for goods and services. The IRS considers the entire value of your digital assets as taxable at your marginal income tax rate on the day you acquired them. Similar rules apply to crypto earned through yield-bearing activities such as staking.

Retaining crypto from such transactions and later using or selling them at higher values than you paid attracts capital gains tax on the profits. Conversely, if you sell your crypto at lower prices than you paid, you can claim this as a capital loss tax, which may be used to balance other income taxes.

U.S. crypto taxes in 2023

As stated previously, the tax on cryptocurrency in the U.S. will vary based on several factors, including your earnings, filing status, and the duration for which you held your crypto assets before selling them.

If you hold your coins for less than a year, the tax authority will treat them as a short-term gain and tax them equivalent to your income tax. On the other hand, if you held a cryptocurrency for more than a year, the tax applied would be that of long-term gains.

The section below outlines the tax rates applicable to long-term cryptocurrency gains for the 2023 fiscal year.

TAX RATESINGLEMARRIED FILING JOINTLYHEAD OF HOUSEHOLD
0%$0 – $44,625$0 – $89,250$0 – $59,750
15%$44,626 – $492,300$89,251 – $553,850$59,751 – $523,050
20%>$492,300>$553,850>$523,050
Source: IRS

Here are the tax rates applicable to short-term crypto gains for 2023.

TAX RATESINGLEMARRIED FILING JOINTLYHEAD OF HOUSEHOLD
10%$0 to $11,000$0 to $22,000$0 to $15,700
12%$11,001 to $44,725$22,001 to $89,450$15,701 to $59,850
22%$44,726 to $95,375$89,451 to $190,750$59,851 to $95,350
24%$95,376 to $182,100$190,751 to $364,200$95,351 to $182,100
32%$182,101 to $231,250$364,201 to $462,500$182,101 to $231,250
35%$231,251 to $578,125$462,501 to $693,750$231,251 to $578,100
37%>$578,125>$693,750>$578,100
Source: IRS

In addition to the IRS rates, several U.S. states have provided additional guidance on how crypto affects income taxes. Illinois has guidelines on apportioning income from crypto transactions, directing that it be treated like other types of intangible property for tax purposes.

Other states, including California, Kentucky, Minnesota, New Jersey, New York, and Washington, have issued guidance regarding sales and use tax on digital currency. 

This tax is usually imposed on the sale of taxable tangible personal property, and questions have arisen about whether it applies to goods or services that have been paid for with crypto.

California and New York don’t burden crypto users with a sales and use tax, as they do not recognize digital assets as tangible personal property. In contrast, Minnesota applies sales and use tax to non-fungible tokens (NFTs) when the associated product is also taxable within the state.

New Jersey requires businesses that use crypto as a form of wage payment to account for their fair market value at the time of payment for withholding purposes. Similarly, independent contractors paid in cryptocurrency must determine their U.S. dollar equivalent fair market value on the date of receipt. Payments made in crypto are subject to the same reporting requirements as other property types.

In Washington, the state’s Department of Revenue advises that to apply tax to a transaction involving NFTs correctly, it’s key to consider the nature of the transaction, the taxability of each component, and the identity of the involved parties.

Tax-gain harvesting

With the crypto market shaking off the effects of the prolonged bear market, allowing investors to make profits on their holdings, tax experts have suggested paying attention to tax-free opportunities in crypto gains.

One such avenue savvy crypto enthusiasts may want to consider is tax gain harvesting. This strategy can work particularly well for those within the 0% long-term capital gains bracket who have held their cryptocurrencies for over a year.

The approach involves selling profitable digital assets, registering a gain, and immediately buying them back by taking advantage of the absence of a wash sale rule for gains. This resets a cryptocurrency’s basis to the new purchase price, potentially reducing future profits if prices continue to rise.

Any decision to repurchase crypto depends on your risk tolerance and financial goals. Tax experts recommend gain harvesting for those in the 0% bracket, particularly with the immediate buy-back strategy, especially since the IRS wash sale rules do not currently apply to crypto losses or gains.

As shown in the table above, in 2023, those that fall within the 0% capital gains rate included individuals with taxable income below $44,625, couples making $89,250 or less, and heads of households earning $59,750 or less.

Tax reporting for cryptocurrency

In the U.S., the process of tax reporting for cryptocurrency starts with the updated Form 1040, which now includes a question about crypto transactions you may have made within the year. If you only bought crypto, then it is not taxable. However, if you sold it, then it becomes taxable.

It is crucial to track all your cryptocurrency transactions, including what you paid for them, how long you held them, and their selling price. Also, remember to keep all receipts and note the cryptocurrency’s fair market value when used or sold.

