How Are Cryptocurrency Income Taxed on Your 2023 Taxes?

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With bitcoin (BTC) hovering round 45K and the fast-approaching tax season, there has by no means been a greater time to speak about how the IRS taxes your cryptocurrency revenue.

Cryptocurrencies like bitcoin are handled as property per the IRS Notice 2014-21. You could have to report your cryptocurrency positive factors and pay taxes in your 2023 tax return for those who had any of the next transactions throughout 2023.

Taxable cryptocurrency transactions

1/ Promoting cryptocurrency or Non-fungible token (NFT
NFT) into USD (Cashing out)

That is most likely the clearest reportable occasion for many individuals.

Say you bought 1 BTCBTC for $20,000 in January 2023 and offered it for $41,000 in December 2023. Your revenue from this transaction is $21,000 ($41,000 – $20,000). This $21,000 is taken into account short-term capital positive factors since you solely held your coin for lower than 12 months. Consequently, $21,000 can be taxed as strange revenue and topic to your revenue tax bracket which ranges from 10% to 37%.

Alternatively, for those who have been to promote the BTC after holding it for greater than 12 months, the $21,000 revenue could be topic to long-term capital positive factors which give you extra favorable tax charges (0%, 15%, or a most of 20%).

2/ Changing one crypto/NFT to a different crypto/NFT

That is maybe probably the most stunning taxable occasion for many individuals.

Say you bought 1 BTC utilizing 40 ether (ETHETH) valued at $40,000. You bought this ETH a number of years in the past for $10,000. Throughout this transaction, a revenue of $30,000 ($40,000 – $10,000) can be topic to capital achieve taxes. Right here, the logic is that by the point you spend 40 ETH to buy 1 BTC, your wealth has elevated by $30,000 as a result of appreciation of ETH. This IRS taxes this delta. Receiving money or not is irrelevant for tax functions (A16).

3/ Spending cryptocurrency to purchase items or companies

Though considerably unusual, you possibly can spend cryptocurrency to purchase items and companies.

Say you spent 1 BTC to buy a automobile throughout 2023. You spent $10,000 to amass this BTC a number of years in the past. On the time you spent this on the automobile, it was value $40,000. Right here, you’ve got a taxable achieve of $30,000 ($40,000 – $10,000) which is topic to capital positive factors taxes.

4/ Incomes cryptocurrency by means of wages, mining, and staking

You possibly can earn cryptocurrency by means of varied strategies comparable to employment revenue, mining rewards, and staking rewards. Most of these rewards are taxed as strange revenue on the time of receipt primarily based in your tax bracket.

Say you earned 1 BTC as a mining reward. On the time of the receipt, that is value $30,000. You’d be taxed for $30,000 of revenue primarily based in your strange revenue tax bracket. Say you later offered this coin for $40,000. Right here, the delta of $10,000 ($40,000 – $30,000) can be taxed as capital positive factors.

5/ Receiving cryptocurrency by means of an airdrop or harfork

Lastly, primarily based on IRS Rev. Rul. 2019-24, cryptocurrency acquired by means of airdrops and arduous forks are taxed on the time of receipt, as strange revenue. It’s fairly widespread to see the coin worth taking place after you obtain the airdrop. Sadly, you cannot get any tax aid for this until you promote the coin to assert the loss.

Different advanced cryptocurrency-related transactions like wrapping, liquidity swimming pools, initiating loans, and bridging might additionally end in taxable occasions relying on the details and circumstances of every case.

Non-taxable occasions embrace hodling cryptocurrency, transferring property from one pockets/alternate you personal to a different, donating cryptocurrency to a charity, and sending & receiving cryptocurrency items.

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