USA Crypto Tax Guide 2024

Updated upto 21/03/2024 to accommodate ICO, DAO, Gifts and Donation Taxes

Tax authorities in the USA consider crypto to be a form of property not a currency according to Notice 2014-21, and any transactions made using crypto assets entails tax liabilities. Depending on the nature of your transactions, you’ll either pay income tax or capital gains tax in the USA. Crypto assets held for less than a year attract short-term capital gains tax with tax rates ranging between 10-37%, while those held for over a year attract long-term capital gains tax which is either 15% or 20% depending on the value of your gains.

The following transactions are considered taxable by the tax authorities-

• Selling cryptocurrency for fiat currency
• Trading one cryptocurrency for another
• Using cryptocurrency to purchase goods or services
• Earning cryptocurrency as income
• Receiving cryptocurrency through mining or staking activities
• Giving cryptocurrency as a gift or donation (subject to gift tax rules)
• Inheriting cryptocurrency (subject to state tax rules)

If you’re involved in any of these transactions, you must report them to the IRS and file your taxes by April 15, 2024. This guide covers all the different types of crypto transactions that entail tax liabilities such as mining, staking, or trading crypto assets. It also answers some crucial questions like “How to calculate my income or capital gains?”,  “Are there any tax-free crypto transactions?”, and “How can I pay less taxes on my crypto gains/income?” to help resolve all your crypto-tax related queries.

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How is Crypto Taxed in the USA?

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Crypto transactions broadly fall into two categories in the USA, the first one attracts income tax while the other attracts capital gains tax. Transactions where crypto assets are received as a result of provisioning a service or as interest usually attract income tax, while those where crypto assets are acquired and then sold on a later date for a profit attract capital gains tax. 

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Capital Gains Tax

There’s both short-term and long-term capital gains tax in the US, so if you’re selling your assets within less than a year of acquisition then the transaction would attract short-term capital gains tax, and if you’ve held it for over a year then it would attract long-term capital gains tax.

Note that if your gains are less than $44,625 (for the 2023 tax year), you don’t have to pay any long-term capital gains tax.

Example:

Consider the following transactions:

01/13/2023 - Jack bought 2 BTC

02/15/2023 - Jack bought 2 ETH tokens

04/16/2023 - Jack sold 1 BTC

06/04/2023 - Jack sold 2 ETH

01/16/2023 - Jack sold 1 BTC

As evident from the above ledger of transactions, three disposals were made.

Out of the three disposals, two were short-term disposals made within a year, and one was long-term disposal.

1st Disposal

1 BTC sold on 04/16/2023

Let’s assume Jack incurred a capital gain of $8,000 on this transaction, for the sake of simplicity

2nd Disposal

2 ETH sold on 06/04/2023

Let’s assume Jack incurred a capital gain of $2,000.

Collective Gain from both disposals =  $8,000 + $2,000 = $10,000

So the above amount will be subjected to short-term capital gains tax.

3rd Disposal

1 BTC sold on 01/16/2023

Let’s assume Jack made a capital gain of $14,000 on this transaction.

But since the disposal was made after holding the asset for over a year, it comes under long-term capital gain.

But since the gain is less than $44,625, Jack owes no long-term capital tax to the IRS.

Listed below are the tax rates applicable on both short-term and long-term capital gains transactions.

Short-Term Capital Gains Tax Rate

These tax rates are for the 2023 tax year, to be filed in 2024

Looking forward to the next financial year? Here is the chart for short-term capital gain tax brackets for the 2024 tax year, to be filed in 2025.

Long-Term Capital Gains Tax Rate

You can refer to the long-term Capital Gains Tax rates for the 2023 tax year (to be filled in 2024) listed below:

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Now, here is the chart for tax brackets for the 2024 tax year, to be filed in 2025.

Crypto Income Tax

There are many ways you can earn crypto income and some of the most common ones include-

• Receiving crypto as airdrops
• Getting paid in crypto in exchange for a product or a service
• Mining crypto as a hobby
• Hard forks
• Referral programs
• Staking rewards

Moreover, any income derived from staking, lending, or liquidity farming on Defi protocols or engaging with Play2Earn platforms is also categorised as income and hence subject to the regular income tax rules. 

Income Tax Rates

Following are the income tax rates in the USA for the 2023 tax year.

