- Some tax professionals are bracing for more scrutiny of cryptocurrencies as the IRS works to enhance its digital asset services, reporting, compliance and enforcement programs.
- Experts cover how to answer the “digital assets” question on your return, calculate cryptocurrency taxes and handle reports.
- When you trade or sell cryptocurrency at a profit, you may be subject to capital gains or regular income taxes, depending on the “holding period,” or how long you have owned the asset.
Whether you're a long-time cryptocurrency investor or a digital asset you recently purchased, here are some key things to know from cryptocurrency tax experts.
Cryptocurrency has become a priority area for the IRS, and the agency shared guidance in January on reporting digital currency this tax season.
Since the 2019 tax year, the IRS has been collecting cryptocurrency data on tax returns with different versions of the yes or no question. For 2023, the “Digital Assets” question is on the first page of Form 1040, along with returns from estates, trusts, partnerships, corporations, and S corporations.
However, many cryptocurrency investors don't realize that the term “digital assets,” which includes cryptocurrencies, stablecoins, non-fungible tokens and more, applies to them, said registered agent Matt Mitras, owner of MDM Financial Services.
For 2023, you must answer “yes” if you sell cryptocurrencies; Trade one currency for another; Or received cryptocurrency as payment, reward, or prize, as instructed by Form 1040. You can answer “no” if you purchased cryptocurrency with US dollars and still hold the asset.
Yes or no questions are very powerful.
Andrew Gordon
President of Gordon Law Group
“Yes-or-no questions have a very powerful impact,” said Andrew Gordon, a tax attorney, certified public accountant and president of the Gordon Law Group.
If you have earnings or income from cryptocurrencies and choose “no” to the digital assets question, the IRS could argue there was “willfulness” in intentionally violating the law, Gordon said.
However, the 2023 digital asset issue does not apply to Bitcoin futures ETFs or Bitcoin spot ETFs.
When you trade or sell cryptocurrency at a profit, you may be subject to capital gains or regular income taxes, depending on the “holding period,” or how long you have owned the asset.
“They are treated like stocks or other property,” Gordon said. The gain is the difference between the “basis,” or purchase price, and the value when the asset is sold or exchanged.
If you hold cryptocurrencies for more than one year, you will be eligible for long-term capital gains of 0%, 15% or 20%, depending on your taxable income. In contrast, short-term capital gains or ordinary income taxes apply to assets owned for one year or less.
Both brackets use “taxable income,” which is calculated by subtracting the largest of the standard or itemized deductions from your adjusted gross income.
For high-income earners, selling cryptocurrencies after one year can “cut your price in half,” Gordon said, which is why tracking your purchase history is so important.
Many investors rely on tax forms to file tax returns each year. But experts say it's harder for cryptocurrency investors without reliable reports.
For 2023, you may receive Form 1099-MISC for bonuses or income, Form 1099-B for transactions or no forms at all, depending on the exchange.
Additionally, if you receive cryptocurrency tax forms, there could be errors in underlying reporting if you transfer the currency from one exchange to another.
The U.S. Department of the Treasury and the IRS have issued proposed regulations, including Uniform Form 1099-DA for reporting digital assets, for transactions on or after January 1, 2025.
Meanwhile, cryptocurrency investors must report activity based on personal record keeping, which can be a challenge with a high volume of activity, Mitras said.
“Once you have more than five transactions, trying to do it yourself in an Excel spreadsheet becomes cumbersome,” he said.
