U.S. crypto tax guide 2024: Latest IRS updates

Attention all cryptocurrency dabblers, non-fungible token (NFT) buyers, airdrop farmers and beyond.

The Internal Revenue Service (IRS) tax season is officially open in the United States.

By April 15, 2024, any U.S. taxpayer who has traded, received or profited from digital assets over the previous tax year — Jan. 1 to Dec. 31, 2023 — is legally required to report his/her transactions to the IRS.

All activity must be reported and no minimum threshold applies. (e.g.,even if you have transacted as little as $10 worth of crypto or NFTs).

Late filings, failure to report transactions and pay taxes owed and crypto tax evasion all carry potential penalties ranging from significant fines to jail sentences.

To make crypto tax reporting less stressful, we've pulled together some important information you'll need to know this year. 

Note that while this guide includes some helpful crypto tax tips, it is neither intended to be comprehensive nor constitute tax advice (which should be sought from a licensed tax professional).

There are several crypto activities that are tax exempt. Some of these activities include:

💳  Purchasing cryptocurrency (including NFTs) using U.S. dollars.

🔁  Transferring digital assets (including NFTs) from one of your crypto wallets to another crypto wallet you own.

🖨️  Minting NFTs (creating them, but not selling them).

🎁  Gifting cryptocurrency (subject to the per person gift limit: $17,000 for gifts made during the 2023 tax year and $18,000 for the 2024 tax year).

🏦  Depositing cryptocurrency as collateral for decentralized finance (DeFi) loans.

💸  Donating cryptocurrency to charitable causes (subject to qualification noted below).

🔒  Locking up digital assets in a staking* smart contract (although earning rewards on those assets generally is taxable).

Charitable crypto donations can be tax deductible. However, an IRS memorandum mandates anyone claiming a tax deduction above $5,000 must obtain a qualified appraisal first.

Generally speaking, the most common crypto-related activities are subject to capital gains tax treatment.

However, there are some activities that are treated as ordinary income.

Income tax explained

There are two primary ways that crypto activities are taxed:

1. Profits made when disposing of or selling cryptocurrencies, taxed as capital gains. These profits can be taxed at ordinary income tax rates or lower (long-term) capital gains tax rates ( more on this below).
2. Profits or rewards earned as a payment for conducting certain crypto-related activities, such as staking,* which generally are treated as ordinary income and taxed at ordinary income tax rates.

You can find the latest IRS income tax brackets here.

Ordinary Income tax activities

💰  Any wages paid in cryptocurrency for completing work

📅  Interest earned from staking* and DeFi lending platforms such as MakerDao (MKR), Curve (CRV), or Aave (AAVE)

🏆  Block rewards earned from crypto mining

🐜  Digital assets earned from bug bounties

🕹️  Crypto received from play-to-earn games such as Axie Infinity (AXS), Gala Games (GALA), and Star Atlas (ATLAS).

🥇  Rewards earned from watching ads on crypto-based web browsers such as Brave.

💸  Creator earnings from NFT collections such as Bored Ape Yacht Club, CrypToadz and Doodles.

🌎  Any cryptocurrency income earned from metaverse land or properties such as Decentraland (MANA) or The Sandbox (SAND)

🌊  Interest earned from DeFi liquidity pool activities on platforms such as Uniswap (UNI), Balancer (BAL), or Compound (COMP)

🪂  Tokens received from airdrops such as Blur (BLUR), Jito (JTO) or Flare (FLR)

👫  Cryptocurrency earned from referral bonuses

🍴 Cryptocurrency that comes from hard forks, like Bitcoin Cash (BCH)

🧑‍🏫  Any tokens received from Learn and Earn educational programs 

Capital gains tax explained

Under this tax treatment, you owe taxes only if you’ve sold or otherwise “disposed of” a digital asset for a profit.

In other words, you’ll likely owe capital gains tax for each time you’ve traded one crypto asset for another, or cashed out your crypto into fiat (USD, GBP, JPY) for a profit during the tax year.

There are two different capital gains tax rates for digital assets:

• Short-term capital gains: taxed at the ordinary income rates
• Long-term capital gains: taxed at the more favorable rates

Which rate applies depends on how long you’ve held each investment.

Gains on the disposal of any digital asset investment held for one year or less are subject to short-term capital gains tax. Gains on the disposal of those held for over one year are subject to long-term capital gains tax.

