In 2023 we saw the beginning of a cryptocurrency bounce back. Bitcoin and most other cryptos recovered significantly from the “crypto winter,” and diversifying savings with cryptocurrencies once again became a topic debated around the Thanksgiving turkey.
While there was a lot for long-term crypto investors to smile about, there’s still quite a bit of uncertainty regarding cryptocurrency; owning and transacting digital assets can create headaches. Especially at tax time.
Earlier this year, we partnered with leading CPAs to answer the crypto tax questions sent in by the public. We hope the answers below are helpful as you prepare your 2023 tax returns (due Monday, April 15, 2024). You might find the 2023 crypto tax Q & A helpful as well.
To learn more about the cryptocurrency tax pros that answered these questions, read their bios at the bottom of this article.
Note: Consult a qualified tax professional for advice specific to your situation – you can find one here. The purpose of this Q&A is to give you the background you need for a consultation with a professional advisors. Please do not construe the following as advice; consult a professional.
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Digital IRAs
“How are crypto assets held within a SEP IRA or ROTH IRA taxed, and what specific questions should I ask regarding their taxation?”
Crypto assets held in a ROTH or SEP IRA are not taxed. This is the same treatment as other assets in either a SEP IRA or ROTH IRA. In either case, your investments grow tax free. You will be taxed when you distribute assets out of a SEP IRA. Whereas, you can distribute assets from a ROTH IRA tax free, if you follow the requirements.
You should ask your tax professional when you can take out crypto tax free from a ROTH IRA. You should also ask if there have been any recent changes in the laws regarding IRAs and how would the changes affect you.
–Josh Cahan, Josh Cahan, CPA
“I have an IRA, do I need to file?”
An IRA is generally not required to submit a tax filing each year. While there are exceptions, such as Unrelated Business Income, that would necessitate a filing, trading crypto assets is not one of them.
–Jason M. Tyra, Jason M. Tyra, PLLC
Ownership
“Given that I mainly buy and hold cryptocurrencies, what strategies should I employ to ensure compliance with tax regulations without causing unnecessary stress?”
If you are just holding your crypto, you usually don’t have to report anything on your return, but I would still recommend keeping track of your transactions. In order to do that, you will want to keep a log of all of the wallets and exchanges that you use (and have used in the past), and then consolidate all of your records into one place. We recommend using crypto tax software to simplify the process. Then you can reconcile and clean up your transactions each year by tracking all transfers between wallets and exchanges, correctly classifying income and expenses, and ensuring all transactions balance at the end of the year. In the years when you sell, trade, or spend your crypto, it might also be worth having a crypto tax accountant help with this or at least review it to ensure that calculations were done properly.
–Laura Walter, Crypto Tax Girl
“Would you summarize the worst pitfalls for HODLers when Celsius closes their website in the next 2 weeks?”
Hopefully, people involved with Celsius should be getting all the notices on what to do and when. Stretto has been doing a good job keeping people informed on the process and specific instructions on what to do to get some of their money back. The biggest pitfall would be not getting back some of your money. The next pitfall would be not downloading your transaction history in order to prepare your taxes.
–Josh Cahan, Josh Cahan, CPA
Taxable Events
“I had assets in Celsius… now that the bankruptcy has entered the phase of repaying creditors, like me, do I have to declare this as income?”
It depends. If you had already claimed a loss for the crypto you lost in Celsius on a prior year tax return, then the entire amount you receive from the bankruptcy distribution is taxable income. If you did not report any losses on the crypto you lost in Celsius, then you would instead now claim a loss equal to the difference between the amount you receive from the distribution and your cost basis in the amount you lost when Celsius first went down. The process of claiming this loss is not straight forward, so I recommend all taxpayers work with a licensed CPA to claim this loss on their tax return.
–Colby Cross, Colby Cross CPA
Earlier this year, I transferred some crypto from an exchange onto a hardware wallet. The funds were non-qualify. Is that a taxable event?
A transfer from yourself (or an account under your control) to your hardware wallet is not considered a disposal for tax purposes. However, if the transfer originates from a retirement account, there is recent case law that suggests the IRS may consider it to be a distribution. In that case, you may owe ordinary income tax and an early withdrawal penalty on the amount deemed distributed.
–Jason M. Tyra, Jason M. Tyra, PLLC
Reporting, Recording, Requirements
“If a loan was taken out to buy Bitcoin, could the interest expense be claimed as part of the basis?”
No, but you still might be able to deduct the interest separately. If the borrowed funds are used to buy a personal asset (a home renovation for example), the interest expense is considered personal so it is not deductible. If the borrowed funds are used for investment purposes (to buy an NFT for example) the interest expense you incur is considered to be investment interest expense. Investment interest expenses are reported on Form 4952 and can be deducted up to the amount of your net investment income.
–Laura Walter, Crypto Tax Girl
“How can I ensure that my tax filings are done correctly when I don’t fully understand the complexities involved?”
Like everything else in life, you should be aware of the consequences of your actions. If you do not know, there are several outlets to find out what you need to do.
- Schedule a call with a CPA who specializes in the crypto arena.
- Do your own research. The IRS has a website which goes over what transactions are required to be reported on your tax returns.
- Use crypto tax software and get their support staff to help you.
