IRS Crypto Taxes 2024: What You Need To Know Before Filing

Key Takeaways

• The IRS treats cryptocurrencies as property, not currency, affecting tax obligations. Calculating capital gains and losses accurately is vital for tax reporting. 
• Selling or trading crypto, receiving it as income from mining or staking, and using it for purchases all trigger tax obligations, emphasizing the importance of accurate recordkeeping.
• Investors need to determine the cost basis (purchase price) of their cryptocurrencies and subtract it from the selling price to ascertain gains or losses, impacting their tax liabilities.
• Using the appropriate forms (e.g., Form 1040), maintaining detailed records, and seeking professional advice or utilizing reputable tax software can help investors navigate the complexities of cryptocurrency taxation and avoid potential audits or penalties.

The decentralized structure of cryptocurrencies and their ability to facilitate speedier, less expensive transactions are upending established banking systems. Opportunities and challenges are presented by this growing importance. The US Internal Revenue Service (IRS) emphasizes recordkeeping for residents and is especially focused on taxation earnings from cryptocurrency transactions.

When are the crypto taxes due in 2024 in the USA? The IRS deadline for filing taxes related to crypto transactions in 2023 is April 15th, 2024. This applies to all U.S. taxpayers who need to report cryptocurrency gains, losses, or income on their tax returns.

This article delves into the nuances of crypto taxation, covering topics like capital gains, taxable events, and IRS compliance. It seeks to provide users with the knowledge necessary to correctly record and report their cryptocurrency transactions and avoid tax liability. 

How The IRS Treats Crypto?

This section explains how the IRS treats cryptocurrencies, focusing on its property classification and the resulting tax implications:

Property, Not Currency

Like stocks or real estate, the IRS views cryptocurrencies like Ethereum (ETH) and Bitcoin (BTC) as property. This implies that for taxation purposes, they are not regarded as actual currencies.

Understanding Taxable Events

Transactions involving cryptocurrencies trigger tax events called capital gains and losses. Capital gain is the profit individuals make when they sell a capital asset (stocks, real estate) for more than they bought it for. Capital loss is the opposite – selling an asset for less than what an individual paid for it.

Capital Gains And Losses

Selling or trading crypto is the most common way capital gains or losses occur with cryptocurrency. Let’s understand this via examples:

• Example (Capital gain): You spend $20,000 for one BTC. You sell it for $35,000 later. You incur a $15,000 capital gain.
• Example (Capital loss): You buy 1 ETH for $3,000; its value decreases, and you sell it for $1,500. You’ve lost $1,500 in capital (i.e., it is a capital loss).

Cryptocurrency Holding Period And Implications For Taxation

In addition to the above categorization, holding periods matter as well. This implies that if assets are held for a year or less (short-term), gains are taxed according to your regular tax bracket i.e. ordinary income. On the other hand, if assets are held for over a year (long-term), capital gains will incur lower taxes (usually 0%, 15%, or 20% depending on income).

Crypto As Income

Cryptocurrencies obtained through airdrops, mining, or staking are also considered taxable income at the time of receipt based on their fair market value. Conversely, if you receive cryptocurrency in exchange for employment, it is taxable income and is assessed at its fair market value at the time of receipt.

Short-Term Crypto Gains: Know Your Crypto Tax Rates For 2023

Here’s the 2023 federal income tax brackets, tailored for understanding taxes due in 2024:

Long-Term Crypto Gains: Know Your Crypto Tax Rates For 2023

Here are the long-term capital gains Tax rates for the 2023 tax year (for taxes due in April 2024):

Crypto Taxes USA: The Role of Recordkeeping For Reporting Purposes

Why Recordkeeping Matters In Crypto Tax Reporting

Meticulous documentation is not just a smart idea for US-based cryptocurrency investors, but it is also necessary for correct tax reporting and IRS compliance. Here are the reasons why it matters:

• Calculating gains and losses: The foundation for computing capital gains and losses is the ability to ascertain cost basis, or what you paid, and fair market value, or what a specific cryptocurrency was worth when sold or exchanged. Accurate records help avoid issues while reporting crypto taxes.
• Audits: Detailed records become your lifesaver in the event that the IRS chooses to investigate your tax calculations or cryptocurrency transactions.

