As cryptocurrency’s popularity continues to skyrocket, new investors are getting into virtual currency every day. People are understandably excited about the idea of buying crypto, watching its value grow and selling or exchanging it for a profit. Businesses are exploring crypto as a way to make and accept payments. But not everyone thinks about the long-term tax implications of owning and using cryptocurrency, or speaks to their tax attorneys about crypto reporting. These are potentially expensive mistakes. The IRS is getting serious about tax compliance for virtual currency, and the burden is on taxpayers to make sure they’re appropriately reporting any crypto profits.
Because cryptocurrency is such a new financial vehicle, many users have exploited a lack of federal oversight over the last decade. It is believed that individual crypto users have greatly underreported virtual currency on their tax returns.
Starting in 2023, a new element of the tax code is going to make it harder for both individuals and organizations to avoid paying taxes on any gains they earn through cryptocurrency.
Where Crypto Reporting Rules Stand Now
Here’s what you need to know about crypto reporting for 2021 taxes. The IRS treats virtual currency as property for taxation purposes. As with stock or other property, you generally only have to tell the IRS when you recognize a gain or loss from virtual currency. The purchase itself doesn’t have to be reported. So if you bought cryptocurrency with dollars in 2021 but haven’t yet done anything with it, you don’t have to include it on your 2021 return.
If you sold, exchanged or mined any cryptocurrency during 2021, gains or losses from those transactions must be reported on Form 1040 (mining is the process by which new cryptocurrency transactions are verified and recorded to the blockchain, or ledger. People who take on the task of mining are essentially paid with cryptocurrency for their efforts). Profits on virtual currency may be taxed as capital gains if you held the currency for more than one year before selling or exchanging it. Otherwise, gains are taxed as regular income. Cryptocurrency losses may be used to offset capital gains taxes or reduce your tax bill; talk specific strategy with your tax attorney and other tax advisors.
The onus is on taxpayers to keep track of their cryptocurrency transactions and report taxable gains and losses to the IRS. This can get complicated especially for investors who move their currency around frequently, use multiple crypto wallets, and/or use multiple exchanges. You’ll have to know the cost basis of each asset at the time you acquired it in order to calculate your profit or loss. This is why it’s so important for anyone with virtual currency to keep meticulous records, and work closely with their tax attorneys to complete tax returns that include crypto transactions.
How Crypto Reporting Rules Will Change
As of 2022, cryptocurrency exchanges (platforms where people buy, sell and trade crypto) don’t have an obligation to report customer transactions to the IRS. Some exchanges like Coinbase do voluntary reporting, issuing 1099-MISC forms for customers who earn more than $600 in income selling or exchanging crypto through their platform. But many exchanges do no such reporting because they don’t have to—and that’s the big change that’s coming to cryptocurrency tax regulations soon.
President Biden signed a $1.2 trillion bipartisan infrastructure bill into law in November, 2021. The bill, H.R. 3684, addresses a wide range of projects, including improving roads and bridges, expanding public transportation and advancing clean energy. The bill also includes language about reporting requirements for digital assets. Specifically, it amends the Internal Revenue Code to require cryptocurrency brokers to file returns for transactions involving digital assets. Expanding crypto reporting requirements should allow the IRS to more accurately track virtual currency transactions, making it harder for crypto users to avoid taxes on their profits. The Joint Committee on Taxation estimated that improving information reporting requirements will raise $28 billion over 10 years.
These new crypto reporting requirements are set to take effect on January 1, 2023, which would affect tax filings in 2024. There’s still a lot to settle before then, like clarifying the exact definition of “broker” under the law, but the burden of preparing for the new rules falls primarily on crypto exchanges rather than taxpayers.
Expanded crypto reporting shouldn’t be a problem for taxpayers who aren’t trying to hide assets from the IRS. In fact, being issued Form 1099-B (Proceeds from Broker) at the end of every tax year could make reporting much simpler for taxpayers. Still, individuals and business owners who own cryptocurrency are going to want to speak to their tax attorneys to make sure they’re appropriately tracking, calculating and reporting their gains and losses. Start that conversation right now, if you haven’t yet.
The tax attorneys at Sassoon Cymrot Law, LLC can help individuals and business owners anticipate and manage all the challenges around cryptocurrency and taxes as the industry continues to evolve. Crypto reporting isn’t an area of tax law that taxpayers should try to navigate alone. Contact us today.