–Josh Cahan, Josh Cahan, CPA
“How do I address errors in tracking programs used for cryptocurrency transactions, especially when they could impact tax reporting accuracy?”
Actual trade data will provide the most accurate tax result and the one least likely to be challenged by the IRS or your state under audit. For example, raw trade data from an exchange will include actual pricing data. In the case of decentralized trading activity, many trade tracking platforms apply a notional value (usually a daily average) for the asset in question as part of the calculation process. If no data is available, you will likely have no choice but to estimate USD values at the time of each trade.
–Jason M. Tyra, PLLC
“What are the implications of using a hard wallet like Ledger instead of platforms like Coinbase or Kraken in terms of tax reporting and tracking purchase prices?”
Ledger, and other wallets, will not allow for easy reporting. On centralized exchanges like Coinbase, taxpayers can download a report that shows their entire transaction history in a clean manner. Many of them also allow for the download of 1099 tax forms showing capital gains/losses. However, I tell my clients to be careful when using these 1099s from exchanges because they often will wrongly report the cost basis for their crypto. This happens if you transfer crypto from another exchange or wallet into that exchange and sell it there– the selling exchange has no idea what you paid for that crypto elsewhere and will assume a $0 cost basis. It is always best to download transaction history reports and use a tool like Koinly.io or Cointracker in order to calculate the gains/losses and generate the tax forms themselves. The same is true for hard wallets like Ledger. Many softwares will allow you to connect a wallet address and pull the transaction history, which is the only way to calculate your taxable income with such wallet activity. Note that you will need to repeat this process for each blockchain that address has activity on.
–Colby Cross, Colby Cross CPA
“How can I accurately determine the purchase prices of cryptocurrencies when transactions are spread across multiple smaller transactions instead of one?”
The best way to do this is to use an online trade tracking platform. Many quality options are available for a reasonable cost per year.
–Jason M. Tyra, Jason M. Tyra, PLLC
“I never sold any crypto last year; do I need to report anything?”
Potentially not, but if you spent or traded any crypto last year, you will need to report a gain or loss on those transactions. Additionally, if you received any crypto income from staking, mining, interest, airdrops, forks, etc. you will also need to report that income.
–Laura Walter, Crypto Tax Girl
“Does the Wash Sale Rule apply to Cryptocurrencies?”
As of right now, wash sales rules do not apply to crypto. As with all stances the IRS has, this can easily change. So I caution all my clients to behave as if wash sale rules apply whenever they can. It is always safer to err on the side of caution and wait to re-enter positions until at least 1 week has passed, but preferably a month. This will protect you from wash sale disallowances in the event of a rule change if that were to occur. However, if necessary, taxpayers can trade without fear of wash sale rules for the time being.
–Colby Cross, Colby Cross CPA
“I have an IRA, do I need to file?”
An IRA is generally not required to submit a tax filing each year. While there are exceptions, such as Unrelated Business Income, that would necessitate a filing, trading crypto assets is not one of them.
–Jason M. Tyra, Jason M. Tyra, PLLC
“Earlier this year, I transferred some crypto from an exchange onto a hardware wallet. The funds were non-qualify. Is that a taxable event?”
A transfer from yourself (or an account under your control) to your hardware wallet is not considered a disposal for tax purposes. However, if the transfer originates from a retirement account, there is recent case law that suggests the IRS may consider it to be a distribution. In that case, you may owe ordinary income tax and an early withdrawal penalty on the amount deemed distributed.
–Jason M. Tyra, Jason M. Tyra, PLLC
Tax Specialist Bios
A special thanks to all the crypto tax professionals who answered your additional questions for the 2023 tax season. Below is the professional background information of each specialist.
Laura Walter, Crypto Tax Girl
Laura is the founder of Crypto Tax Girl, and has been an industry leader in the crypto tax space since 2017. Her firm specializes in cryptocurrency taxation and they offer a wide range of services including crypto tax reports, tax return filing services, tax advisory services, tax notice resolution services, and bookkeeping services. She also is very active on Twitter/X and tweets out free tax tips all year long @CryptoTaxGirl.
Colby Cross, Colby Cross CPA
Colby Cross is a licensed CPA that specializes in the taxation of cryptocurrencies. He has been involved in the cryptocurrency space since 2013, and has been preparing tax returns for crypto investors since 2017. He offers tax preparation, planning, and strategy in all 50 states, as well as accounting and tax preparation for small businesses.
Jason M. Tyra, Jason M. Tyra, PLLC
Jason M. Tyra is a Certified Public Accountant licensed to practice in the States of Texas and New York, an Attorney licensed to practice in Texas, and an ACFE Certified Fraud Examiner. Jason is a member of the Texas Society of Certified Public Accountants, the American Institute of Certified Public Accountants (AICPA), the Association of Certified Fraud Examiners (ACFE), the American Bar Association, and the Dallas Bar Association. His specific areas of practice include:
- Federal, state, local tax matters
- Assurance & attest sercvices
- Equity crowdfunding & private placement support
- Virtual currency process accounting & taxation
Josh Cahan, Josh Cahan CPA
Josh Cahan is a certified public accountant with a passion for helping individuals and businesses navigate complex tax landscapes. With a focus on cryptocurrency taxation and small business needs, Josh provides personalized and expert tax advice to his clients.