US Crypto Tax in 2023: What You Need to Know – Kraken Blog
The end of the tax year is fast approaching, and the clock is ticking for crypto holders to report their transactions to the Internal Revenue Service (IRS).
To crack down on cryptocurrency theft, the IRS modified its terminology from “virtual currency” to “digital asset” this year. The new changes include all functions related to convertible cryptocurrencies, stablecoins, and non-fungible tokens.
April 18th, 2023 is the deadline to declare your 2022 crypto activity as part of your 2022 US Federal Income Tax Return. The 2022 tax year includes any activity between January 1, 2022, and December 31, 2022.
Late filing, failure to pay taxes owed, and crypto tax evasion all attract penalties ranging from fines to prison terms. We’ll cover these below.
2022 Tax Brackets 2022 US Federal Income Tax Brackets*1 Tax Rate Single Head of Household Married Filing Jointly 10% $0 to $10,275 $0 to $14,650 $0 to $20,550 $0 to $10,275 12% $10,276 to $41,775 $14,651 to $55,900 $20,5561 $10,5561 से $10,556 $41,775 22% $41,776 to $89,075 $55,901 to $89,050 $83,551 to $178,150 $41,776 to $89,075 24% $89,076 to $170,050 $89,051 to $170,050 $178,151 to $340,100 $89,076 to $170,050 32% $170,051 to $215,950 $170,051 to $215,950 $340,101 to $431,900 $170,051 to $215,950 35% $215,951 to $539,900 $215,951 to $539,900 $431,901 to $647,850 $215,951 to $323,925 37% $539,901 or more $539,901 or more $647,851 or more Married $323,926 or more 2022 Filing Jointly Single Head of Household Filing Separately 0 % of Long Term Capital Gains Tax Rates* Married Filing Up to $41,6758 Up to $83,350 Up to $41,675 15% $41,676 – $459,750 $55,801 – $488,500 $83,351 – $517,200 $41,676 – $258,600 20% Over $459,750 Over $488,500 Over $488,500 $205r0517,20 How are cryptocurrencies taxed in the US?
For tax purposes, the IRS treats digital assets as property, not currency.
Generally speaking, this means that most crypto-related activities will be subject to capital gains tax. However, there are some instances where the IRS treats cryptocurrency profits from specific operations as ordinary income.
Here, the IRS makes a distinction between the disposal or sale of cryptocurrencies and profits earned from other activities (for example, staking or airdrops).
There is no minimum threshold involved in crypto tax reporting. Transactions of any amount, even as little as $100 worth of crypto, still need to be reported to the IRS.
Before we dive into taxable crypto events, let’s take a look at what crypto-related activities you can do tax-exempt.
Tax-Free Crypto Activities
According to the latest guidance provided by the IRS the following actions are not taxable events:
Buying cryptocurrency (including NFTs) using fiat currency Transferring digital assets (including NFTs) from one of your crypto wallets to another crypto wallet Minting NFTs you own Gifting cryptocurrency (subject to gift limit per person: $16,000 for 2022 filing) and $17,000 for 2023 filings). Depositing cryptocurrency as collateral for DeFi loans Donating cryptocurrency to charitable causes (subject to qualifications below) Locking digital assets in a staking smart contract (this does not include any rewards earned through staking)
It is important to emphasize here that buying cryptocurrency using another cryptocurrency is a taxable event. The IRS considers this action a settlement, which we’ll look at below.
Additionally, charitable crypto donations may be tax deductible. However, a new IRS memo mandates anyone claiming a tax deduction in excess of $5,000 to first obtain a qualified appraisal.
capital gains taxable activities
The following actions are taxable events according to the latest guidance provided by the IRS:
Trading any digital asset for another (this includes stable coins and NFTs) Selling digital assets for fiat currency (including metaverse items or assets) Selling or using digital assets to pay for goods or services
Under this tax treatment, you are liable to tax only if you have sold or otherwise disposed of a digital asset for a gain. The amount you owe is based on the difference between the price you paid for the asset (known as the “cost basis”) and the price it sold for.
There are two different capital gains tax rates for digital assets:
Short term capital gain Long term capital gain
What you pay depends on how long you hold each investment.
Gains on disposal of any digital asset investment held for one year or less are subject to short-term capital gains tax. Those held for more than a year are subject to long-term capital gains tax on disposal.
The IRS taxes short-term capital gains at the same rate as your income tax bracket. See the tax bracket chart above for the latest figures.
The IRS taxes long-term capital gains at a lower rate, thereby encouraging crypto investors to HODL assets.