Note that any attempts you make to underreport your assets and evade some taxes may end up severe penalties as the IRS can track crypto transactions through the following avenues-

• KYC requirements in the US mandate crypto exchanges to share customer data with authorities
• Exchanges track user wallets, bank transactions and report them to the IRS
• All major exchanges send Form 1099 to the IRS

Classification of Crypto for Tax Purposes

Back in 2014, the IRS issued Notice 2014-21 which states that crypto assets are to be treated as ‘property’ from a tax perspective. The IRS defines cryptocurrency as-

“...a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.”

Therefore, any transactions involving the purchase and sale of such assets would be capital in nature and hence attract capital gains tax. Moreover, these assets are taxable as income when received as compensation for a product or service, or as interest.

How to Calculate Crypto Income in the USA?

Calculating income from crypto transactions is fairly straightforward, the taxable value of crypto assets received as income is simply their fair market value on receipt. The real problem lies in calculating capital gains. Since most investors buy multiple assets of the same kind, they usually end up in a stir when it’s time to calculate the capital gains upon disposal. That’s exactly why one must rely on dedicated accounting methods as specified by the tax authorities for capital gains calculations.

The IRS permits the use of three accounting methods namely FIFO, HIFO, and LIFO. Let’s discuss them in a bit more detail.

FIFO

FIFO or First-In-First-Out is one of the most commonly used accounting methods. It states that the first asset you buy is the first one you sell.

LIFO

LIFO or Last-In-First-Out states that the last asset you buy is the first one you sell.

HIFO

HIFO or Highest-In-First-Out simply considers the highest acquisition price of an asset to be the cost basis.

Here’s an example to better understand capital gains calculations.

Consider the following transactions:

01/14/2023 - Mark buys 2 BTC for $20,000 each

03/16/2023 - Mark buys 1 BTC for $21,000

04/05/2023 - Mark buys 10 ETH for $2,200 each

04/28/2023 - Mark buys 2 ETH for $3,000 each

05/06/2023 - Mark sells 2 BTC for $34,000 each

07/16/2023 - Mark sells 1 BTC for $35,000

08/18/2023 - Mark sells 8 ETH for $3,400 each

As evident from the above ledger of transactions, Mark made 3 disposals.

Let’s look at each transaction separately and calculate the gains/loss associated with them.

1st Disposal

2 BTC sold for $34,000 each

Now since BTC tokens were acquired on two different dates for different prices, we need to figure out which one was sold by Jack, and we need to use a specialised accounting method as suggested by the IRS.

We will be using FIFO for these calculations.

The FIFO accounting method assumes that the first asset you buy is the first one you sell.

So the BTC tokens sold were the ones acquired on 01/14/2023 for $20,000 each

Cost Basis = $20,000

Disposal Amount = $34,000

Capital Gain/Loss = Disposal Amount - Cost Basis = $34,000 - $20,000 = $14,000(For 1 BTC)

Gain from 2 BTC = 2*14,000 = $28,000

2nd Disposal

1 BTC sold for $34,000

This token was acquired on 03/16/2023 for $21,000

Cost Basis = $21,000

Disposal Amount = $34,000

Capital Gain/Loss = $34,000 - $21,000 = $13,000

3rd Disposal

8 ETH sold for $3,400 each

Now using the FIFO accounting method, these tokens belong to the same group of tokens acquired on 04/05/2023 for $2,200 each

Cost Basis = $2,200

Disposal Amount = $3,400

Capital Gain/Loss = $3,400 - $2,200 = $1,200(from 1 ETH)

Gain from 8 ETH tokens = 8* 1,200 = $9,600

Collective Gain from all 3 disposals = $28,000 + $13,000 + $9,600 = $50,600

This is your taxable base and capital gains tax will be levied on it.

Crypto Tax Exemptions in the USA

While the tax regime in the US is considered to be a little rough by crypto investors and traders, there are some tax-free allowances offered by the IRS that can help you reduce your tax bill significantly:

Although investors consider the IRS to be one of the thorough and austere tax authorities in terms of crypto tax regulations, it does offer some tax exemptions for investors to lower their tax bill.

1. Capital Gains Tax-Free Allowance: US citizens are allowed a capital gains tax-free allowance. In 2023, if your taxable income is $44,625 or less for single filers or $89,250 or less for married couples filing jointly, you could potentially be eligible to benefit from a 0% long-term capital gains rate.

