What Crypto Users Need To Know Before Filing Their 2023 Tax Returns

Crypto investors and US citizens who have been paid in crypto or received digital assets are now required to report their taxable transactions. Crypto users have to disclose the transaction details in their 2023 tax return before April 15. Crypto investors will need to pay tax on any income they made from their assets in the past year. The IRS currently bolstering its cryptocurrency expertise, and ‘digital assets’ is one of the agency’s “priority areas,” according to one of its press releases.

Crypto taxes are currently a voluntary system, where taxpayers are supposed to volunteer information. However, the IRS says cryptocurrency is one of its five problem areas where taxpayers could evade taxes. The agency has also begun criminal proceedings against tax avoiders, according to a report from Crypto Tax Calculator. Thus, it is important for traders to know what they need to do to avoid any repercussions.

All You Need To Know About Taxes on Crypto

The first method by which the IRS collects information on crypto trades is by asking taxpayers about the details on their federal 1040 tax form.

The question on the form states, “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

As per CNN, investors need to answer “yes” if those descriptions fit the nature of their crypto transactions. However, traders can answer “no” if they bought, held digital assets, or simply transferred digital assets from one of their accounts to another. These transactions are not taxable events, as per the report.

However, in case any taxpayer accepts payment in crypto, it be counted as taxable income and they will owe income tax on that payment, determined by the price of that cryptocurrency the day they got paid, to Miles Fuller, a senior director at TaxBit told CNN.

For instance, if a taxpayer got paid in Bitcoin worth $10,000, that income will be reportable and if that $10,000 grows to $20,000 over time, the taxpayer will need to report a $10,000 capital gain as well.

Furthermore, if anyone sold crypto in 2023, they will need to calculate if they had a capital gain or loss to determine the taxes owed. While capital gains are taxable, investors can use their losses to offset the gains and taxes.

Investors who made a loss by selling Bitcoin in the crypto winter can also apply the leftover losses that they weren’t able to use on their 2022 tax return.

Investors who held a digital asset for less than a year and made a short-term gain will taxed at ordinary income tax rates. Further gains made by holding assets for over a year are considered long-term gains, which are taxed at the lower capital gains rate.

Furthermore, those who donated cryptocurrency to charity must pay to get a qualified appraiser to officially calculate the value of their donation. Donations valued over $5,000 are eligible for deductions but those who fail to obtain the appraisal won’t be able to take the deduction, according to Fuller.

A new arena that taxpayers may find difficult to navigate is Bitcoin ETFs as the Security and Exchange Commission greenlighted the listing of Bitcoin ETFs just this January. According to the CNN report, since taxpayers won’t own Bitcoins directly through an ETF, these digital assets will be taxed as an SEC-regulated financial product.