Are you looking for a simple guide on how cryptocurrency (crypto) and digital assets are taxed in the United States? You’re in the right spot. Here are the FAQs we’ll answer in this article:
- How is crypto treated for U.S. income tax?
- When do I have a taxable event?
- What are common events that are generally nontaxable?
- What are the five common events that are generally taxable? And, within those events:
- What is the applicable tax rate? (Hint: it depends)
- Are there any additional surtax considerations? (Hint: most likely)
- How do I report my taxable events? (Hint: it depends)
The general flow of determining your U.S. federal tax impact should look something like this:
- Do I have a taxable event?
- What is the character of my taxable event?
- What is the applicable tax rate?
- Are there any additional surtax considerations?
- How do I report my taxable event(s)?
How is crypto treated for U.S. income tax?
“Virtual currency,” aka digital assets or cryptocurrency (crypto), is considered “property” according to the IRS. The character of the income, gain, or loss is typically determined by how the taxpayer intends to use the digital asset. You can make a similar correlation between the treatment of security (stock) transactions and virtual currency transactions, as security transactions fall under property treatment for tax purposes as well. However, there are some rules that apply to stock transactions that don’t apply to virtual currency.
Read more about the taxation of digital assets in this article.
When do I have a taxable event?
In general, if a taxpayer sells or exchanges digital assets, a taxable event has occurred, and the character of the transaction is either capital or ordinary in nature. However, there also are nontaxable events.
What are common events that are generally nontaxable?
- Purchasing and holding digital assets
- Transferring digital assets from one wallet to another (both wallets must be owned by the same party)
- Gifting digital assets is not a taxable event to the extent the gift is under the annual exclusion ($17,000 for an individual in 2023)
- Donating crypto to a charitable organization (although you may be able to claim this as a tax deduction on your tax return). Learn more about the tax implications of donating crypto here
The above events can generally be carried out without reporting income, gain, or loss.
What are common events that are generally taxable?
- Converting digital assets to fiat currency, e.g., U.S. dollars
- Converting a digital asset to another digital asset
- Purchasing goods or services with digital assets
- Receiving digital assets for compensation, a fork, or airdrop
- Receiving mining, staking, or other decentralized finance (DeFi) rewards
Keep reading for a deeper dive into each of the above taxable events.
1. Converting Digital Assets to Fiat
Character
In most circumstances, this type of transaction results in a capital gain or loss. This is the most common event related to digital assets, and a simple formula can be used to determine a taxpayer’s gain or loss. The formula is as follows:
Proceeds – Cost Basis = Gain/Loss
Proceeds: Fair market value received less any transaction/gas fees
Cost Basis: Purchase price plus any acquisition costs, i.e., transaction/gas fees
What is the applicable tax rate?
If the digital asset has been held for more than one year, it is treated as long-term. Otherwise, it is treated as short-term. In general, long-term capital gains can be taxed at more advantageous rates as shown in the table below.
2023 Capital Gains Tax Brackets
| For Unmarried Individuals, Taxable Income Over | For Married Individuals Filing Joint Returns, Taxable Income Over | For Heads of Households, Taxable Income Over | |
|---|---|---|---|
| 0% | $0 | $0 | $0 |
| 15% | $44,625 | $89,250 | $59,750 |
| 20% | $492,300 | $553,850 | $523,050 |
Are there any additional surtax considerations?
In effect since 2013, the Net Investment Income Tax is an additional 3.8% tax that applies to net investment income (such as capital gains) if the taxpayer’s modified adjusted gross income (MAGI) exceeds certain thresholds such as $200,000 for single filers and $250,000 for married filing jointly.
NFTs may be considered collectibles and subject to higher tax rates. For more info on this topic, see this FORsights™ article.
How do I report my taxable event?
Details of these gains or losses are generally reported on Form 8949 and Schedule D of a taxpayer’s individual tax return. If the net investment income tax applies, it is reported on Form 8960.
2. Converting a Digital Asset to Another Digital Asset
Character
These transactions are treated the same as converting a digital asset to fiat as discussed above. The basis in your digital asset is the amount you spent to acquire the digital asset plus transaction, commission, gas fees, and other acquisition costs paid. The proceeds in your gain or loss calculation are equal to the fair market value of the digital asset received in the exchange less any transaction/commission/gas fees.
It is important to track the fair market value of the new digital asset to be able to calculate the gain or loss on the next sale or exchange. There are crypto tax software products available that can help streamline this process so that you don’t have to keep track of these transactions manually.
The same general rules for the applicable tax rate, additional surtax considerations, and how to report the taxable event that were outlined in “Converting Digital Assets to Fiat” also apply to “Converting a Digital Asset to Another Digital Asset.”
3. Purchasing Goods & Services With Digital Assets
Character
If there is an increase or decrease in the fair market value from the time of acquisition of the digital asset to the time of payment of the digital asset for goods or services, the paying taxpayer may recognize a capital gain or loss based on the increase or decrease of the fair market value of the digital asset used for payment.
The same general rules for the applicable tax rate, additional surtax considerations, and how to report the taxable event that were outlined in “Converting Digital Assets to Fiat” also apply to “Purchasing Goods & Services with Digital Assets.”
4. Receiving Digital Assets for Compensation, a Fork, or Airdrop
Character
Compensation – When a taxpayer receives digital assets for compensation, the fair market value at the time of receipt is generally considered ordinary income. Receiving digital assets in exchange for a good or service also may constitute ordinary income if the activity rises to the level of a trade or business.