Long-term capital gains are taxed at a lower rate, encouraging crypto investors to HODL.

You can check the latest IRS long-term capital gains tax brackets here.

Capital gains tax activities

🤝🏽  Trading any digital asset for another (this includes stablecoins and NFTs)

🏡  Selling digital assets for fiat currency (including metaverse items or property)

🧸  Selling or using digital assets to pay for goods or services

During 2023, the IRS has published guidance regarding the treatment of cryptocurrency staking rewards. 

In Revenue Ruling 2023-14, the IRS provided guidance that staking rewards must be included in gross income for the taxable year in which the taxpayer acquires “dominion and control” of the awarded cryptocurrency.

The ruling further clarifies that this treatment applies whether the taxpayer stakes directly to a proof-of-stake blockchain or receives additional tokens through staking on an exchange/through delegation. 

The amount of taxable income is based on the reward’s fair market value on the date the taxpayer gains dominion and control.  

Please consult your tax advisor for further guidance.

US clients that received over $600 in staking rewards in 2023 will receive an IRS Form 1099-MISC from Kraken. Kraken will also send this form to the IRS.

This form helps in calculating the reward amount includible on your 2023 U.S. income tax return.

You can learn more about IRS Form 1099-MISC here and the Kraken Tax Forms FAQ here.

Note that at this time, Kraken does not provide a Form 1099 to report gains, losses, or sales as that is not a regulatory requirement (however, there currently are Proposed Regulations that would require this in the future).*

Step 1: Calculating the the cost basis

To find out how much tax you owe, you’ll need to calculate the “cost basis” for each crypto transaction you made over the previous tax year that resulted in a profit.

The cost basis equals the price you paid for the asset increased for any fees paid (such as exchange fees, gas fees, etc.) to acquire the digital asset.

Similarly, when you sell cryptocurrency, you can deduct the selling fees from your proceeds. This deduction is beneficial because it reduces your tax liability (which results in lower gains or higher losses).

Step 2: Determining which digital asset was sold

For investors that only use one platform and who complete a handful of digital asset activities per year, calculating gains and losses is a relatively straight-forward process. But, for people who are highly active in the crypto space and engage with multiple platforms and assets, it can be significantly harder.

When you sell digital assets, you are required to identify which “tax lot” was sold. For example, let's say you purchased varying amounts of SOL at different prices through the year. At the end of the year, you decided to sell 2 Solana (SOL) tokens. You will need to determine which specific tokens you had sold from your SOL holdings.

Assuming such tokens were purchased for varying amounts, this will impact your gain or loss from the sale.

The IRS accepts several methods for determining which “tax lot” was sold, including:

• First In First Out (FIFO): The first asset you bought is the first asset you sell.

• Last In First Out (LIFO): The last asset you bought is the first asset you sell.

• Highest In First Out (HIFO): The most expensive asset you bought is sold first.

• Specific Identification (Spec ID): Specific Identification (Spec ID): pick the asset you sold, provided you can identify it with records.

Note: Methods other than FIFO are effectively just variations on Spec ID. 

If you select Spec ID, the IRS requires you to identify the date and time of acquisition, the fair market value at the time of acquisition, the date and time of disposition, and the fair market value at disposition (along with what was received as consideration in the disposition).

This provides you with flexibility in determining your gain or loss, but can also be complicated if you buy and sell a lot of crypto. 

For example, in the above scenario using SOL, if you sell only 1.5 SOL, then you would need to identify from which lot you bought the SOL, and then break that lot up into the part that was sold and the part that’s retained. 

There are software providers available that can help you to make these computations and lot selection processes simpler and will track your crypto lots, gains, and losses for your tax return.

Step 3: Calculating capital gains and losses

Your capital gain or loss is determined by subtracting your cost basis (adjusted for any fees) from the selling price (adjusted for any fees).

In addition, if you had multiple sales transactions, you will usually “net” capital gains and losses; i.e. you would apply a long-term capital loss to a long-term capital gain, and a short-term capital loss to a short-term capital gain. If there are excess losses in one category, you can net these against gains of either type.

What this means is, the IRS allows people to deduct their losses from their overall capital gains tax liability.

For example, let’s imagine Alice had made an overall long-term capital gain of $10,000 after disposing of her crypto assets that she had held for more than one year.

In the same tax year, Alice made an overall short-term capital loss of $1,000.