How To Calculate Crypto Cost-Basis 

The different cost-basis methods the IRS allows can significantly impact how much tax you owe, especially with volatile assets like cryptocurrencies. Let’s break down each:

First In First Out (FIFO)

The crypto you bought first is assumed to be the first you sell, regardless of the actual order of your transactions.

• Example: You buy Bitcoin at different times: 0.5 BTC at $20,000, 0.3 BTC at $30,000, 0.2 BTC at $40,000. If you sell 0.5 BTC, FIFO assumes you sold the oldest one (bought at $20,000).

This cost-basis method is generally used by long-term investors in a bull market where prices generally rise over time.

Last In First Out (LIFO)

As per LIFO, The most recently acquired crypto is considered sold first.

• Example (same as above): Selling 0.5 BTC means you’re assumed to have sold mostly from the $40,000 batch.

This cost-basis method is generally used in the cases of short-term trading or if you expect prices to decline, potentially maximizing capital losses (but be mindful of wash-sale rules).

Highest In First Out (HIFO)

As per HIFO, you always sell the crypto you bought at the highest price first.

• Example (same as above): Selling 0.5 BTC would be attributed to the coins bought at $40,000.

Tax minimization, as it usually leads to the lowest capital gains is an event where this cost-basis method is usually utilized.

Specific Identification (Spec ID)

This method offers the highest flexibility – you choose the exact crypto sold based on records. It requires meticulous recordkeeping to track the purchase date and price of each portion of your holdings.

Advanced tax optimization is the particular use-case where this cost-basis method is applied, potentially selling coins with specific cost basis for strategic advantages.

What To Track For Crypto Tax Reporting

As a crypto investor or trader, you need to record the following information for reporting crypto taxes to the IRS:

• Dates of transactions: Purchases, sales, trades, income received.
• Cryptocurrency type: Bitcoin, Ethereum, etc.
• Quantity: Crypto amount, but also fair market value in USD at the time.
• Cost basis: How much you paid.
• Purpose: Was it selling, swapping, or income?

IRS Forms And Crypto Tax Reporting

Comprehending IRS forms is essential for precise crypto tax filing. Important forms are Schedule 8949 (details individual crypto transactions), Schedule D (summarizes capital gains/losses), and Schedule 1 or Schedule C (reports crypto income depending on its nature).

These forms are explained in more detail below:

Form 8949: The Foundation

• Purpose: Form 8949 is where you list each individual cryptocurrency transaction resulting in a capital gain or loss.
• Sections:
  • Part I: Short-term capital gains/losses (assets held for a year or less)
  • Part II: Long-term capital gains/losses (assets held for over a year)
• Role: The totals from Form 8949  are then transferred to Schedule D, where they’re combined with other types of capital gains and losses.

Schedule D: Summarizing Capital Activity

• Purpose: Schedule D aggregates your capital gains and losses from various sources, including crypto from Form 8949, stocks, real estate, etc.
• Calculating net gain/loss: Schedule D determines your overall net capital gain or loss for the tax year. This figure is then carried over to your Form 1040  (individual tax return).

The answer to the “yes” or “no” crypto question  at the top of Form 1040 (please see below) will have a big impact on how you file your taxes. 

“Did you dispose of any investment(s) in a qualified opportunity fund during the tax year?”

Selecting “yes” indicates that you have to fill out Form 8949 with the details of your cryptocurrency transactions, including any profits or losses. This question encompasses a wide range of activities, such as earning cryptocurrency income, selling it, transferring it between different cryptocurrencies, and even making purchases with it. The IRS takes false answers seriously, so if you’re unsure, it’s usually safer to answer “yes” and report your activities. 

You can only respond “no” if you have only purchased and retained cryptocurrency or if you have only moved it between wallets that you own. Even if you respond “no,” you must maintain thorough records to support your stance in the event that the IRS queries your return.

