How Are Cryptocurrencies and NFTs Taxed?
Worried about your taxes because you traded crypto or NFTs last year or just don't know how cryptos and NFTs are taxed in the U.S.? Even though you trade crypto similarly to securities on the stock market, some of the taxable implications differ. No decentralized application (dApps) like OpenSea and Uniswap prepares documentation for you like most stock trading platforms do. All transactions on these applications are recorded on the blockchain, so you’ll be able to see your transaction history with tools such as Etherscan. It is time-consuming to add these transactions to your tax return on your own, however, so you may want to use leading crypto-tax software like Ledgible to heavily streamline the process and save potentially many hours of your time.
Read more to calm your fears and figure out where you stand with the IRS.
How Is Income Taxed?
The U.S. government imposes taxes on money you earn, and it divides that income into two general categories. The first category, individual income — such as wages for a job — is taxed at different rates than the second, capital gains, which are taxes you pay when you make money from selling property like a house, stocks, cryptocurrency or non-fungible tokens (NFTs).
Taxes are only imposed when the taxpayer actually earns money (also called realizing a gain). For example, you earned your paycheck working the last two weeks of December 2022, but because you didn’t actually get that money until January 2023, you don’t pay tax on it until you do your 2023 taxes.
In the same manner, as an individual, you don’t pay capital gains taxes on stock market or crypto gains until you actually sell them and realize (lock in) the gain. A common concern is that you might owe a lot of tax in a year when your ending portfolio balance is much higher than it was when the year started. Unless you are a mark-to-market trader, a high last-day balance doesn’t mean you owe tax; for example, if on Dec. 31, 2022, the balance on your stock market or crypto portfolio was higher than it was on Jan. 1, 2022, you don’t pay taxes on that balance increase — you only owe taxes on the profit you make when you actually sell stocks, crypto or NFTs.
How Are Crypto Assets Taxed?
In 2022, cryptocurrency and NFTs are classified by the Internal Revenue Service (IRS) as property that is taxed at capital gains rates.
Capital gains tax brackets are lower than income tax brackets and are split into 2 categories based on time horizon. Assets held over a year — long-term gains — are taxed at a lower, more-advantageous capital gains rate. These rates (0%, 15%, or 20% at the federal level) vary based on your income that year. You realize a taxable capital gain when you sell an asset for more than you paid for it.
Assets held less than a year that you profit from — short-term gains — are taxed at your ordinary income rate, which is usually a higher, less-favorable rate.
You realize a capital loss when you sell an asset for less than you paid for it. Losses can work to your advantage, though. You can use losses to offset other capital gains (including from non-crypto assets, like stocks), potentially reducing your overall tax bill.
If you have more losses than gains or have no gains at all, the maximum amount of losses that you can declare each year on your personal tax return to offset other income is $3,000. Any remainder carries over to subsequent years until the full amount of the loss is applied.
What Do the U.S. Tax Codes Say About Crypto Taxation?
In simplified terms, IRS Notice 2014-21 says that crypto:
Is property, not money
Causes a taxable gain when you sell, swap or convert it for a profit
Is considered U.S. and not foreign
Must be quantified in U.S. dollars on the date you got it
Is classed as income rather than as an asset when it is created by mining, making NFTs, staking or yield farming
How is Crypto Taxed in the U.S.?
Crypto is taxed like any other financial asset class in the U.S. The U.S. uses a progressive tax system, which means that specific tax rates apply to each part of your taxable income rather than to the entire amount (for 2022, it’s 10%, 12%, 22%, 24%, 32%, 35% and 37%). For example, for 2022 taxes, if you are a single taxpayer who has $600,000 in income, you pay 10% on the first $10,275 you earned, 12% on the next $31,500 earned, 22% on t