2. Gifting Crypto: US citizens are also offered an annual gift tax exclusion which allows every citizen to give up to $17,000 worth of crypto assets to anyone and the transaction is considered tax-free.

3. Long-Term Capital Gains Tax Rate: By holding onto your crypto assets for over a year, you can take advantage of a reduced long-term capital gains tax rate ranging between 0 and 20%.

Treatment of Crypto Losses

Investors were allowed to deduct losses they might’ve made due to theft or fraud before the Tax Cuts and Jobs Act was passed. This legislation states that investors can no longer use lost or stolen assets as deductible expenses. So any losses you might’ve made due to scams, chain hacks, phishing attacks, or by losing the private keys to the wallet are now useless.

But here’s the caveat, any losses incurred in or before 2017 are tax deductible if you have relevant documents to prove ownership and theft of these assets.

If you own tokens that have been delisted from exchanges due to regulatory changes and guidelines, you can dispose of these assets to generate fictitious losses and deduct these losses to lower your tax bill. You can do that by selling these tokens at a centralised or decentralised exchange, swapping them for some other token, or by simply burning them.

Taxation of Specific Crypto Activities

Now that we have a good grip on how crypto taxes work and how to calculate them. Let’s look at how specific crypto transactions are taxed.

Mining Taxes

Crypto assets received as a result of mining are taxed as income based on their fair market value at the time of receipt. Furthermore, if you decide to sell these assets for a higher price at a later date, then you’ll be liable to pay capital gains tax on the gains.

Staking Taxes

The IRS has specified in the past that any assets received as a result of staking crypto assets would attract income tax. However, some investors argue against it while suggesting that staking rewards, like newly created tokens, should be taxed upon disposal and not on receipt.

To clarify this situation, the IRS issued Notice 2023-14 which clearly states that staking rewards are taxable as income, dismissing any doubts regarding the same. However, there are no clear guidelines around the taxation and deductibility of additional expenses like “gas fees” and the calculation of staking rewards for income tax purposes. Therefore, one must seek advice from experienced tax consultants to gain more clarity on the subject.

Airdrops and Forks

Soft forks do not constitute a taxable event since no new tokens are created, Soft forks, on the other hand, attract tax liabilities. Any new tokens received due to a chain split are taxed as regular income and these tokens inherit the tax base equal to the fair market value of these tokens on receipt. 

Staking rewards also attract capital gains tax on disposal.

Crypto Gifts and Donations Taxes

Gifting crypto is a taxable event in the US. However, there’s a personal gift exemption limit of $17,000 for the 2023 tax season. If the total value of the gifted assets is more than $17,000, then investors are required to pay a 40% tax.

But here’s the catch, gifts over $17,000 are only taxable when you surpass the lifetime gift exemption limit of $12.92 million. Note that receiving crypto gifts isn’t taxable and the gifted assets simply inherit the cost base equal to the fair market value of the assets at the time they were gifted. So that you attract capital gains tax when you decide to dispose of these assets for a profit.

Any donation made to a registered charity in the US is tax deductible given that the organisation you’re donating to has a 501(c)3 status with the IRS. Here’s a list of all charitable organisations having 501(c)3 status with the IRS.

DeFi Transactions

The IRS is yet to declare clear guidelines on the nature of DeFi transactions and how they are viewed from the tax perspective. Since DeFi is a new landscape and is still evolving, making space for new avenues of earnings for people across the globe, there’s no way to accommodate all DeFi transactions and the returns offered by them into a set of tax guidelines.

However, it’s important to note that you might attract tax liabilities if you appear to be making an income or capital gain from DeFi transactions. Given below are some DeFi transactions that can attract tax liabilities from the IRS:

• Earning liquidity tokens or new tokens from DeFi protocols
• Taking a loan against collateral from DeFi protocols or private lenders
• Staking, yield farming, and adding or removing liquidity from liquidity pools
• Gains made from DeFi margin trades
• Paying interest in crypto for loans sourced from DeFi protocols, which in some cases may be considered as a disposal of crypto assets and hence attracts capital gains tax.

ICOs and Token Sales

ICOs are special events that allow investors to acquire tokens from unreleased projects in exchange for mainstream tokens like BTC and ETH. ICOs are similar to IPOs in traditional markets and are viewed as crypto-to-crypto trades for tax purposes across jurisdictions.

