Crypto Tax Guide 2023: Navigating IRS Rules with Bitcoin & Crypto Tax Software
Crypto tax sucks, the goal of this guide is to make it easier.
It's hard to understand the tax implications of your crypto transactions because the IRS, ATO and tax offices worldwide haven't been clear about how all transactions are taxed. Crypto is creating a new financial system, and the tax laws can't keep up.
But that doesn't mean that there are no rules on crypto tax. In fact, if you fail to report your crypto transactions on your tax return you could be in for a rude awakening. The IRS and ATO have announced in 2023 that they now have advanced data matching capabilities and will be able to see your transactions on chain.
If you verified your identity on an exchange, and have sent funds to a wallet from that exchange - the tax office will know. So before you end up getting a costly and painful audit, now is the time to get on top of your crypto taxes.
Without having to read this entire article, I'll give you the alpha: get an expert to do your crypto tax report for you if you can afford it. Crypto Tax Made Easy offers the most affordable "done for you" crypto tax reports on the market.
But if you can't afford expert help right now, your best bet is to learn how to do your own crypto taxes and this 2023 crypto tax guide will show you how)
Do you pay taxes on crypto?
It is a common misconception that you don't pay tax on crypto until you trade it back into dollars. There are dozens of ways that your crypto transactions might be taxed, so it is important to understand when you do and don't have to pay tax on crypto. That way, you don't end up with an unexpected crypto tax bill that you can't afford to pay.
So the short answer is, yes. You do pay taxes on crypto.
The long answer is: it depends on the nature of the transaction.
Do cryptocurrency exchanges send tax forms?
Most crypto exchanges will not send you tax forms for your capital gains and losses. However, if you have earned over $600 in income from something like staking tokens on Coinbase, you may receive a 1099-MISC.
The exchanges will also submit this information to the IRS, so it is very important that this income is reported on your tax return.
Which crypto exchanges report to the IRS?
Any regulated crypto exchange that operates in the United States and collects your identity verfication (KYC) will report to the IRS. Although they may not send your full transaction history to the IRS, they will comply with any requests for information by the IRS in the case of an audit.
And the IRS has acquired the software to be able to link your identity to your crypto wallets which were funded from these KYC exchanges or fiat on ramps like Moonpay.
How is crypto taxed?
Crypto is primarily taxed as capital gains or income. This is the case in the US, Canada, Australia, New Zealand, and most countries where our clients are located.
Crypto is taxed a lot like stocks or bonds.
When you buy crypto with dollars, it is not taxed. But if you trade your crypto for another crypto token, that is a capital gains tax event. If you trade crypto for dollars, that is a capital gains tax event. And if you receive crypto as "interest" or a "reward" it is taxed as income. Just like interest and dividends in traditional investing.
How to determine if you owe crypto taxes
Now that you know selling or trading crypto is a taxable event, or receiving interest or rewards is a taxable event, you probably know whether you are required to pay taxes. But you might still be wondering how much tax you need to pay.
The best way to determine this is by either working with a crypto tax professional, or setting up a crypto tax software.
How to simplify the crypto tax reporting process
If you plan to hire a crypto tax professional, like Crypto Tax Made Easy, then you can stop reading this guide and request a quote.
But if you plan to do your own crypto tax filing, your best first step is to set up a crypto tax software like Koinly or Awaken.
Before you do this, you will need to collect some data to set the software up.
- Generate view-only API keys or download your transaction history as a csv file
- Collect all of your public wallet addresses for your wallets (never share your private keys or seed phrase)
- Get your public wallet addresses for each blockchain you have used.
If this is your first time doing your own crypto taxes, you will need to review your entire transaction history from the first time you bought crypto. This will help reduce your crypto tax bill by making sure you have accurate capital gains timelines and hopefully qualify for the long term capital gains tax rates rather than the more expensive short-term capital gains tax rates.
In the future, it will help to maintain records of your crypto transactions. This way, you don't have to guess what a random 169 USDT deposit to your wallet came from. It also helps to stay on top of your crypto tax by reviewing your crypto tax software every 1-3 months.