Income Reporting: Schedule 1 Vs. Schedule C

• Schedule 1 (additional income and adjustments to income): Schedule 1 (Form 1040)  is used to report various income types, including crypto received as payment for goods or service, staking reward, mining income, and airdrops (treated as ordinary income).

• Schedule C (profit or loss from business): Schedule C (Form 1040)  is used to report business income. If your crypto activities (extensive trading, running a mining operation) are substantial enough to qualify as a business, you’ll report income and expenses on Schedule C.

Potential For 1099s

Forms like 1099-B, 1099-K, or 1099-MISC may be provided by centralized exchanges to assist you in reporting your cryptocurrency activities to the IRS. These forms might appear if you transact a lot or if you’ve made a sizable profit from cryptocurrency-related activities like staking rewards or accepting payments in cryptocurrency. 

Crucially, you must accurately declare all of your cryptocurrency-related income, along with any capital gains or losses, on your tax return even if you do not receive any 1099 forms.

How To Report Crypto Losses To The IRS

You must first keep thorough records of all transactions, including the dates, prices, and amounts of both purchases and sells, to report cryptocurrency losses to the IRS. Subtract the sale price for each asset sold at a loss from the cost basis to get each asset’s individual losses. 

Form 8949 is used to record these losses, and Schedule D of your tax return serves as a summary of them. Any capital gains you may have from cryptocurrency or other assets can be offset initially by capital losses. Furthermore, on your Form 1040, you can deduct net capital losses of up to $3,000 from your ordinary income. Please note that unused losses are carried over to subsequent tax years.

Does The IRS Allow Crypto Tax-Loss Harvesting?

With tax-loss harvesting strategy, assets are purposefully sold at a loss to offset realized capital gains. In the cryptocurrency world, you may choose to sell some coins at a loss in order to lessen the tax liability associated with other sales that generated profits. By doing this, you may be able to reduce your annual tax liability.

The same regulations that apply to capital losses on assets like stocks also apply to cryptocurrencies, as the IRS views them as property. To counteract any capital gains you have made from other investments, such as stocks or real estate, as well as from other cryptocurrency ventures, you can strategically sell cryptocurrency assets at a loss. 

• Reducing ordinary income: Your ordinary income may be reduced by up to $3,000 in net capital losses, which will further lower your taxable income.
• Carryover: Should you incur losses above the $3,000 threshold, they can be carried forward to subsequent tax years and utilized to counterbalance profits or subtracted from your regular income.

Important Considerations While Utilizing Crypto Tax-Loss Harvesting:

• Wash-sale rule: The IRS may reject the deduction if you buy the same cryptocurrency again within 30 days of the sale in which you suffered a loss.
• Not a scheme to avoid taxes: Tax avoidance is not the only goal of tax-loss harvesting; portfolio management should be the main objective.
• Recordkeeping is the key: It is necessary to keep reliable records to support your losses to the IRS. 

Tools For Crypto Tax Reporting

Crypto tax software solutions like Koinly, Accounting, CoinLedger can make crypto tax reporting significantly easier. This article will offer insights on how Koinly, a popular player in the space, helps users track their portfolio and automatically generate tax reports.

Expert Insights: Q&A with Michelle Legge, Koinly

CCN reached out to Michelle Legge, senior researcher and head of crypto tax education at Koinly, to delve deeper into how the platform addresses the complexities of crypto taxation:

1. The IRS doesn’t always provide clear guidance on how to categorize certain crypto transactions (e.g., staking rewards, NFT royalties, hard forks). How does Koinly handle these ambiguous areas, and does it allow for user overrides if there’s disagreement with the default classification?

Michelle Legge: “Although the IRS provides clear guidance on hard forks and staking rewards, there are many other transactions like liquidity pool transactions, crypto cashback, and transfer fees where the IRS offers nothing to work with, as of yet. For the average Joe, it’s hard to figure out the taxes you might owe on these transactions.

