Stay Updated with Latest IRS Changes: U.S. Crypto Tax Guide 2024

Key Takeaways

• Stay Updated: The IRS updates for 2024 demand attention from anyone involved in cryptocurrency, NFTs, or airdrops. Reporting your digital asset transactions from January 1 to December 31, 2023, is crucial by April 15, 2024.
• Tax-Free Activities: Some crypto actions won’t increase your tax burden.
• Tax Insights: Most crypto actions in the U.S. are taxed as capital gains, with exceptions for certain activities that are treated as regular income.
• Kraken and Taxation: Kraken users need to be aware of IRS guidelines on staking rewards. These rewards are taxable income, and Kraken provides forms for reporting them.
• Reporting Process: Three simple steps guide the calculation of taxable income from crypto: determining cost basis, identifying sold assets, and calculating gains/losses.
• Forms and Tax Filing: Different forms are used for capital gains tax and income tax related to crypto activities.
• Software Assistance: Third-party software can simplify crypto tax reporting, with recommended providers like CoinTracker, Koinly, and CoinLedger.
• Tax-Saving Strategies: Charitable donations, holding assets for over a year to benefit from lower capital gains tax rates, and refraining from selling crypto are effective ways to reduce tax liabilities.

No matter how small the transactions, everything must be reported – even if it’s just $10 worth of crypto or NFTs. Missing the deadline, not reporting your transactions, or avoiding taxes on crypto can lead to serious consequences, like hefty fines or even jail time.

To help ease the process, we’ve gathered some key information you’ll need this year. Remember, while this guide offers useful tips, it’s not a substitute for professional tax advice. For that, consult a licensed tax professional.

Tax-Free Crypto Activities: What You Need to Know

• Certain crypto actions won’t land you in the taxman’s sights. Here’s what’s exempt:
•  Buying crypto (including NFTs) with U.S. dollars.
• Moving digital assets (like NFTs) between your crypto wallets.
• Creating NFTs (without selling them).
• Giving crypto gifts (within the yearly limit: $17,000 for 2023, $18,000 for 2024).
• Using crypto as collateral for DeFi loans.
• Donating crypto to charity (conditions apply).
• Staking digital assets in a smart contract (though rewards are typically taxable).

Remember, if you’re claiming a tax deduction for charitable crypto donations over $5,000, get a qualified appraisal first as per IRS rules.

Understanding Cryptocurrency and NFT Taxes in the U.S.

In America, most crypto actions are taxed as capital gains. But there are exceptions.

Income Tax Breakdown:

• Capital gains tax applies to profits from selling crypto. Rates can be standard or lower, depending on how long you held the assets.
• Certain crypto activities, like staking, are treated as regular income and taxed accordingly.

Activities Subject to Ordinary Income Tax:

• Getting paid in crypto for work.
• Earning interest from staking or DeFi lending.
• Mining rewards.
• Bug bounty earnings.
• Crypto rewards from gaming.
• Creator earnings from NFTs.
• Income from virtual land in the metaverse.
• Interest from DeFi liquidity pools.
• Airdrop tokens.
• Referral bonuses.
• Cryptocurrency from hard forks.
• Tokens from educational programs.

Understanding Capital Gains Tax

Here’s how it works:

• You owe taxes if you sell or trade a digital asset for a profit.
• This applies when swapping one crypto for another or cashing out to fiat.
• There are two rates:
  
  • Short-term gains: taxed like regular income.
  • Long-term gains: taxed at lower rates.
    
    • The rate depends on how long you held the investment.
    • Hold for over a year? You get a lower long-term rate.
    • This incentivizes long-term holding.
    • Check the latest IRS brackets for long-term gains.
    • Activities subject to capital gains tax include:
• Trading digital assets.
• Selling for fiat.
• Using crypto to buy goods/services.

Taxation of Staking Rewards on Kraken

Here’s what you need to know:

• IRS guidance in Revenue Ruling 2023-14 states that staking rewards are taxable income.
• This applies when you gain control of the rewarded cryptocurrency.
• It doesn’t matter if you stake directly or through an exchange like Kraken.
• The taxable amount is based on the reward’s value when you gain control.
• For detailed advice, consult a tax advisor.
• If you received over $600 in staking rewards from Kraken in 2023, you’ll get an IRS Form 1099-MISC.
• Kraken will also send this form to the IRS.
• The form helps calculate the taxable amount for your U.S. tax return.
• You can find more about IRS Form 1099-MISC and Kraken’s Tax Forms FAQ for further clarification.
• Kraken doesn’t currently provide Form 1099 for reporting gains, losses, or sales, but this may change in the future due to Proposed Regulations.