How To Do Your Crypto Tax
It would be a dream if all you had to report your cryptoccurency transactions on your tax is set up a crypto tax software. And that's how they advertise themselves, "crypto taxes done in minutes." What they don't tell you is that it takes thousands of minutes to get it done!
Crypto tax software improperly labels about 30% of our clients' transactions. The 30% of transactions the software gets wrong overestimate our clients' capital gains 9 times out of 10. This is where a manual review and correction of the transactions in the crypto tax software is required.
And it can take an hour to get through 25-50 transactions. If you have 1000 transactions in your software, this would take you 20-40 hours of work to fix.
So what is the point of using a crypto tax software if they get it so wrong, and take so long to fix?
How cryptocurrency tax software can help
Although crypto tax software isn't 100% accurate "out of the box" it is incredibly useful for the following reasons:
- It automatically keeps track of crypto activity for tax purposes. This saves time vs. manually tracking in a spreadsheet.
- It calculates your cost basis and holding time for accurate capital gains tax calculation.
- It tracks transactions where you need to report income tax on your tax return and assigns a cost basis at fair market value.
- It does accurately and automatically label basic transactions like trades on Coinbase.
- It generates tax reports in multiple formats without needing to code complicated formulas into a spreadsheet.
There are some other benefits to using a tax software. For example, you can see at-a-glance what your tax liability is in real time. That way, you aren't blindsided by a huge crypto tax bill.
Many of them also show you your unrealized losses in your portfolio for tax-loss harvesting purposes.
Cryptocurrency Tax Software Options
There are lots of crypto tax platforms in the market. I will do a full article on the best crypto tax software, but this list is a good starting place for your search:
- Coinledger (code CRYPTOTAX10 for 10% off)
- Netrunner (Solana)
- Awaken Tax (code CTME for $30 off)
- Crypto Tax Calculator
There are many other crypto tax platforms to choose from, however in my experience these are the best.
How to track cryptocurrency for tax purposes
In addition to setting up a cryptocurrency tax software, it is important to keep other records for tax purposes.
The tax software will pull your transaction data off the blockchain into the software, but this lacks context. If you go to look at the transaction a year later, you might forget what the transaction is!
In particular, whenever you send crypto to another wallet, it can get very confusing. Did you send a gift to your mom? Were you participating in a token presale? Making a loan to a friend?
Your best bet is to either write down when you made the transactions, and what they were for. Or, make a habit of labeling the transactions in your tax software the same day, week or month which you make them. That way, you don't forget what they were.
How to report crypto trades on your taxes
Reporting crypto trades on your taxes is simple if you use a crypto tax software. These software allow your generate the relevant tax reports which you can either provide to your tax preparer, or upload to your tax return software like Turbotax.
Can I use Crypto tax software in combination with TurboTax?
The short answer is: yes.
Turbotax has recently added a feature to their software which does basic crypto tax calculations and portfolio tracking. It is not a very useful software unless you just did basic transactions like trades in Coinbase.
Currently, the best way to save money on your crypto tax is by using a crypto-specific tax software, and exporting reports which can be one-click uploaded to Turbotax.
Every major crypto tax platform supports Turbotax form exports.
How to calculate your cryptocurrency capital gains and losses
Although the software will do this for you, it is important to know how capital gains and losses are calculated. That way, you know what affects your taxes, and can find ways to reduce your crypto taxes.
The way to calculate gains or losses from crypto is:
Value of tokens at disposal - Cost Basis of your tokens = Gain or loss
The cost basis is the fair market value of your crypto when you acquired it.
A token is 'disposed of' if you trade it for dollars, another crypto token (including NFTs), pay gas fees or other costs, exchange for goods or services, or send it to another person's wallet.
Staking, gifts, and posting loan collateral are not necessarily disposals.
Example: How to calculate your tax liability
Let's take a simple example.
You purchased 1 BTC for $1000 in 2017. Your cost basis is $1000
In 2020, you sold 1 BTC for $10,000. The value of tokens at disposal is $10,000.
$10,000 - $1000 = $9,000 capital gain.
So how much would you pay in tax on this capital gain?
It depends on the long-term capital gains tax rates in your country since the tokens were held for longer than 12-months.
