Bitcoin and Crypto Taxes in 2023: What You Need To Know

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hocus-focus / Getty Images

hocus-focus / Getty Images

Cryptocurrency is the Wild West of the investment world. Not only are these digital currencies completely intangible, but they fluctuate with such volatility that trading and investing in them can feel more like playing a video game than investing in a real asset class.

But from a tax perspective, the IRS views cryptocurrency transactions the same as if you were buying or selling stocks, bonds or other financial assets. Here are the important tax-related things you need to know about cryptocurrency, whether you trade it or simply use it to buy your morning coffee.

Yes, Cryptocurrency Is Taxable

Let’s cut right to the chase — yes, cryptocurrency can be taxable, depending on what you do with it. The IRS views cryptocurrency as a capital asset, meaning there are taxes to be paid on any gains. But other actions can also trigger tax on cryptocurrencies, and you should be prepared to declare any such transactions when you file your taxes.

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Cryptocurrency Is Taxed as a Capital Gain If You Sell It

If you buy crypto and then sell it, from a tax perspective, you’ll be taxed the same as if your cryptocurrency was a stock. In other words, you’ll pay short-term capital gains tax if you held the security for one year or less, and you’ll owe long-term capital gains tax if you held your position for longer than one year. The long-term capital gains tax rate is more favorable for most taxpayers, as it tops out on most transactions at 15%. For single filers with an AGI of $41,675  or less — or $83,350 or less for joint filers — the long-term capital gains rate drops to 0%. Short-term capital gains, on the other hand, are taxed at your ordinary income tax rate.

You’ll Owe Tax If You Use Cryptocurrency To Purchase Something Else

Planning to use your crypto to purchase things like your daily latte or some new clothes? You’d better plan on recording the details of that transaction as well because it’s likely to be taxable. If you use crypto to purchase goods or services, you’re technically converting your crypto into dollars and then using those dollars to make your purchase. In other words, the IRS views purchases with crypto as sales of crypto. If your crypto is worth more than when you bought it, that transaction becomes a taxable gain.

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Mined Crypto Is Taxed as Ordinary Income

If you successfully mine cryptocurrency, you’re rewarded with coins or tokens for your efforts. In a sense, you’re being paid a financial reward for the work you do for the blockchain. The IRS views these payouts as taxable income, and you’ll owe ordinary income tax on the value of what you receive, even if you don’t sell it. If you do ultimately sell that cryptocurrency, you might also be subject to capital gains taxes if its value has risen since you received it.

Buying Crypto With US Dollars Has No Immediate Tax Consequence

If you simply buy cryptocurrency, you won’t have to report that transaction to the government, and there is no taxation involved. Theoretically, you can avoid taxation on your cryptocurrency forever if you simply hold it. You’ll only be taxed on your cryptocurrency if you sell or exchange it at a gain in the future.

Will My Crypto Exchange Send Me Tax Information?

Since cryptocurrency exchanges are still in their infancy, you shouldn’t expect them to provide you with any year-end tax information regarding your crypto holdings or transactions. The same was true in the early days of stock brokerages. But whereas brokerage firms now provide customers with transaction data and gain/loss information regarding their holdings, most crypto exchanges still do not. This is scheduled to change in tax year 2023 when crypto exchanges will be required to send out a 1099 to customers. But for now, you should take care to record all of your transactions on your own, particularly when it comes to calculating taxable gains or losses.

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What Tax Forms Will I Need To File?

Your crypto transactions, including amounts and dates, should be reported on Form 8949. Ultimately, this information will transfer to your Schedule D, where all of your capital gains and losses will appear. Crypto you earned from mining should usually appear on Schedule C if you’re running your mining operations as a business. In this case, you’ll likely be liable for self-employment tax as well. If you can demonstrate that crypto mining is simply a hobby, you’ll report that crypto income on Line 8 of Schedule 1. Obviously, as crypto taxes can get complicated, you’ll likely want to consult with a tax advisor for specific answers regarding your crypto tax filing questions.

Are There New Crypto Regulations for Tax Year 2023?

There have been rumors floating around for months that the IRS would formally enact new requirements for crypto exchanges and trading in 2023, but those have been delayed once again. Part of the problem seems to be that the IRS is struggling to define what a “cryptocurrency broker” is. But it’s certainly likely that regulation is on the way, particularly in the wake of the spectacular failures like that of crypto exchange FTX.

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