You will typically “net” gains and losses; That is, you will set off long-term capital loss against long-term capital gain, and set off short-term capital loss against short-term capital gain. If there are excessive losses in any one category, you can set them off against any gains.
income tax action
The following actions are also taxable events according to the latest guidance provided by the IRS:
Any gain from any of the above actions is considered ordinary income and taxed as short-term capital gain. See the US federal income tax brackets table above for the latest federal income tax brackets.
Staking with Kraken
The IRS has yet to issue clear guidance on how (character) and when (timing) staking rewards should be taxed. However, some businesses treat the prizes as ordinary income and say they are currently taxable.
Other practitioners may disagree with this position. Please consult your tax advisor for further guidance.
US customers who received rewards over $600 in 2022 will receive an IRS Form 1099-MISC from Kraken. Kraken will also send this form to the IRS. This form helps calculate the amount to include on your US tax return.
You can learn more about IRS Form 1099-MISC here and in the Kraken Tax Form FAQ.
IRS Form 1099-B and 1099-DA Reporting
Form 1099-B reports receipts from the sale of stocks and other financial instruments. Form 1099-B may also report other details of the sale such as basis and more. US taxpayers use this form to calculate the gain or loss from selling such instruments. Kraken currently does not issue Form 1099-B.
The Infrastructure and Investment Jobs Act, signed on November 15, 2021, requires cryptocurrency “brokers” like Kraken to report client activity to the IRS using a new Form 1099-DA.
The IRS deferred the requirement to report digital asset transactions on Form 1099-DA for the 2023 tax year through Announcement 2023-2. Therefore, Kraken does not currently file Form 1099-DA with the IRS, nor do we issue Form 1099-DA to clients. Instead, we provide you with the ability to download your account history, as described below. Upcoming US tax regulations will require reporting of cryptocurrency sales or transfers in future years. We expect these new rules soon.
Please check the Tax section of our Help Center for updates.
How to Calculate and File Your Crypto Taxes Calculate Your Cost Basis
For investors who only conduct a handful of digital asset activities per year, calculating taxes is a relatively straight-forward process. But, for those who are highly active in the crypto space and involved with multiple platforms and assets, it can be quite difficult.
Thankfully, the IRS accepts several methods for calculating the cost basis of investments subject to capital gains tax. It is important to note that the amount you pay as taxes may vary depending on the option you choose.
First In First Out (FIFO): Digital assets purchased first are assets sold Highest in First Out (HIFO): Your most expensive digital assets are sold first Last In First Out (LIFO): Assets you bought are the first assets Sold Unique ID (Special ID): You calculate based on the unique cost for each transaction
Kraken provides you with the ability to download your account history for all your trades and other account history on your Kraken account. Third-party providers can assist you when calculating your crypto taxes using a CSV file downloaded from Kraken. You can also provide the form below while filing your crypto tax. We are currently working on enhancing our tax reporting capabilities.
We also want to note that you should include the fee as an adjustment to your cost basis and gross income. This adjustment will affect your profit/loss calculation.
If you were charged an acquisition fee when you purchased the cryptocurrency, you can add that fee to your purchase price to increase your cost basis. Similarly, when you sell cryptocurrency, you can deduct the sales fee from your income. This deduction is beneficial because it results in less profit or more loss.
Filing Your Crypto Taxes
After calculating how much tax you owe, you will need to fill up the form below.
For capital gains tax, you must file Form 8949. If you have reported the loss, you can deduct the amount from your capital gains tax liability. To do this, you must file Form 1040, Schedule D.
For crypto-based income taxes, most people will need to complete Form 1040, Schedule 1 or Schedule C.
However, depending on your situation, you may need to file a different type of Form 1040.
Form 1040-SS: applicable to residents of Guam, American Samoa, the US Virgin Islands (USVI), the Commonwealth of the Northern Mariana Islands (CNMI), and Puerto Rico Form 1040-NR: for those considered “nonresident aliens” penalties Applicable
Crypto theft can result in severe penalties. The IRS can issue fines of up to 75% of unreported crypto profits (up to a maximum of $100,000 for individuals and $500,000 for corporations) and keep a tax year audit open indefinitely.
Additionally, a criminal conviction can result in a prison sentence of up to five years.
If you are unsure how to calculate or file your tax return, it is recommended to seek guidance from a tax professional.
keep learning about crypto
Now that you understand how your digital asset investments are taxed, why not continue your crypto journey by visiting our Learn Center.
These materials are for general information purposes only and do not constitute investment advice or a recommendation or solicitation to buy, sell, wager or hold any digital assets or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can result in the loss of funds. Tax may be payable on any returns and/or any increase in the value of your crypto assets and you should seek independent advice on your taxation situation.