Calculate Your Crypto Income Tax
Calculating your crypto income tax is quite simple. But what types of transactions are considered income?
It depends on the country where you have tax residency, but transactions which potentially have income tax liabilities include:
- Staking rewards
- Yield farming rewards
- Interest earned from lending tokens
- Receiving crypto as payment for goods and services
You are taxed based on the fair market value of the tokens received at your ordinary income tax rate.
Bitcoin & Crypto Tax Report
After you've properly labeled all of your crypto transactions, the last step is to generate a tax report. This step requires some careful consideration, and consulting a tax professional for guidance on decisions like what accounting method you should use for your crypto taxes, whether you're taxed as a professional trader or investor, and whether you should hold your crypto assets personally or in an entity like a trust.
What accounting method should I use for my crypto taxes?
When it comes to accounting methods for calculating cost basis, your tax software may give you a few options. The standard options include:
- FIFO - First In, First Out which is usually the default and good for HODLers
- HIFO - Highest In, First Out which is aggressive and often favored by traders.
- LIFO - Last In, First Out which I have never see anybody use.
- ACB - Average Cost Basis which I have never seen anybody use.
There are other accounting methods which can be used in countries like Australia, for example "LTFO" or Lowest tax, first out.
What happens if you don’t report your crypto gains?
If you decide not to report your crypto gains, you might get away with it...but the penalties if you don't are severe!
Tax evasion and tax fraud are both federal offenses, and failure to report your crypto gains could land you up to 5 years in prison! The fines in the United States are up to 75% of the taxes owed with a maximum penalty of $100,000.
You will also owe interest on any underpaid tax liabilities.
If you report your crypto tax, not only will you avoid prison time, penalties, and interest but YOU get to tell the government how much you think you owe. This means you can take a more aggressive stance and possibly pay a lower crypto tax.
However, if you get caught evading your taxes then the government will tell you how much they calculate that you owe. And it won't be favorable to you. Not only will you owe penalties & interest, you will likely end up paying more on your tax than if you did it yourself!
Is receiving crypto as a gift taxed?
Receiving crypto as a gift is not taxed. When you receive the tokens, the cost basis is the fair market value at the time you received them.
If you swap, exchange, or otherwise dispose of the tokens, this is subject to normal capital gains.
Giving crypto as a gift is tax-free up to $17,000 per recipient in the United states.
When do you owe taxes on your crypto?
You owe taxes on your crypto whenever your normal tax payments are due. In 2023 the tax deadlines are:
April 15th, 2023 in the United States
October 31st, 2023 in Australia
Even if you file an extension, you must make a tax payment equal to no less than 90% of your total tax. If you have to make quarterly tax payments, you will need to make estimated payments totaling no less than 90% of your total tax.
What crypto transactions are taxable?
Taxable crypto transactions include the following.
For Capital Gains
Short-term vs. long-term capital gain or loss
One of the best ways to pay a lower crypto tax is by HODLing. In the United States and Australia, holding crypto tokens for longer than 12-months qualifies you for a 50% capital gains tax discount.
If you hold your tokens for less than 12-months, your capital gains tax rate is the same as your income tax rate.
Germans are lucky, and any gains on tokens held for longer than 12-months are not subject to ANY tax!
How do crypto tax brackets work?
Crypto tax brackets work exactly like normal tax brackets. There are different tax brackets for each country, and different brackets for income vs. capital gains in many countries.
Your gains are taxed at the capital gains rate. Your income is taxed at your personal income tax bracket.
Crypto tax rates for tax year 2022 / 2023
The crypto tax rates for 2022/2023 are the same as the capital gains and income tax rates.
Here is an article with all of the tax rates by country for the 2022 and 2023 tax years.
How is getting crypto in exchange for goods and services taxed?
Getting crypto in exchange for goods and services is considered income on your tax return and it is taxed at your marginal tax rate.
The way you calculate the amount of income for tax purposes is to take the fair market value of the tokens received, and to subtract any costs involved with the transaction.
For example, if you sold a product for $1000 and your customer paid you $1000 of BTC then you have $1000 of income. But if the product cost you $500, then your
How is trading one crypto for another taxed?