It is worth noting that your crypto exchange might not record the original cost if you transfer coins between offline cold wallets and your account.

When filing taxes on trading crypto, there are several forms you might need to fill out, such as Form 1040 for reporting your total gains or losses from crypto, Form 1099-NEC if you earned crypto by mining it, Form 8949 for logging every crypto purchase or sale, Schedule C if you received coins from mining, Schedule D for summarizing your total capital gains and capital losses, and Schedule SE if you earned any crypto income through self-employment.

Furthermore, you should also specify the date you sold, exchanged, or disposed of a digital asset. You will also require the proceeds or selling price and the cost basis of each cryptocurrency to help you calculate crypto taxes.

What does 2024 hold for crypto and taxes?

Looking forward to 2024, experts predict further developments in crypto taxation. As more people engage in crypto trading, the demand for services such as crypto tax report generation and blockchain taxation understanding will likely increase. 

The evolving regulatory environment may also change trader tax laws and the taxation of blockchain technologies.

The IRS has already published guidelines for applicable rates when paying taxes on crypto in 2024.

TAX RATESINGLEMARRIED FILING JOINTLYHEAD OF HOUSEHOLD
0%$0 to $47,025$0 to $94,050$0 to $63,000
15%$47,026 to $518,900$94,051 to $583,750$63,001 to $551,350
20%>$518,900>$583,750>$551,350
Source: IRS

According to existing tax laws, various crypto transactions may also have varying tax implications in the coming year. Here is an overview of some of them:

  • Crypto income: Mining and staking rewards, as well as any crypto received as payment for goods or services, may generate taxable income in 2024.
  • Sales and trading: The IRS considers exchanging, using, or trading crypto taxable.
  • Capital losses: Crypto losses can offset taxes on other capital gains and as much as $3,000 of your income, reducing your overall tax bill.
  • Buying with stablecoins: In 2024, trading with stablecoins will have the same tax implications as with fiat currency.
  • Bankruptcies: With a spate of bankruptcies hitting the crypto space in 2023, affected investors may be glad to know that it is possible to balance out their losses from such events against their profits using the original purchase cost of the affected digital asset.
  • NFTs: Sales of NFTs are taxable, with rates depending on how long they’ve been held and total income.
  • Transferring between digital wallets: The taxman does not consider transferring crypto between wallets as a taxable event as long as you are not exchanging it for another cryptocurrency or fiat currency.
  • Decentralized finance (defi) protocols: Participating in defi liquidity pools can incur trading taxes, possibly from exchanging your cryptocurrency for a liquidity pool token or claiming reward tokens. Earnings from defi staking may also be subject to capital gains or income taxation.
  • Decentralized Autonomous Organizations (DAOs): Obtaining crypto from a DAO is reported as income, with any subsequent profits from sale subject to capital gains tax.
  • Airdrops and hard forks: These are taxable and should be reported at their fair market value at the time of receipt.
  • Gifts and donations: Receiving cryptocurrency as a gift is not taxable until sold, at which point capital gains or losses come into play. Donating crypto can result in a tax-free charitable deduction.

If you are an American taxpayer, the deadline for submitting your crypto tax report for 2023 or applying for an extension falls on Oct. 15, 2024.

Please note that while this summary aims to simplify tax rules on cryptocurrency, seeking professional crypto tax services for exact tax calculations and reporting is always recommended.

If you sell crypto, do you pay taxes?

In most tax jurisdictions, crypto is taxed like stock and other property types. Therefore, you must pay taxes on any gain you realize from selling crypto.

Do you pay taxes on Bitcoin?

Like other cryptocurrencies, selling Bitcoin at a profit is subject to capital gains tax.

Can you claim crypto losses on taxes?

You can claim crypto losses on your taxes and offset them against gains on your tax bill.

Do you have to report crypto under $600?

Yes. While the Biden administration proposed to raise the reporting threshold for cash payments from $600 to $10,000, it does not apply to digital asset transactions, meaning the IRS still requires all crypto transactions, big or small, to be reported.

How is crypto mining taxed?

When you successfully mine crypto, the rewards obtained are subject to taxation. The taxman determines the taxable amount by considering the fair market value of the mined cryptocurrency on the day it was mined.

Are crypto tax calculators safe?

Crypto tax calculators can be safe and efficient tools for filing taxes, but it’s important to be cautious due to potential security concerns. There have been alerts about potential phishing scams targeting crypto tax calculator users, so it’s crucial to stay vigilant.

How much tax will I pay on crypto?

The amount of tax you will pay on crypto can vary greatly and is usually impacted by factors including how long you have held the asset and your total income. Potential taxes on trading crypto can range from nothing to 37%.

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