This said, in many cases, even without guidance from the IRS, there may be some generally agreed-upon practices from professionals within the field. For example, prior to the IRS releasing its 2023 guidance on staking rewards, most experts agreed that rewards should be treated as income. In these instances, Koinly  has default settings that follow best practices – which is usually the most conservative approach from a tax perspective.

However, Koinly also offers customizable tax settings where users can decide how to treat these transactions from a tax perspective. For example, while the default handling for providing liquidity to a decentralized exchange in Koinly is to treat these as taxable events (like any crypto-to-crypto trade), if the user doesn’t wish to treat these as taxable events, they have the option to change this in in their Koinly tax settings, alongside many other customizable settings. 

We do always advise however that users consult with an experienced crypto accountant in order to remain compliant and avoid an audit.”

2. Koinly supports various cost-based methods (FIFO, LIFO, etc.). Are there settings for applying different methods to separate parts of a portfolio for tax optimization? Is it easy to simulate the tax impact of these method choices before filing?

Michelle Legge: “Koinly supports a variety of allowable cost basis methods under the Spec ID method including FIFO, HIFO, LIFO, and optimized HIFO. In regard to changing your cost basis method, Koinly allows users to select different methods for different tax years, as allowed by the IRS. As well as this, before selecting a cost basis method for a given tax year, you can head over to settings in Koinly to switch between cost basis methods. Koinly will recalculate your gains and losses according to the chosen cost basis method, and generate a new tax summary preview so you can see the impact it’s had on your tax liability for the relevant financial year.

When it comes to tax optimization, Koinly also offers a free tax optimization dashboard that allows users to view unrealized gains and losses on specific assets and simulate sales to understand how it would impact their tax liability for the financial year. This can help investors with strategies like tax loss harvesting before the end of the financial year.”

3. DeFi interactions can involve airdrops, liquidity pools, and multi-step transactions across protocols. How granular does Koinly’s tracking get? Can it parse out the individual taxable events within complex DeFi activity?

Michelle Legge: “In most instances, Koinly is excellent at handling DeFi transactions automatically. For example, if a user removes liquidity tokens from a farm, in most cases the user will receive rewards alongside LP tokens. For the majority of DeFi protocols, Koinly will understand the LP tokens are being returned from a farm (non-taxable) and that the other tokens being received are rewards (taxed as income). You can view all of these transactions in the transactions tab in Koinly to get a complete overview of every transaction you’ve made with every single wallet or exchange you’ve connected to Koinly, with a full breakdown of transaction details like TXID, fiat value, and more. Koinly’s data is as detailed as the blockchain data it imports. 

Of course, DeFi is an ever-evolving space, and adding automatic support for each DeFi protocol as it appears and as each DeFi protocol develops is an endless task for our product and development team. While we’re constantly adding support for new protocols and different transaction types, some transactions may need to be tagged manually by the user. In these instances, we provide help documentation and customer support.”

Conclusion

An in-depth comprehension of the changing regulatory environment and attention to detail are necessary to successfully navigate the challenges of filing crypto taxes to the IRS in 2024. Due to the IRS’s increased scrutiny of cryptocurrency transaction revenues, the decentralized structure of cryptocurrencies presents both opportunities and challenges.

Accurate tax reporting requires an understanding of how the IRS views cryptocurrency as property rather than currency. Comprehending the various taxable events, holding periods, and cost-basis techniques is also necessary to minimize tax obligations and ensure compliance. Investors are able to optimize their tax strategies and streamline the reporting process with the help of crypto tax software and expert legal advice. Ultimately, it’s critical to keep thorough records and up to date on IRS regulations.

FAQs

About the Author

Alisha Bains

Alisha is a versatile professional with a strong background in digital finance backed by multiple certifications. In 2016, she started working with DeFi projects. Alisha has since held various roles, including analyst, researcher, and project manager, in the cryptocurrency and blockchain space. Her contributions extend widely within the industry. Alisha has  contributed to newsletters and research reports. Beyond her professional endeavors, Alisha is a passionate traveler who embraces diverse cultures. She frequently engages in outdoor activities such as hiking and trekking, finding solace in the natural world, which complements her enthusiasm for the dynamic landscape of blockchain technology.

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