Trading one crypto for another is considered a capital gains tax event.
The way you calculate the gain or loss is by subtracting the cost basis of the tokens sold from the dollar amount you are receiving.
For example, if trade sell 1 BTC that you purchased for $1000 USD for $10,000 worth of ETH there is a $9000 capital gain. $10,000 disposal price - $1000 cost basis = $9000 capital gain.
The tax rate is determined by how long you held the tokens for.
How can I reduce my crypto capital gains tax?
There are numerous strategies to reduce your crypto capital gains tax. Some of them are best discussed with a personal tax advisor who understands your overall tax situation.
Two common strategies that investors use to reduce their crypto taxes include tax-loss harvesting or holding crypto in a tax-advantaged account.
Tax loss harvesting involves selling crypto or NFTs for a capital loss. You can determine which of your tokens has an unrealized loss by reconciling all of your transactions on the crypto tax platform you are using. This will allow you to run a report to see which tokens in your portfolio are down.
By selling the tokens which have a loss, you will offset some of your gains.
In the United States, some crypto investors utilize a crypto tax loophole called "wash sales". A wash sale involves selling a token that is down in price, and immediately re-purchasing it if you plan to hold it long term. It is uncertain how long this loophole will be allowed. And it is not allowed for any securities in the United States. So, be very careful that you don't accidentally perform a wash sale on a token that is involved in an SEC enforcement action!
The other strategy many crypto investors use to reduce their capital gains tax is to hold and trade their crypto assets in a tax-advantaged account. For example, a self-managed IRA in the United States or a self-managed super fund in Australia. This defers your capital gains tax until retirement.
Do you pay taxes on crypto like Bitcoin in the United States?
In the United States, the IRS has made it very clear that crypto like Bitcoin is taxed like property. It is important to report any cryptocurrency transactions on your tax return. Failure to report these transactions has penalties ranging from financial to criminal.
You may also end up paying penalties and interest on any non-reported or misreported gains in the case of an IRS audit. You're better off paying your taxes than risking penalties in the case of an audit.
And if you lose money on crypto, you can claim a tax deduction for those losses which result in a tax saving!
Tax-free cryptocurrency transactions
Some tax-free cryptocurrency transactions include:
- Staking crypto
- Gifts of crypto
- Up to $17,000 per recipient in the US for 2023 tax year
- Up to $10,000 per recipient in Australia for 2023 tax year
- Transferring crypto from one wallet you own to another wallet you own
- Providing collateral for a crypto loan
- Receiving tokens or fiat from a crypto loan
Are crypto assets used as collateral for a loan taxed?
If you use crypto assets as collateral for a loan, this is not a taxable event. The assets being used as collateral are not considered a disposal, because the expectation is that you will repay the loan and receive the collateral back.
However, if your collateral is liquidated - either in full or in part - this is considered a disposal and is subject to capital gains tax.
The tokens that you receive when you take the loan out do have some tax implications. You are not taxed when you receive the loan. However, the tokens are given a cost basis of the fair market value on the day you received the tokens as a loan.
If you trade, swap or otherwise dispose of the tokens you borrowed, this is a capital gains tax event.
Be aware that when you repay the loan, some crypto tax platforms treat this as a capital gains tax event if the price of the tokens borrowed has changed. This is a very conservative stance. If you want to take a more aggressive stance - you can apply the appropriate label to treat this transaction as non-taxable.
In some cases, you may also be able to use the interest from the loan as a tax deduction.
How is selling crypto for fiat currency taxed?
When you sell any crypto asset for fiat currency like US Dollars or Australian Dollars, this is a capital gains tax event. The way you calculate the gain or loss is by subtracting the cost basis of the tokens sold from the dollar amount you are receiving.
For example, if you sell 1 BTC that you purchased for $1000 USD for $10,000 there is a $9000 capital gain. $10,000 disposal price - $1000 cost basis = $9000 capital gain.
The tax rate is determined by how long you held the tokens for.
We will continue to update this article to help you make crypto tax easy.
If you'd rather just have someone do your crypto tax for you - request a free crypto tax review today!