New York may be a burgeoning hotspot in the crypto world, but it’s also the highest-taxed state in America. New Yorkers, according to The Heritage Foundation, pay the highest total tax burden compared to any other state. So whether you're trading Bitcoin from a cramped apartment in Manhattan or mining Ethereum upstate near the cheap hydroelectric power of Niagara Falls, there's one thing you’re going to need to tackle: taxes.
This guide untangles all the complex tax jargon and makes crypto tax planning as straightforward as enjoying a classic New York cheesecake.
The Legal Framework for Crypto Taxes in New York
Let's cut to the chase: New York means business when it comes to crypto taxes. Your crypto gains are just as taxable as any traditional income.
In the eyes of the IRS and New York's Department of Taxation and Finance, your digital currency is treated like property. This means that whether you're dabbling in Bitcoin, Ethereum, or any other cryptocurrency, it's akin to trading in stocks or real estate. So, when you cash in on those digital assets, be prepared to share a piece of the pie with Uncle Sam.
First let’s go through what individuals need to know and after that we’ll cover businesses.
Crypto Taxes for Individuals in New York State
Income Tax
If you're mining, staking, or otherwise earning crypto, this counts as income. Just like your job's paycheck, you'll need to report this and pay income tax on it. The rate? It depends on your total income that year.
Check the table below to calculate your income tax rate based on how much income you earned during the year and your filing status.
New York also has a standard deduction for income taxes, in other words a fixed amount that taxpayers can subtract from their taxable income. For taxes filed in 2023, the standard deduction amounts are:
- Single: $8,000
- Single (claimed as a dependent): $3,100
- Married filing jointly or surviving spouse: $16,050
- Married filing separately: $8,000
This is essentially tax-free income for taxpayers. For example, for single New York taxpayers, it means $8,000 of their income will not be subject to state income tax.
Example: Your income from non-crypto activities is $50,000 and you earned $5,000 from staking Ethereum last year. Your total taxable income is $55,000. As a single filer, your standard deduction is $8,000. Therefore, your taxable income after the standard deduction is $55,000 - $8,000 = $47,000.
Since the tax rate for this income bracket is 5.85%, the tax owed would be 5.85% of $47,000, or $2,749.50.
Note: Residents of New York City are subject to additional city income taxes of 3.078% to 3.876% atop of what they owe to New York state.
Capital Gains Tax
When you sell crypto for more than you purchased it, you've realized a capital gain. The tax on this capital gain is calculated based on how long you've held the asset.
At the federal level, if it's held for less than a year, your profit falls under short-term capital gains, taxed at the same rate as your regular income. However, if you hold onto your crypto for more than a year before selling, these profits are considered long-term capital gains, which are taxed at lower rates – either 0%, 15%, or 20%, based on your income bracket.
Additionally, if you’re a high earner, federal tax law requires an additional 3.8% Net Investment Income tax on unearned income in order to fund the Affordable Care Act. You will owe the tax if you have Net Investment Income and also have modified adjusted gross income over the following thresholds:
At the state level, New York makes no distinction between short-term and long-term capital gains tax rates. State capital gains are simply taxed at your ordinary income tax rate. This can range from 4% to 10.9% in New York, depending on your income bracket.
Understanding this distinction is crucial for effectively managing your potential tax liability on crypto gains.
Example: You bought Bitcoin worth $30,000 and sold it after 18 months for $35,000 for a long-term capital gain of $5,000. Assuming you’re single and your total income in the year (including the sale of this Bitcoin) was under $44,625, then you’re subject to the 0% federal tax rate and 4% New York state tax rate.
Property Taxes
New York State does not collect any property taxes, rather property tax is a local tax, raised and spent locally. Each county, city, town, village, school district, and special district has its own tax rate, which you can learn more about on New York State’s Department of Taxation and Finance webpage on assessments and property taxes.
Additionally, remember to mark your calendar for Grievance Day, typically the fourth Tuesday in May, which offers a unique opportunity to contest your property assessment if you believe it is unfair or inaccurate.
Gift and Estate Taxes
Regulations regarding gift and estate taxes, both on the federal and state level, can influence how you manage and plan for the transfer of your digital assets.
Gift Tax
The gift tax is a tax imposed on the transfer of assets where the receiver pays less than the full value for them, or nothing at all. This tax is the responsibility of the person giving the gift, not the recipient.
New York doesn’t have a gift tax, but there is a three-year clawback rule. This means when a person dies, New York State will claw back the last three years of gifts and include the value of those gifts in the person’s estate, which is subject to estate tax.