Calculating Your Crypto Taxable Income: 3 Simple Steps

Follow these steps:

Step 1: Determine the cost basis

• For each profitable crypto transaction in the past tax year, calculate the “cost basis.”
• This includes the purchase price of the asset plus any associated fees (like exchange or gas fees).
• When selling crypto, subtract selling fees from your proceeds to reduce your tax liability.

Step 2: Identifying the Sold Digital Asset

Here’s what to do:

• If you’re a casual investor with limited activity, calculating gains and losses is straightforward.
• But for active crypto users with multiple platforms and assets, it gets complex.
• When you sell, you must specify which “tax lot” you’re selling.
• For instance, if you bought SOL tokens at different prices, you need to know which ones you sold.
• This affects your gain or loss.
• IRS allows various methods for identifying the sold lot:
  
  • FIFO: First bought, first sold.
  • LIFO: Last bought, first sold.
  • HIFO: Most expensive bought, sold first.
  • Spec ID: Choose the asset sold if you have records to identify it.
• Spec ID offers flexibility but can be intricate with many transactions.
• The software can simplify this process by tracking your lots, gains, and losses for tax returns.

Step 3: Calculating Capital Gains and Losses

Here’s how it works:

• Your capital gain or loss is found by subtracting the selling price (after fees) from the cost basis (including fees).
• If you have multiple sales, you’ll usually combine gains and losses.
• This means long-term gains offset long-term losses, and short-term gains offset short-term losses.
• Excess losses in one category can be used to offset gains in the other.
• IRS allows you to deduct losses from your overall capital gains tax.
• For example, if Alice had a $10,000 long-term gain and a $1,000 short-term loss in a year, she’d deduct the loss from the gain.
• So, her taxable gain would be reduced from $10,000 to $9,000.

Report Your Crypto Activities

• On Form 1040, Page 1, you need to confirm if, at any point in 2023, you:
• (a) Received digital assets for property or services, or
• (b) Sold, exchanged, or disposed of digital assets.
• For instance, say “Yes” if you:
• Received digital assets for services or property.
• Got digital assets as rewards or awards.
• Acquired new digital assets from mining, staking, or similar activities.
• Received digital assets from a hard fork.
• Traded digital assets for goods/services.
• Swapped one digital asset for another.
• Sold a digital asset.
• Disposed of any financial interest in a digital asset.
• These actions typically don’t require a “Yes” response:
• Holding digital assets in a wallet.
• Transferring digital assets between your wallets.
• Buying digital assets with real currency.

Forms for Capital Gains Tax

• To handle capital gains tax, you’ll use Form 8949. If you’ve faced losses, you might deduct them from your tax bill.
• You’ll also fill out Form 1040, Schedule D, to offset your gains with losses.
• Income Tax Forms
• For crypto-related income taxes, most people use Form 1040 along with either Schedule 1 or Schedule C.
• But depending on your situation, you might use a different 1040 form:
• Form 1040–SS: for residents in Guam, American Samoa, the US Virgin Islands, Northern Mariana Islands, and Puerto Rico.
• Form 1040-NR: for nonresident aliens, like those doing certain activities in the US or earning income from the US.

Tips for Crypto Tax Reporting

1. Here’s how to make reporting easier:
2. Use third-party software tailored for crypto taxes.
3. They analyze trade data from supported exchanges.
4. Forbes Advisor and Blockpit recommend these providers in 2024:
   a. CoinTracker
   b. Koinly
   c. CoinLedger
5. For Kraken users:
6. Download your account history for trades and other activities.
7. Some services may suggest linking your Kraken account via API for easier calculations.
8. Follow security best practices:
   a. Check the service’s security measures and history.
   b. Limit API access to essential functions.
   c. Double-check the report’s accuracy.
   d. Delete the API key once you’re done for added security.

Tips for Saving on Crypto Taxes

Here’s how to cut your tax bill:

Consider charitable donations: Giving crypto to charity can lower your income tax if you itemize deductions. Remember, donations over $5,000 need an appraisal.
HODL: Holding onto your crypto for over a year can reduce capital gains tax, especially if you’re in a higher income tax bracket.

Keep holding: Avoid selling your crypto to avoid taxable events altogether.