Fork – When a hard fork occurs and you are deemed to have constructive receipt of the new forked token, report the fair market value as ordinary income at the point in time when you have dominion and control in accordance with IRS Revenue Ruling 2019-24. In cases where a token is held on a blockchain that performs a protocol upgrade such as proof-of-work to proof-of-stake, the IRS has provided non-authoritative guidance in CCA 202316008 suggesting this is a nontaxable event. One example of this type of protocol upgrade is the ETH Merge in September 2022.
Airdrop – Airdrops are distributions of cryptocurrency coins, typically with the intention of promoting the use of the airdropped coin. A conservative approach is to treat the fair market value at the time of receipt of a digital asset received via airdrop as ordinary income.
What is the applicable tax rate?
Ordinary income tax rates are tiered based on income, similar to capital gains.
| For Unmarried Individuals | For Married Individuals Filing Joint Returns | For Heads of Households | |
|---|---|---|---|
| 10% | $0 – $11,000 | $0 – 22,000 | $0 – $15,700 |
| 12% | $11,001 – $44,725 | $22,001 – $89,450 | $15,701 – $59,850 |
| 22% | $44,726 – $95,375 | $89,451 – $190,750 | $59,851 – $95,350 |
| 24% | $95,376 – $182,100 | $190,751 – $364,200 | $95,351 – $182,100 |
| 32% | $182,101 – $231,250 | $364,201 – $462,500 | $182,101 – $231,250 |
| 35% | $231,251 – $578,125 | $462,501 – $693,750 | $231,251 – $578,100 |
| 37% | $578,126+ | $693,751+ | $578,101+ |
Are there any additional surtax considerations?
If you are receiving compensation as an employee, your employer should be withholding both the employee and employer’s payroll tax obligation (such as FICA and FUTA) from your payment. These payments should also be reflected on your Form W-2. For 2023, the employee portion of payroll tax is 7.65% of the first $160,200 of wages, and 1.45% for wages beyond that.
High income earners exceeding certain thresholds may be subject to the Additional Medicare Tax which is generally equal the amount of Medicare wages and net self-employment earnings above the threshold times 0.9%. As of the time of this writing, the threshold is $200,000 for single taxpayers and $250,000 for married filing joint taxpayers.
If you are receiving compensation as an independent contractor, you are generally subject to self-employment tax on your net earnings. For 2023, the self-employment tax rate is 15.3% of the first $160,200 of net self-employment earnings and 2.9% for net self-employment earnings beyond that.
How do I report my taxable event?
Compensation as an employee is typically reported on Page 1 Line 1. Compensation as an independent contractor is typically reported on Schedule C. File Schedule SE to determine your self-employment tax.
Income from a hard fork or airdrop is generally reported on Schedule 1 Line 8 if not connected with a trade or business. If connected to a trade or business, it is typically reported on Schedule C. File Schedule SE to determine your self-employment tax.
5. Receiving Mining, Staking, or Other DeFi Rewards
Character
Mining – Mining rewards are generally taxed as ordinary income and determined as income at the fair market value at the time of receipt. Mining cryptocurrency, according to IRS Notice 2014-21, may cause a rise in business income. If the activity rises to the level of a trade or business, you can deduct necessary and ordinary business expenses related to mining the cryptocurrency.
Staking – The IRS released Revenue Ruling 2023-14 to clarify the timing of when to include staking rewards in gross income. For cash method taxpayers, the general rule is to include the staking rewards in gross income at the time you have dominion and control over the staking rewards. To learn more, please reference this article.
DeFi Rewards – Due to a lack of guidance from the IRS, a conservative approach would be to treat these rewards as ordinary income and report the fair market value at the time of receipt as the amount includable in income.
It is important to track the fair market value upon receipt of your digital assets to be able to calculate the gain or loss on the next sale or exchange. The amount shown as income from mining, staking, and DeFi rewards becomes the basis for the next sale or exchange. There are crypto tax software products available that can help streamline this process so you don’t have to keep track of these transactions manually.
What is the applicable tax rate?
Ordinary income tax rates are tiered based on income, similar to capital gains. Refer to the table above.
Are there any additional surtax considerations?
If you are carrying on a trade or business and not taxed as a corporation, you are generally subject to self-employment tax on your net earnings .For 2022, the self-employment tax rate is 15.3% for the first $147,000 of net self-employment earnings and 2.9% for net self-employment earnings beyond that.
High income earners exceeding certain thresholds may be subject to the Additional Medicare Tax which is generally equal the amount of Medicare wages and net self-employment earnings above the threshold times 0.9%. As of the time of this writing, the threshold is $200,000 for single taxpayers and $250,000 for married filing joint taxpayers.
In effect since 2013, the Net Investment Income Tax is an additional 3.8% tax that applies to net investment income (such as capital gains) if the taxpayer’s MAGI exceeds certain thresholds such as $200,000 for single filers and $250,000 for married filing jointly.
How do I report my taxable event?
Mining income connected with a trade or business is typically reported on Schedule C. File Schedule SE to determine your self-employment tax.
Income from staking, DeFi rewards, and mining income is generally reported on Schedule 1 Line 8 if not connected with a trade or business. If connected to a trade or business, it is typically reported on Schedule C. File Schedule SE to determine your self-employment tax.
Conclusion
This guide does not cover every scenario, and transacting with digital assets can create additional tax complexities. If your situation does not fit neatly into the examples provided in this guide or if you’re still confused, you may benefit from working with a professional. Due to the lack of authoritative guidance from the IRS, there are many unknowns for reporting digital asset transactions, and your unique situation may benefit from working with a professional. At Forvis Mazars, we have a team of dedicated individuals with crypto and digital asset experience.
Contact a professional at Forvis Mazars or submit the Contact Us form below if you have questions.