At the federal level, the gift tax involves two key limits: the annual gift tax exclusion and the lifetime gift tax exclusion.
The annual exclusion allows you to give up to $17,000 each year (as of 2023) without incurring any gift tax liability or the need to file a gift tax return. However, if your gift exceeds this annual limit, you're required to file a gift tax return, and the excess amount is counted towards your lifetime gift tax exclusion of $12.92 million (as of 2023). Once the lifetime limit is reached, you pay gift tax on the amount over. Below is a table of the gift tax rate based on the amount over the lifetime limit.
Note: There are exceptions to how the gift tax is calculated. To see those check out IRS Form 709.
It's important to note that gifts to family or friends are not tax-deductible. Only charitable contributions to qualified nonprofits are eligible for tax deductions.
Estate Tax
Estate tax, often referred to as the "death tax," is a levy on the assets of a deceased person. This tax applies to the fair market value of the assets at the time of the person's death, rather than their original purchase value.
Only thirteen states levy an estate tax, and New York is one of them.
New York’s exemption threshold for estate tax is $6,580,000. Anything exceeding this value is subject to New York's estate tax. The tax rate depends on the amount over the limit, highlighted on Form ET-706. Your estate’s executor will also need to fill in Form 706 even if you’re under the federal estate tax exemption. And remember, New York implements a clawback rule where gifts made within three years of the deceased’s death are included in the estate for tax calculations.
At the federal level, the estate tax exemption is set at $12.92 million (as of 2023). For estates exceeding this amount, the IRS imposes taxes at rates ranging from 18% to 40%. Here’s a breakdown:
It's important to note that this exemption is per individual, allowing a married couple to potentially double the exempt amount. Assets passed to a surviving spouse are usually exempt from this tax due to the unlimited marital deduction.
Crypto Taxes for Businesses in New York State
Income Tax
In a nutshell, your business structure – be it a corporation, LLC, LLP, partnership, or S corp – determines how your crypto business will be taxed in the Empire State. Each structure has its own set of rules and perks.
Article 9-A for Corporations
- In the nitty-gritty of New York state tax laws, Article 9-A is the rulebook for traditional corporations. If your business is a corporation, you're looking at a tax rate of 6.5% on your business income, or 7.25% if you're really raking it in (over $5 million). But if you're a qualified emerging tech company, you get a bit of a break at 4.875%.
- There's also something called the business capital tax, which is a tiny tax on your total business capital (0.1875% for most). And don't forget the fixed dollar minimum tax – it's based on your New York receipts and ensures that every corporation contributes at least a little to the state coffers.
LLCs, LLPs, and Partnerships
- LLCs and LLPs are like chameleons. They change their tax color based on their federal classification. If the IRS sees your LLC as a partnership, New York agrees. If it's seen as a corporation, then corporate tax rules apply.
- Partnerships are cool because they pass on profits and losses directly to you and your partners. The income gets reported on your personal tax returns, so the partnership itself doesn’t pay income taxes.
- For the single-member LLCs out there, you're seen as a sole proprietorship if you're the sole owner. This makes tax filing a bit simpler.
S Corporations: A Different Beast
- S corporations are a unique breed. They pass profits and losses directly to shareholders, who then report this income on their personal tax returns. Now here’s the twist: New York doesn’t automatically recognize your business as an S corp just because the IRS does. You need to elect this status in New York separately.
- S corps pay a minimum tax based on their New York receipts. But the cool part? Any tax credits earned by the S corp can flow through to the shareholders.
To summarize: if you're a corporation, you're playing by the Article 9-A rules. If you're an LLC or a partnership, you're looking at pass-through taxation, which can be a real advantage. And for S corporations, it's all about making sure you're recognized as one in New York, to make the most of those tax benefits.
Capital Gains Tax
For a business owner in New York, especially in industries like crypto where capital gains can be a significant factor, it's crucial to understand how these gains will be taxed. The impact on your tax liability can vary considerably based on your business structure and how the state treats income and capital gains for that structure.
Corporations (C Corps and S Corps)
- C Corporations: When a C corporation sells an asset for a profit, the capital gain is taxed at the corporation's income tax rate. Unlike individuals, corporations do not benefit from lower capital gains tax rates; the gain is taxed as regular income. So, in New York, a C corporation's capital gains would be subject to the same tax rates as other corporate income under Article 9-A.
