IRS tax season is officially open in the United States. April 15, 2024 is the deadline for crypto holders to report their 2023 transactions to the Internal Revenue Service (IRS).
The 2023 tax year includes any activity between January 1, 2023 and December 31, 2023. Late filings, failure to pay taxes owed and crypto tax evasion all carry potential penalties ranging from fines to jail sentences. We will cover these below.
2023 U.S. federal income tax brackets
Source: Internal Revenue Service
The tax brackets for U.S. federal income tax apply to short-term capital gains
2023 long-term capital gains rates
Source: Internal Revenue Service
How is cryptocurrency taxed in the United States?
For tax purposes, the IRS treats digital assets as property, not currency.
Generally speaking, this means most crypto-related activities will be subject to capital gains tax. However, there are some instances where the IRS views cryptocurrency gains from specific actions as ordinary income.
Here, the IRS makes the distinction between profits made when disposing of or selling cryptocurrencies and profits earned from other activities (for example, staking or airdrops).
There are no minimum thresholds involved with crypto tax reporting. Transacting any amount, even as little as $100 worth of crypto, still needs to be reported to the IRS.
Before we dive into taxable crypto events, let’s look at what crypto-related activities are tax-free.
Tax-free crypto actions
The following actions are not taxable events according to the latest guidance provided by the IRS:
Purchasing cryptocurrency (including NFTs) using fiat currency
Transferring digital assets (including NFTs) from one of your crypto wallets to another crypto wallet you own
Minting NFTs
Gifting cryptocurrency (subject to the per person gift limit: $17,000 for 2023 filing and $18,000 for 2024 filing).
Depositing cryptocurrency as collateral for DeFi loans
Donating cryptocurrency to charitable causes (subject to qualification noted below)
Locking up digital assets in a staking smart contract (this does not include any rewards earned through staking)
It’s important to stress here that buying cryptocurrency using another cryptocurrency is a taxable event. The IRS considers this action a disposal, which we’ll explore below.
Additionally, charitable crypto donations can be tax deductible. However, an IRS memorandum mandates anyone claiming a tax deduction above $5,000 must obtain a qualified appraisal first.
Capital-gains-taxable actions
The following actions are taxable events according to the latest guidance provided by the IRS:
Trading any digital asset for another (this includes stablecoins and NFTs)
Selling digital assets for fiat currency (including metaverse items or property)
Selling or using digital assets to pay for goods or services
Under this tax treatment, you only owe taxes if you’ve sold or otherwise disposed of a digital asset for a profit. The amount you owe is based on the difference between the price you paid for the asset (known as the “cost basis”) and the price for which you sold it.
There are two different capital gains tax rates for digital assets:
Short-term capital gains
Long-term capital gains
Which one you pay depends on how long you’ve held each investment.
Gains on the disposal of any digital asset investment held for one year or less are subject to short-term capital gains tax. Gains on the disposal of those held for over one year are subject to long-term capital gains tax.
The IRS taxes short-term capital gains at the same rate as your income tax bracket. See the tax bracket charts above for the latest figures.
The IRS taxes long-term capital gains at a lower rate, encouraging crypto investors to HODL assets.
You will usually “net” gains and losses; i.e. you apply a long-term capital loss to a long-term capital gain and a short-term capital loss to a short-term capital gain. If there are excess losses in one category, you can net these against gains of either type.
Income tax actions
The following actions are also taxable events according to the latest guidance provided by the IRS:
Any profits made from any of the above actions are considered ordinary income and taxed the same as short-term capital gains. See the U.S. federal income tax brackets table above for the latest federal income tax brackets.
Staking with Kraken
The IRS has published new guidance regarding the treatment of cryptocurrency staking rewards. In Revenue Ruling 2023-14, the IRS ruled that staking rewards must be included in gross income for the taxable year in which the taxpayer acquires dominion and control of the awarded cryptocurrency. Dominion and control generally refers to the taxpayer’s ability to sell or otherwise transfer or withdraw the asset.
The ruling further clarifies that this treatment applies whether the taxpayer stakes directly to a proof-of-stake blockchain or receives additional tokens through staking on an exchange. The amount of includible income is based on the reward’s fair market value on the date the taxpayer gains dominion and control.
Please consult your tax advisor for further guidance.
U.S. customers that received over $600 in staking rewards in 2023 will receive an IRS Form 1099-MISC from Kraken. Kraken will also send this form to the IRS. This form helps to calculate the amount required on your 2023 U.S. Income Tax Return.
You can learn more about IRS Form 1099-MISC here and the Kraken Tax Forms FAQ here. Additionally, if you are not eligible for the Form 1099-MISC, you should still include any staking rewards that you received dominion and control over in 2023.
IRS Form 1099-B
Form 1099-B reports proceeds from the sale of stocks and other financial instruments. Form 1099-B may also report other details of the sale such as the cost basis and data for determining the taxable income for the transaction. U.S. taxpayers use this form to calculate their gains or losses from selling such instruments. Kraken does not currently issue Form 1099-B. Depending on the finalization of the Proposed Regulations for Digital Asset Brokers, beginning in 2025, Kraken may have to report certain transactions involving options and forward contracts on the Form 1099-B.
IRS Form 1099 reporting on crypto sales
The Infrastructure and Investment Jobs Act, signed on November 15, 2021, requires cryptocurrency “brokers,” like Kraken, to report the sale of Digital Assets to the IRS similar to what you would see in traditional finance (like a Form 1099-B). The IRS issued Proposed Regulations for Digital Asset Brokers, and in these proposed regulations deferred the requirement to report digital asset transactions on a proposed Form 1099-DA until the year 2025. A large number of responses were received on the proposal from industry and taxpayers that we would expect to be analyzed before any temporary or final regulations are issued.
