Have you dabbled in cryptocurrency? If the answer is yes, you must already know that you owe crypto taxes to the IRS.
Taxpayers can file their returns for the 2022 tax year until the deadline, which is April 18 of this year. However, if you fail to do so, you’ll be charged with fines if you pay taxes after the crypto tax deadline. If you’re still unsure of how cryptocurrency is taxed, what are the taxable events and how you can prepare yourself to pay taxes before the tax deadline set by the IRS, this article is just for you!
How is Cryptocurrency Taxed in the USA?
The IRS issued Notice 2014-21 in 2014, stating that virtual currency is classified as property for tax purposes. The phrase “virtual currency” is used by the IRS to identify different kinds of convertible virtual currency used as a medium of trade, such as cryptocurrencies.
Virtual currency is a digital version of value that serves as a monetary unit, a measure of value, and a means of exchange, but is not a representation of the US dollar or any other fiat currency.
Taxable and Non-Taxable Events
Since not all crypto events are table, here’s a comprehensive list of a few taxable and a few non-taxable events to help understand the concept better:
In the crypto world, there are four sorts of taxable events:
- Selling cryptocurrency for fiat currency (BTC to USD, ETH to GBP)
- Cryptocurrency trading (BTC for ETH, like-kind exchanges are disallowed)
- Buying a product or service with cryptocurrency
- Receiving cryptocurrency as a consequence of a fork, mining, an airdrop, staking, or trade for goods or services (included as income)
There are a few non-taxable cryptocurrency events as well:
- Buying cryptocurrency with fiat currency
- Donating Bitcoin to a 501(c)(3) non-profit (carryover basis)
- Gifting cryptocurrency (up to $15k on a carryover basis)
- Transferring cryptocurrency from one wallet of yours to another (self-transfer)
Since cryptocurrency is taxable, we must understand how the tax is calculated since the IRS tax deadline is approaching.
Tax Estimation before the IRS Crypto Tax Deadline in 2023
If you sell an asset for a profit, you may have to pay capital gains tax on the profit. You’ll need the date you bought the cryptocurrency, the date you sold, swapped, or otherwise disposed of it, and the cost base to figure out your exact gain or loss (the amount you paid plus transaction fees).
Short-term capital gains are profits earned from the sale of assets held for a year or less, and they’re taxed at the same rate as regular income, which can range from 10% to 37%.
| Tax rate | Single filer | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | $0 to $9,950 | $0 to $19,900 | $0 to $9,950 | $0 to $14,200 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 | $9,951 to $40,525 | $14,201 to $54,200 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 | $40,526 to $86,375 | $54,201 to $86,350 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 | $86,376 to $164,925 | $86,351 to $164,900 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 | $164,926 to $209,425 | $164,901 to $209,400 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 | $209,426 to $314,150 | $209,401 to $523,600 |
| 37% | $523,601 and up | $628,301 and up | $314,151 and up | $523,601 and up |
Long-term gains, on the other hand, are taxable on assets held for more than a year and are taxed at 0%, 15%, or 20%, based on your taxable income bracket and filing status.
| Tax rate | Single filer | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 0% | $0 to $40,400 | $0 to $80,800 | $0 to $40,400 | $0 to $54,100 |
| 15% | $40,401 to $445,850 | $80,801 to $501,600 | $40,401 to $250,800 | $54,101 to $473,750 |
| 20% | $445,851 or more | $501,601 or more | $250,801 or more | $473,751 or more |
Example
Suppose you bought a cryptocurrency for $5,000 in December 2021 and sold it for $8,000 in February 2022. The short-term capital gains tax rate would apply to the $3,000 capital gain.
You must report your loss or gain on Schedule D of Form 1040 after you’ve estimated them on Form 8949. You’ll file your taxes before the April 18th crypto tax deadline.
What do You need to Report before the IRS Tax Deadline in 2023?
When certain taxable events occur, such as the following, reporting is needed:
- By exchanging one cryptocurrency for another, you can earn a profit
- Cryptocurrency is being exchanged for government-issued fiat currency
- Purchasing products or services with cryptocurrencies (such as paying for either snacks or a Tesla with cryptocurrency)
How to Prepare for the IRS Crypto Tax Deadline in 2023?
As the IRS tax deadline is approaching, it’s time to wrap up your crypto taxes for the year 2021.
Here’s how you can do it!
- Do not omit any transactions
If you withhold information on your taxes, you risk facing penalties, levies, and, in the worst-case scenario, tax evasion accusations.
The IRS is suggesting that individuals who fail to report will not be able to claim ignorance with the amendment of Form 1040. This form includes a direct yes-or-no question on whether you received, sold, swapped, or disposed of cryptocurrencies.
- Organize your records
Until about the 2023 tax year, cryptocurrency exchanges will not be required to give taxpayers 1099-B forms, popularly known as tax-reporting summaries. As a result, traders are responsible for keeping detailed records of their activities.
Many crypto exchanges offer you to export your transaction history, which may make calculating gains and losses simpler for you, tax software (like ZenLedger), or a tax professional. However, if you make off-exchange trades, you may need to set up more time for research.
ZenLedger is easily one of the most useful software during the tax season. It is a cryptocurrency tax software that makes filing taxes simple for you by aggregating information from many exchanges, and computing your taxes.
ZenLedger’s integration with over 500+ crypto exchanges and wallets makes it easy for you to import the records of all the transactions you’ve made. It automatically computes the taxes based on the cost basis and the fair market value. Additionally, you can also evaluate any older cryptocurrency tax income, including mining, staking, lending, and gifts, as well as exchange bonuses like airdrops and forks.
The final step to organizing your crypto records using ZenLedger is to review your reports and double-check for accuracy. You can now download and file typical IRS documents such as Form 8949, Schedule 1, Schedule D, and others.
- Tax Loss Harvesting
Tax-loss harvesting is a strategy for reducing the amount of tax paid by offsetting capital gains on equity against capital losses.
If you didn’t use tax-saving techniques last year, such as giving or donating, but nevertheless incurred losses, you still have time to reduce your tax bill. If your net losses exceeded your net gains, you may be able to deduct up to $3,000 of those losses on your taxes, just like with stocks.
ZenLedgers tax-loss harvesting tool lets you know how many unrealized capital losses you have in each token type. Once you see this preview, you can then decide if you want to realize the loss. You can decide which token(s) you want to realize the loss on, and by how much. Learn more in our Complete Tax Loss Harvesting Guide
- Hire a CPA
Consider dealing with a cryptocurrency-savvy tax professional if your case is complicated. They can walk you through the many accounting procedures for reconciling your gains and losses that the IRS allows, and help you decide which one is best for you. ZenLedger can connect you with a crypto-focused tax professional via our professionally prepared plans. Or, you can alternatively…
- … Use an Online Tax Software
An average taxpayer holds three to five wallets and exchanges. This makes reconciling cost basis across platforms more difficult.
If you’re a frequent trader, it can be worthwhile to invest in software like ZenLedger, which allows you to keep track of your transactions.
The Bottom Line
The US tax deadline, April 18th, is approaching quickly!
Although most people only pay taxes once a year, there still are ways to save throughout the year. Using ZenLedger, you can learn how to avoid paying taxes on crypto by recognizing tax-loss harvesting prospects year-round, lowering your tax burden, and paying your taxes before the crypto tax deadline of 2022.
You should also consult with a CPA to determine the most appropriate accounting system and company entity for your circumstances.
ZenLedger can help you easily calculate your crypto taxes, and also find opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