The IRS is yet to release guidelines on the taxation of ICOs. We suggest seeking guidance from an experienced tax professional on the matter to avoid complications with the IRS. Relevant details regarding ICO taxation will be added here soon as the guidelines hit our radar.

Crypto Lending and Borrowing

Borrowing crypto assets doesn’t constitute a taxable event. But if you lend your crypto assets to an individual, exchange, or a Defi protocol in exchange for interest, then the event will attract income tax.

NFT and DAO 

According to the section titled “Digital Assets” on the 16th page of the new tax guidelines report:

“Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.”

This makes it pretty evident that the Internal Revenue Service (IRS) considers NFTs to be a form of property, similar to cryptocurrencies. In other words, disposing of digital assets, such as through a sale or exchange, may result in tax obligations, just like with any other type of property. This is because such transactions may result in capital gains or losses that must be reported to the IRS.

The recent mandate has provided a clearer understanding of NFTs and established a more defined framework for their taxation. The tax rate for NFTs is not fixed and may vary based on factors like mode of purchase, duration held, and amount of gains or losses incurred upon disposal.

To determine the amount of taxes owed to the IRS, you will need to itemise all of your NFT transactions on form 8949 and then use the standard deduction chart at the end of the form to calculate the tax due.

You can refer to the complete NFT tax guide here.

The IRS is yet to release specific guidance on how income from DAOs is taxed. However, DAOs aren’t registered organisations and can’t file taxes independently, they’re closer to flow-through organisations. Therefore, it's safe to assume that any income from DAOs will be subjected to income tax, and any gains incurred on the disposal of tokens received from DAOs will be taxed as a capital gain.

Crypto Margin Trading, Futures and CFDs

For individual investors, the tax treatment of margin trades, crypto futures, and CFDs is similar to other crypto transactions that incur capital gains tax. Any profits derived from these financial instruments are classified as capital gains and are subject to capital gains tax. Just like the disposal of assets, tax liabilities arise only upon the closure of a margin trade, future, or CFD position.

Regarding crypto futures, trading regulated products can lead to more advantageous tax outcomes, particularly due to the IRS 60/40 rule. Essentially, this rule stipulates that if investors engage in regulated futures trading, 60% of any capital gains will be taxed as long-term gains, while the remaining 40% will be taxed as short-term gains, regardless of the duration of the position. Although it's important to note that most crypto futures are currently unregulated and therefore exempt from this rule.

How to Avoid Paying Tax on Cryptocurrency in the US?

To make things clear, there’s no legal way to avoid paying taxes on crypto entirely in the US and any attempt at doing so will be met with regulatory and legal repercussions from the feds. However, there are ways you can avoid paying taxes on a portion of your gains and here are some of them:

1. Buy and HODL Crypto Assets

As mentioned above, buying crypto assets and holding them is not a taxable event in the US. An individual attracts tax liabilities only when he/she disposes of his/her assets and makes a capital gain as a result.

2. Utilise Tax Deductions

The IRS offers several exemptions that can significantly lower your tax bill, therefore it’s advisable to utilise your tax deductions like tax-free capital gain allowance, and the gifting allowance to reduce your taxable base.

3. Actively Track Your Losses and Harvest Them

You can close some of your dud positions or even potentially good ones at a loss and use them as an anchor to bring down your net capital gains and hence save thousands of dollars in capital gains taxes. The wash-sale rule for tax-loss harvesting is only applicable for securities at the moment and therefore, you can sell your assets to create a fictitious loss and then buy the same assets right after.

4. Gift and Donate Crypto

Gifting and donating crypto are considered tax deductibles by the IRS and can be used to bring down your tax bill, however, make sure the total amount of crypto gifted should not exceed $17,000 and the donations made are towards a registered charity and isn’t directly or indirectly linked to you in any way.

5. Invest in IRAs and OZFs

Invest in tax-advantaged investment funds to compound your returns and plan for the future. Alternatively, contribute to an Opportunity Zone Fund (OZF) to support public good initiatives while potentially benefiting financially.

Reporting Requirements, Compliances and Deadlines

Typically, in the US, you must report your cryptocurrency taxes by April 15th, which coincides with the deadline for filing individual income tax returns. However, if April 15th falls on a weekend or holiday, you may be granted an extension to the next business day.