- S Corporations: For S corporations, capital gains are typically passed through to the shareholders. This means that the gains are taxed at the individual shareholders' tax rates for capital gains on their personal income tax returns, not at the corporate level. The state of New York recognizes this pass-through nature and taxes these gains accordingly on the shareholders' personal income tax returns.
Pass-Through Entities (LLCs, Partnerships)
- For LLCs, LLPs, and partnerships, which are generally treated as pass-through entities for tax purposes, capital gains are passed through to the individual members or partners. These gains are then reported on the individuals' personal income tax returns and are subject to New York State's personal income tax rates.
- New York State taxes capital gains as ordinary income. So, for individuals, including those receiving pass-through capital gains from a business, the tax rate on these gains is the same as their regular income tax rate, not a separate, lower capital gains rate as is the case on federal tax returns.
To recap the most important point: all your capital gains will be added to your other income and taxed at the standard income tax rates, without any preferential treatment for long-term gains.
Tax on Mining Income
Income from mining is taxed as ordinary income. It's crucial to recognize the fair market value of the mined crypto at the time of receipt. If you decide to hold onto the mined crypto and sell it later when its value has changed, you'll then have to deal with capital gains or losses. All in all, it's super important to keep accurate records of when you mine each unit and its value at that time. This will ensure you're reporting and paying the correct amount of tax.
Self-Employment Tax
Individuals mining crypto as a self-employed venture must pay self-employment tax on their earnings. This tax is essentially the equivalent of the combined employer and employee share of Social Security and Medicare taxes. As of 2023, the self-employment tax rate is 15.3%, with 12.4% going towards Social Security and 2.9% towards Medicare.
When you’re an employee, these taxes are typically withheld from your paycheck by your employer, but as a self-employed miner, you're responsible for paying this tax yourself.
Payroll Taxes
Paying employees in crypto requires calculating payroll taxes based on the crypto's fair market value at the time of payment. Here’s a bit more detail on how this works:
- Fair Market Value (FMV) Calculation: When you pay employees with crypto, the value of the crypto for payroll tax purposes is its fair market value in U.S. dollars at the time of payment. This means you need to determine how much the crypto is worth in dollars at the exact moment you pay your employees.
- Payroll Taxes: Just like with regular, cash-based salaries, various payroll taxes apply to crypto payments. These include federal and state income taxes, Social Security and Medicare taxes (FICA), and any other relevant state and local taxes.
- Withholding and Reporting: As an employer, you're responsible for withholding the appropriate amount of taxes based on the FMV of the crypto at the time of each payment. You also need to report this income and the withholdings to the IRS and the New York State tax authorities, typically using the same forms you would for regular wages (like Form W-2).
- Employee Income Reporting: For your employees, the crypto they receive as payment is taxable income. They must report this income on their personal tax returns, based on the FMV at the time they received it.
- Price Volatility Consideration: One unique challenge with paying employees in crypto is the potential volatility. The FMV can fluctuate significantly, which might affect the calculation of taxes and the actual value received by the employee.
It’s a cutting-edge approach to compensation, but it does require careful management to align with tax laws and regulations.
Sales Tax
Transactions where crypto is accepted as payment for goods or services may attract sales tax, calculated based on the crypto's value at the transaction time. You'll need to convert the value of the crypto to U.S. dollars at the time of each sale to determine the correct amount of sales tax to collect and remit.
Like any other sales tax, you’re responsible for reporting and remitting this tax to the New York State Department of Taxation and Finance. This includes keeping accurate records of transactions, the FMV of the crypto at the time of each sale, and the sales tax collected.
The sales tax rate depends on the location of your business and your customers within New York State, as different localities can have different tax rates.
And remember, the tax applies to the sale of the goods or services, not the crypto itself.
Good record-keeping is crucial
If you deal with crypto, navigating New York’s tax landscape can feel a bit like exploring a new digital frontier. You need to keep track of your earnings, report them accurately, and set aside funds to cover your tax liability. Meticulous documentation is essential.
One invaluable tool to help you stay on the right side of tax laws is Bitwave. Tailored for businesses, Bitwave is a comprehensive crypto tax platform that streamlines back-office workflows. It automatically tracks each crypto transaction and taxable event, making quarter-end procedures less of a headache. More so, it seamlessly integrates blockchain technology with your traditional accounting systems, fostering automation in mark-to-market calculations, thus saving time and curbing the risk of manual errors.
Ready to manage your crypto tax obligations effectively and avoid surprises come tax time? Explore what Bitwave has to offer and request a demo today.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