When reporting her transactions to the IRS, Alice would be able to deduct her short-term capital loss of $1,000 from her overall capital gain of $10,000. This would reduce her capital gains tax liability from $10,000 to $9,000.

Once you’ve calculated how much tax you owe, you’ll need to complete one or more of the following forms.

Declare your crypto activity 

Page 1 of Form 1040 requires you to affirmatively state whether, at any time during 2023, you: 

(a) Received (as a reward, award, or payment for property or services); or 

(b) Sold, exchanged, or otherwise disposed of a digital asset (or a financial interest in a digital asset).

For example, check “Yes” if at any time during 2023 you:

• Received digital assets as payment for property or services provided
• Received digital assets as a result of a reward or award
• Received new digital assets as a result of mining, staking,* and similar activities
• Received digital assets as a result of a hard fork
• Disposed of digital assets in exchange for property or services
• Disposed of a digital asset in exchange or trade for another digital asset
• Sold a digital asset
• Otherwise disposed of any other financial interest in a digital asset

The following actions or transactions in 2023, alone, generally don’t require you to check “Yes”:

• Holding a digital asset in a crypto wallet or account
• Transferring a digital asset from one wallet or account you own or control to another wallet or account that you own or control
• Purchasing digital assets using U.S. or other real currency, including through the use of electronic platforms such as PayPal and Venmo

Capital gains tax forms

For capital gains tax, you’ll need to complete Form 8949. If you’ve reported losses, you may be able to deduct the amount from your capital gains tax liability. 

To do this, you will need to complete Form 1040, Schedule D.

Income tax forms

For crypto-based income taxes, most people will be required to complete Form 1040, Schedule 1 or Schedule C.

However, depending on your status, you may be required to complete a different type of 1040 form.

• Form 1040–SS: Applicable to residents in Guam, American Samoa, the U.S. Virgin Islands (USVI), the Commonwealth of the Northern Mariana Islands (CNMI), and Puerto Rico
• Form 1040-NR: Applicable to people considered “nonresident aliens”, e.g., engaging in certain activities in the U.S. or receiving certain income from the U.S.

To streamline the crypto tax reporting process, several third-party service providers offer tailored software solutions.

These services generally estimate your crypto taxes using exported trade order data from supported crypto exchanges and other platforms that you might use.

Forbes Advisor and Blockpit list the following crypto tax companies as leading service providers in 2024:

1. CoinTracker
2. Koinly
3. CoinLedger

In order to simplify your reporting, Kraken provides you with the ability to download your account history for all of your trades and other account history on your Kraken account.

Certain third-party service providers may suggest that they can more readily calculate your taxable income if you connect your Kraken account to their site via an API (Application Programming Interface). 

We understand that many of our clients use these services particularly when they have accounts at multiple exchanges or wallets. To keep your account and information safe, it’s advisable to the follow important security best practices:

1. Review the third-party service provider and understand what security they have in place to keep your information secure. For example, is 2FA available, have there been previous breaches?
2. Limit the information shared via an API to the following selections: query, query closed orders and trades, and query ledger entries.
3. Review the output and verify the accuracy and completeness.
4. Delete the API key from your Kraken Account once you receive the tax reporting from the third-party service provider. This will limit any further access to your account.

For U.S. taxpayers seeking to reduce their crypto tax liability, there are several popular options available.

Please seek your own tax advice as the below options are just examples and each individual may have different options that may work better for their own unique tax positions.

1. Charitable donations: For taxpayers that itemize their deductions, donating crypto to a recognized and qualified charity may lower your income tax bill. Donations above $5,000 must receive an appraisal before you can apply for the tax deduction. After completing these steps, a person may receive a deduction based on the fair market value of the donated crypto assets (generally subject to a 30% limitation based on adjusted gross income).
2. HODL: An easy way to reduce your capital gains tax liability is to hold your crypto assets for longer than one year. Depending on what income tax bracket you are in, this can have a significant impact on lowering the amount of tax you’ll pay on disposed digital assets.
3. Diamond hands: If you don't sell your crypto, you don't incur a taxable event.

Now that you understand how your digital asset investments are taxed, why not continue your crypto journey by checking out our Learn Center.

Kraken does not provide tax advice. We strongly advise you to contact a personal tax advisor for further information about your personal tax circumstances.

* In February 2023, Kraken ended staking services for U.S. clients, which you can learn more about here. However, there may be tax implications for any staking rewards earned in 2023 prior to this date.