If you’re a crypto investor or have been paid in bitcoin or other cryptocurrency for your services, you’re going to have to report your taxable transactions on your 2023 tax return, which for most people comes due April 15.
And — no surprise — you’re also obligated to pay tax on any income or gains you received from your crypto assets last year.
The wrinkle is that there are still questions surrounding the rules for tax reporting and the calculations needed in that reporting.
While 2023 was supposed to be the year, for instance, that third-party reporting requirements went into effect for crypto brokerage platforms to report on their customers’ transactions to the IRS, the IRS has hit pause on enforcing those rules until the Treasury issues its final regulations, said Miles Fuller, a senior director at crypto tax advisory firm TaxBit. Fuller previously worked at the IRS as senior counsel specializing in virtual currency issues.
Despite the temporary enforcement reprieve, you may have received tax forms from some third-parties. But even if you didn’t, you are still on the hook to be honest with the IRS about your crypto transactions. “It still falls to you to make sure you’re reporting the information,” Fuller said.
What you need to do
For starters, that means answering the question on the first page of your federal 1040 tax form that asks: “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Answer “yes” if those descriptions reflect the nature of your crypto transactions. But you can answer “no” if all you did was buy or continue to hold a digital asset; or you simply transferred digital assets from one of your accounts to another, because those are not taxable events.
If an employer or client paid you in cryptocurrency: You will owe income tax on that payment — the value of which is determined by the price of that cryptocurrency the day you were paid, Fuller noted. While cryptocurrency is not legal tender, for the purposes of compensation it is taxed as if you had received payment in dollars. The entity that paid you may have sent you a W2 form if you’re a regular employer or a 1099 form if you’re a contractor or freelancer.
If you sold crypto in 2023: You need to calculate whether you had a capital gain or loss. In other words, what was the difference between the value of your crypto the day you bought it (i.e., your cost basis) and the day you sold it?
If you lost money, you can use that capital loss to offset any capital gains you realized last year — even if it comes from the sale of another security or another property, such as a stock or a home. Once you’ve offset any gains you had, if you still have losses left over, you can use them to offset the tax owed on up to $3,000 of your ordinary income in 2023. Any remaining losses left over beyond that can be carried forward and applied in future tax years.
Remember, too, if you sold bitcoin in 2022 during the so-called crypto winter you may have booked a big capital loss and can apply whatever you weren’t able to use on your 2022 taxes on your 2023 return.
If, instead, you made money on the sale or exchange of your crypto last year, you realized a capital gain. If you held that digital asset less than a year, it’s considered a short-term gain and will be taxed at ordinary income tax rates. If you held it for more than a year, it’s a long-term gain and you will be taxed at the lower capital gains rate — which, for most people ranges from 0% to 15%, depending on your income.
If you used crypto currency to buy a good or service: Say you bought a car with bitcoin last year. If it was worth more than $10,000 the car dealership will file with the IRS a Form 8300 reporting your transaction.
And you may need to report a capital gain or loss on the transaction. Say you get paid $10,000 in bitcoin by a client or employer. That’s reportable as income. Then say that $10,000 grows to $20,000 and you use it to buy a car. You will have to report a $10,000 capital gain too ($20,000-$10,000).
If you donated cryptocurrency to charity: The value is based on the price of the crypto the day the transaction occurred. But if you estimate the value to be more than $5,000, you must pay a qualified appraiser to officially calculate the value of your donation just as you would most other personal property donations over $5,000, Fuller said. “If you fail to obtain the appraisal, you can’t take the deduction,” he said.
What about investing in a bitcoin ETF?
In January of this year the Securities and Exchange Commission finally gave the green light for the listing and trading of 11 bitcoin exchange-traded funds, or ETFs.
Currently, if you own cryptocurrency directly it’s treated as personal property for tax purposes. But if you decide to get exposure to bitcoin through an ETF, you won’t own it directly and the ETF is taxed as an SEC-regulated financial product.
So if you do buy a bitcoin ETF this year, you and the IRS will get a form from the broker-dealer where you house your ETF account reporting on your transactions during 2024.
What’s still not clear yet is whether, by owning a bitcoin ETF, you will need to check “yes” on that first question about digital assets on your 1040 form since you won’t own it directly, Fuller said.
Maybe by next January, when filing season for tax year 2024 starts, we’ll have an answer.
