If you sold, traded, or earned interest on any digital assets in 2023, it’s likely you face tax reporting requirements on your 2023 tax return—and possibly a higher tax bill.
The good news is that after years of confusing gray areas in the tax law related to how digital assets should be taxed, there is more clarity after several recent IRS guidelines.
But certain aspects of the law continue to be muddy. And reporting requirements can be tough to meet, given that records of many digital trades aren’t required to be issued to taxpayers, leaving it up to individuals to determine their cost bases.
If your trades are only conducted through a crypto exchange like
Coinbase,
you should be able to download a record of your trades.
But if you trade out of a decentralized digital wallet such as Phantom or Ledger, as many taxpayers do, you have to keep your own records.
“While there is third-party software available, the more transactions you have, the more daunting it is to reconcile for tax purposes,” says Nathan Shubert, a partner at Eisner Advisory Group.
Here’s what to know, and what’s new, for 2023 returns:
Understand what’s taxable
The IRS asks taxpayers at the top of about a half a dozen forms to check a box if they have had any activity in 2023.
But there’s often confusion among taxpayers about whether their dealings with crypto have any tax consequence and should be reported, Shubert says.
If you simply purchased or held a digital asset in 2023, there are no tax ramifications and you don’t have to report that to the IRS.
You can also rest easy if you only transferred digital assets between wallets.
But if you sold any crypto asset for dollars, received digital interest, earned crypto as income or traded one digital asset for another—say, bitcoin for an NFT or for digital property in a virtual world—you must check the box at the top of your tax form and report any resulting gains or losses.
Big donations require an appraisal
Taxpayers claiming 2023 charitable deductions for any donated digital asset valued at $5,000 or more must have the value of the donation appraised.
In a memorandum last year, the IRS reaffirmed that this rule applies even for gifts of cryptocurrency like bitcoin or ethereum that trade on an exchange.
“Some mistakenly think cryptocurrency is similar to publicly traded assets, but you cannot rely on the value reported by a cryptocurrency exchange for your gifts because digital currencies are property, not securities,” says Pamela Dennett a partner at Eisner Advisory Group.
Staking rewards are considered income
Cryptocurrency rewards that result from a practice called staking should be reported as income, and are taxed at ordinary income-tax rates.
Staking crypto means to lock it up for a period. In exchange, you get crypto rewards.
Among cryptocurrencies that allow this are ethereum, solana, telos and cardano. Bitcoin does not.
Uncertainty over whether rewards are taxable was cleared up last year with an IRS ruling, after a taxpayer argued in district tax court in Tennessee that $3,800 in rewards should be taxable only upon selling them.
“The ruling clarifies that the fair market value of staking rewards received should be included in gross income when you gain dominion and control over the rewards,” Shubert says.
When you sell, any capital gains are taxable at a top long-term rate of 20%.
But there is still some uncertainty regarding staking, says Eric Weinapple, a tax director at Moss Adams. “The IRS still hasn’t addressed rewards with respect to whether they are considered active versus passive activities, and whether they are subject to self-employment tax or the net investment income tax,” Weinapple says.
Many NFTs are taxed as collectibles
A gray area for taxpayers who trade NFTs has been how their long-term capital gains should be taxed—at the top 20% capital gains rate for assets like stocks and cryptocurrency, or at a top 28% rate for collectibles such as jewelry, trading cards and fine art.
NFTs are digital proof of ownership in something else, either virtual or physical, anything from digital art to concert tickets.
Last year, the IRS finally issued a notice to clarify its stance on how NFTs should be taxed: it depends, because not all NFTs are alike.
If an NFT represents an asset that itself is a collectible, then the NFT should be deemed a collectible and would be subject to collectible capital-gains tax rates, according to the IRS notice.
If the NFT represents something that isn’t a collectible, then regular capital-gains rates apply.
The IRS clarifies crypto loss rules
There are a couple of ways taxpayers can claim a deduction for losses. For investments, including digital assets, if you sell and realize a loss it can be used to offset gains and up to $3,000 of income.
Any excess losses can be used to offset realized gains or income in future years.
An advantage for taxpayers trading digital assets is that there is no wash-sale rule.
For stocks and other securities, if you sell shares and want to use the losses to offset gains, the wash-sale rule prohibits you from buying the same security for 30 days before or after the sale.
Another way taxpayers can claim a loss is through section 165 of the tax code, which allows deductions if losses are abandoned or worthless, and not compensated by insurance.
After cryptocurrency values collapsed in 2022, some taxpayers sought to claim deductions for their losses under this rule. “But it seems very difficult now to take these losses,” Weinapple says.
The IRS recently clarified that section 165 doesn’t apply to crypto losses as long as the crypto still has any, even if vastly diminished, value.
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