Given that the regulations are only proposed at this time, and may be subject to change in the future pending the Final Regulations, please check the Tax section of our Support Center going forward for updates. Additionally, forthcoming U.S. tax regulations will require reporting transfers of Digital Assets from other exchanges and wallets, and we anticipate incorporating the reporting requirements of these regulations when they are effective.
Kraken, for tax year 2023, will not be filing Form 1099-B (nor equivalent such as the proposed Form 1099-DA) with the IRS, nor are we issuing Form 1099-B to customers. Instead, we provide you with the ability to download your account history, as described below.
How to calculate and file your crypto taxes
Calculate your cost basis
For investors that only complete a handful of digital asset transactions per year, calculating taxes is a relatively straightforward process. For people who are highly active in the crypto space and engage with multiple platforms and assets, it can be significantly more complicated.
Thankfully, the IRS accepts several methods for calculating the cost basis of investments subject to capital gains tax. It’s important to note that the amount you’ll pay in taxes can vary depending on which option you choose.
First in first out (FIFO): Digital assets bought first are the first assets sold
Highest in first out (HIFO): Digital assets bought at the highest price are the first assets sold
Last in first out (LIFO): Digital assets bought last are the first assets sold
Specific identification (Spec ID): You calculate the specific cost basis for each transaction
We also want to note that you should be including fees as adjustments to your cost basis and gross proceeds. This adjustment will impact your gain/loss calculations.
If there was an acquisition fee when you purchased cryptocurrency, you can add that fee to your purchase price to increase your cost basis. Similarly, when you sell cryptocurrency, you can deduct the selling fees from your proceeds. This deduction is beneficial because it results in lower gains or higher losses.
Third-party service providers (crypto tax calculators)
Kraken provides you with the ability to download your account history for all of your trades and other account history on your Kraken account. Third-party providers that provide crypto tax calculation services can assist you with calculating your crypto taxes utilizing the CSV file downloaded from Kraken.
Certain third-party service providers may suggest that they can more readily calculate your taxable income if you connect your Kraken account to their site via an application programming interface (API).
We do not endorse any third-party service providers. We understand many of our clients use these services particularly when they have accounts at multiple exchanges or wallets and recommend the following best practices to keep your account and information safe while using the provider that best suits your needs:
Review the third-party service provider and understand what security they have in place to keep your information secure
For example, is 2FA available or have there been previous breaches?
Limit the information shared via an API to the following selections: query, query closed orders and trades, and query ledger entries
Review the output and verify the accuracy and completeness
Delete the API key from your Kraken account once you receive the tax reporting from the third-party service provider; this will limit any further access to your account
Future Enhancements
We look forward to sharing future enhancements to our tax reporting capabilities, including updates to our CSV files to better integrate with third-party software providers.
Filing your crypto taxes
Once you’ve calculated how much tax you owe, you’ll need to complete the following forms.
Page 1 of Form 1040 requires you to affirmatively state whether, at any time during 2023, you: (a) received (as a reward, award or payment for property or services); or (b) sold, exchanged or otherwise disposed of a digital asset (or a financial interest in a digital asset).
Check “Yes” if at any time during 2023 you:
Received digital assets as payment for property or services provided
Received digital assets as a result of a reward or award
Received new digital assets as a result of mining, staking and similar activities
Received digital assets as a result of a hard fork
Disposed of digital assets in exchange for property or services
Disposed of digital assets in exchange or trade for another digital asset
Sold a digital asset
Otherwise disposed of any other financial interest in a digital asset
The following actions or transactions in 2023, alone, generally don’t require you to check “Yes”:
Holding a digital asset in a wallet or account
Transferring a digital asset from one wallet or account you own or control to another wallet or account that you own or control
Purchasing digital assets using U.S. or other real currency, including through the use of electronic platforms such as PayPal and Venmo
For capital gains tax, you’ll need to complete Form 8949. If you’ve reported losses, you may be able to deduct the amount from your capital gains tax liability. To do this, you will need to complete Form 1040, Schedule D.
For crypto-based income taxes, most people will be required to complete Form 1040, Schedule 1 or Schedule C.
However, depending on your status, you may be required to complete a different type of 1040 form.
Form 1040–SS: Applicable to residents in Guam, American Samoa, the U.S. Virgin Islands (USVI), the Commonwealth of the Northern Mariana Islands (CNMI) and Puerto Rico
Form 1040-NR: Applicable to people considered “nonresident aliens”
Penalties
Crypto tax evasion can lead to severe penalties. The IRS can issue fines up to 75% of unreported crypto gains (a maximum of $100,000 for individuals and $500,000 for corporations) and a tax year audit may remain open indefinitely. There may be other penalties applicable depending on your particular tax circumstances.
Additionally, criminal convictions can result in a five-year jail sentence.
If you’re unsure how to calculate or file your tax returns, it’s advisable to seek guidance from a tax professional.
Keep learning about crypto
Now that you understand how your digital asset investments are taxed, check out our Learn Center for more essential crypto knowledge:
These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell, stake or hold any cryptoasset or to engage in any specific trading strategy. Kraken does not and will not work to increase or decrease the price of any particular cryptoasset it makes available. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your cryptoassets and you should seek independent advice on your taxation position. Geographic restrictions may apply.
Source: https://blog.kraken.com/news/industry-news/u-s-crypto-taxes-in-2024-fast-facts
