According to CNBC, about one in five Americans owned cryptocurrency in 2022, and tens of millions of them will have to kick up to the IRS when they pay taxes this year. Crypto, NFTs and other digital assets can be complicated investments, but calculating and paying taxes on them doesn’t have to be.
If you owned blockchain-based assets in 2022, there’s a good chance you’ll have to report it. Here’s what you need to know.
Do You Owe Taxes for Crypto Transactions? That Depends
The IRS treats cryptocurrency the same way it treats stocks and bonds — as property, or if you’re feeling fancy, capital assets.
The standard tax rules apply.
If you profit from your crypto investment, you’ll pay capital gains taxes. The rate varies depending on whether you held your assets for more or less than one year. With a handful of rare exceptions, long-term capital gains are taxed at a more favorable rate of 0%, 15% or 20%, depending on your income.
On the other hand, short-term capital gains — those realized from investments held for less than one year — are taxed at the same rate as regular income, which means you’ll pay between 10%-37%.
On the flip side of the digital token, you can offset those taxes with capital losses if you sold your crypto for less than you what you paid for it.
You’ll pay capital gains taxes on crypto transactions in the following situation.
- Selling crypto: If you owned crypto as an investment and sold it for cash, you’ll have to pay a capital gains tax.
- Spending crypto: According to Coinbase, the IRS treats spending crypto the same way it treats selling it — as a taxable transaction. That’s because you technically have to sell the asset before it can be exchanged for goods or services.
- Converting crypto: If you use Ether to buy Bitcoin or conduct any other crypto-to-crypto exchange, the IRS considers it a taxable event — here, too, because you technically have to sell crypto to exchange it for something else.
Now that you know about the most common crypto transactions that are treated as taxable events, it’s important to know that some crypto transactions aren’t subject to taxation at all.
If you use money to buy crypto and hold it, it’s a non-taxable event because any gains or losses are unrealized. That all changes when you sell. Donating crypto is a non-taxable event, as is receiving crypto as a gift or giving it as a gift, up to $16,000. You also won’t be taxed for transferring crypto to yourself from one wallet or account to another.
In Some Cases, Crypto Is Taxed as Income
When cryptocurrency transactions are treated as income, they’re taxed at the same rate as any other income you earn based on your tax bracket and filing status. Here are a few common situations where crypto is taxed as income:
- Mining crypto: You’ll owe taxes on any crypto you mined based on the fair market value of that crypto at the time you mined it. If you mine crypto as a business, you’ll pay tax on what you earn as self-employment income.
- Earning staking rewards: The IRS treats staking rewards the same way it treats earnings from mining.
- Receiving payments as crypto: If an employer paid you in crypto or you received crypto as payment for contract work, or if you sold something taxable and were paid in crypto for the exchange, it will be taxed as income according to your tax bracket.
- Specialty transactions: You’ll have to pay income taxes on any crypto you received through a hard fork, an airdrop or staking rewards or as an incentive or reward.
As of Tax Year 2022, NFTs Follow the Same Rules
The IRS now treats NFTs as property just like cryptocurrency. Buying and holding them isn’t a taxable event because any gains or losses are unrealized. But if you sell, trade or transfer them for a profit, you’ll pay capital gains taxes at the standard rates — but here, too, capital losses can offset your liability.
Previously, there was speculation that the IRS would treat NFTs as collectibles like art or trading cards, which would have complicated their taxation. But in 2022, the agency issued guidance clarifying the matter.
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