How to File Crypto Taxes in the US

You can file your crypto taxes online or offline. If you decide to go the traditional way and use paper forms to file your taxes with the IRS, follow these steps to make sure everything goes smoothly:

1. First download Form 8949 and use it to report all your crypto disposals within a tax year.
2. Use Schedule D on Form 8949 to report all your capital gains and losses
3. If you receive crypto income from sources such as airdrops, forks, liquidity pools, or bonuses, you'll need to fill out Schedule 1. However, if you happen to be self-employed or operate a crypto-based business and earn crypto income, you should utilise Schedule C instead.
4. Once all of this is done, complete your tax return using Form 1040 and add all other tax forms with it before you file it with the IRS.

If you choose to go the modern route, there are several ways to file taxes online:

• You can use an online crypto tax platform like Kryptos that can guide you through the process step-by-step, help you find deductions and credits, and e-file your tax return directly with the IRS.

• If you meet certain income requirements, you can use the IRS Free File program to file your taxes online for free. The program partners with various tax preparation companies to offer free filing options to eligible taxpayers.

• Many tax professionals offer online tax filing services through their websites. These services typically involve uploading your tax documents to a secure portal and allowing the tax professional to prepare and file your return on your behalf.

What Crypto Records Will the IRS Want?

The IRS requires taxpayers to maintain adequate records to support the positions taken on their tax returns. To meet this requirement, it is essential to keep records of all crypto transactions, including

• The market value of your assets on the day of acquisition
• The market value of your assets on the day of disposal
• A detailed record of all your gains and losses
• Date and time of your transactions
• Receipt of all sales and purchases
• Record all transfers made between your personal and external wallets

How to File Crypto Taxes Using Kryptos?

Now that you’re aware of how your crypto transactions are taxed and what forms you need to fill out to complete your tax report, here’s a step-wise breakdown of how Kryptos can make this task easier for you:

1. Visit Kryptos and sign up using your email or Google/Apple Account
2. Choose your country, currency, time zone, and accounting method
3. Import all your transactions from wallets and crypto exchanges
4. Choose your preferred report and click on the generate report option on the left side of your screen and let Kryptos do all the accounting.
5. Once your Tax report is ready, you can download it in PDF format.

If you still need clarification regarding the integrations or generating your tax reports, you refer to our video guide here.

Resources and Support

Tax Authority- IRS

Notice 2014-21

Revenue Ruling 2023-14

IRS 60/40 rule

Frequently Answered Questions(FAQs)

1. Do you pay tax on crypto in the US?

Yes, in the United States, cryptocurrency is treated as property for tax purposes, which means that any gains or losses from buying, selling, or trading cryptocurrency are subject to capital gains tax. The tax rate depends on various factors, such as how long the cryptocurrency was held and the individual's income tax bracket. Additionally, cryptocurrency transactions may trigger other tax requirements, such as reporting requirements for foreign accounts. It's always best to consult with a tax professional or accountant to understand your specific tax obligations related to cryptocurrency.

2. Is cryptocurrency legal in the US?

Yes, cryptocurrency is legal in the United States. Although the government has been engaged in efforts to establish cryptocurrency regulations, there are no federal statutes forbidding individuals from engaging in the purchase, sale, or retention of cryptocurrencies. However, it's important to note that the use of cryptocurrency for illegal activities, such as money laundering or financing terrorism, is illegal and can lead to criminal charges.

3. Do you pay tax when transferring crypto in the US?

Transferring cryptocurrency from one wallet to another wallet or from one exchange to another exchange is generally not a taxable event in the United States. This means that you will not owe taxes on the transfer itself. However, you may be subject to taxes on the cryptocurrency if you sell or exchange it for another cryptocurrency or fiat currency.

4. What happens when you don’t report crypto in your tax report?

Failure to report cryptocurrency on your tax return can result in penalties and interest charges from the Internal Revenue Service (IRS). The penalties for not reporting cryptocurrency can vary depending on the specific circumstances of the situation but they can include:

• If you fail to file your tax return on time, the IRS may impose a penalty of 5% of the unpaid tax amount per month, up to a maximum of 25% of the unpaid tax.

• If the IRS determines that you understated your tax liability due to negligence or disregard of tax rules, they may impose a penalty of 20% of the understated tax liability.

• In case of intentional tax evasion or fraud, you could face criminal penalties, including fines and imprisonment.

All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!