Navigating Crypto and Taxes: A Comprehensive Guide for the USA (2023-2024 Tax Season)

Paying taxes is considered a civic duty – it is important for cryptocurrency investors to note they cannot hide their gains from  “Uncle Sam” – also known as the US Internal Revenue Service (IRS). This is the US authority responsible for collecting federal taxes. 

Over the years the IRS has intensified its focus on cryptocurrency investors and any failure to report gains will result in being charged as a criminal — it is not worth the risk. The IRS has made it very clear that digital assets or virtual currency are taxed as property although the tax authority does not recognise it as real currency also known as “fiat.” 

The relevance of cryptocurrency in the financial landscape is changing with digital assets becoming more acceptable and mainstream. Remember every time cryptocurrency is sold for profit it is seen as a gain – this is a “taxable event” which means capital gains will be taxed as they would with any other asset class. 

Tax Basics for Cryptocurrency

Tax can be an extremely complicated arena which requires advice from an accountant – To start you off here is a clear and up-to-date guide on crypto taxes in the US for the upcoming tax season (2023-2024).

This guide aims to help individuals understand their tax obligations related to cryptocurrency transactions, investments, and income. This guide is for information purposes only —  please seek advice from a professional tax advisor.

Many cryptocurrency exchanges such as Coinbase, Kraken, Gemini, Robinhood, Bitstamp and eToro require users to share their identification and upload a video when signing up – these exchanges are subject to the laws and regulations of the country they operate in. The exchanges will also conduct know-your-customer (KYC) checks that require a thorough background check on clients using the platform.

Understanding key tax terms relevant to cryptocurrency investing is crucial. Here is a general overview of how the IRS categorizes cryptocurrencies for tax purposes. 

Taxable Events

Let’s start with breaking down what is a taxable event. It is important to understand that a taxable event can involve crypto-to-fiat transactions, trading, and the mining of digital assets. In the context of cryptocurrency, a taxable event refers to any transaction or action that results in a tax consequence. 

This can include the selling or exchange cryptocurrency for fiat currency (like USD), trading one cryptocurrency for another, receiving cryptocurrency as a form of payment for services rendered or goods sold and the mining of cryptocurrency, which can be considered income.

The specific tax implications can also vary depending on the jurisdiction and individual circumstances, so it is important to consult with a tax professional familiar with crypto taxes.

Reporting taxable events related to cryptocurrency to the IRS in the U.S. involves several steps.
Here’s a simplified overview:

• Keep Detailed Records: It is important to maintain comprehensive records of all cryptocurrency transactions. This includes dates of acquisition and sale of cryptocurrency. The value at the time of the transaction, and any associated costs or fees.
• Determine Gains or Losses: Calculate the capital gains or losses for each transaction. This is typically done by subtracting the cost basis (what you paid for the cryptocurrency) from the sale proceeds (what you received when you sold or exchanged the cryptocurrency).
• Complete Form 8949: Use Form 8949 to report capital gains and losses from cryptocurrency transactions. List each transaction on this form, detailing the date acquired, date sold or exchanged, proceeds, cost basis, and gain or loss.
• Transfer Information to Schedule D:  After completing the Form 8949, transfer the total gain or loss to Schedule D (Capital Gains and Losses). This form summarizes your net capital gain or loss from all transactions, including those from cryptocurrency.
• Include in Tax Return: Include the information from Schedule D in your overall tax return (typically Form 1040). 
• Pay Taxes Owed: Now comes the difficult part – it’s time to part with your gains. If you have a net capital gain from your cryptocurrency transactions, you may owe taxes on that gain. The rate at which you’re taxed depends on how long you held the cryptocurrency before selling (short-term versus long-term capital gains).
• Use Form 1040: If you’ve realized gains from cryptocurrency trading as a business or as a self-employed individual, you may also need to complete additional forms, such as Schedule C, to report the income or loss.

It’s important to note that tax laws and reporting requirements can be complex and may change over time. So it’s advisable to consult with a tax professional or accountant who is knowledgeable about cryptocurrency taxation or crypto taxes to ensure accurate reporting and compliance with current regulations..

How to Stay Informed on Crypto Taxes

There are a number of ways to stay informed about IRS rule changes related to cryptocurrency investing. 

• Official IRS Website: The IRS website often publishes updates, guidance, and rulings related to cryptocurrency taxation. The “Virtual Currencies” section is particularly relevant. There are also IRS Publications so it is worth keeping an eye on publications such as Publication 544 (Sales and Other Dispositions of Assets), Publication 550 (Investment Income and Expenses), and Publication 525 (Taxable and Nontaxable Income) for any updates or guidance related to cryptocurrency. The IRS regularly releases notices, announcements, and rulings that provide guidance on various tax topics, including cryptocurrency. Monitoring these can help you stay updated.
• Get Advice From a Tax Professional: It is important to get professional advice from a qualifies tax professional who specializes in crypto taxes and can provide personalized guidance and ensure you’re adhering to the latest rules and regulations.
• Industry News and Publications:  Online news sites such as Cryptonews.com and CoinDesk and other cryptocurrency-focused media outlets offer up to date news on any tax rule changes and developments.
• Cryptocurrency Exchanges and Platforms: Some exchanges and trading platforms such as Coinbase may provide resources, webinars, or guides on tax implications related to their services.
• Online Forums and Communities: Platforms like Reddit, dedicated cryptocurrency forums, or other online communities can be valuable sources of information. However, always verify information from these sources with official IRS guidance or a tax professional.
• Attend Seminars and Webinars: By attending seminars, webinars, or workshops hosted by tax professionals, financial institutions, or industry organizations focusing on crypto taxes.

Stay One Step Ahead!

Given the evolving nature of cryptocurrency and its taxation, it’s crucial to regularly check multiple sources and prepare early for your tax return — Start by organizing cryptocurrency-related documents, seek professional advice if necessary, and stay informed about any updates in tax regulations. When in any doubt, always consult with a tax professional or advisor familiar with cryptocurrency rules and regulations.

Happy investing!