Recep-bg | E+ | Getty Images
The U.S. Department of the Treasury and IRS on Friday released final tax reporting rules for digital asset brokers — and crypto investors have limited time to prepare, experts say.
Mandatory yearly reporting will phase in starting in 2026, with digital currency brokers required to cover gross proceeds from sales in 2025 via Form 1099-DA. In 2027, brokers must include cost basis, or purchase price, for certain digital asset sales for 2026.
"These regulations are an important part of the larger effort on high-income individual tax compliance," IRS Commissioner Danny Werfel said in a statement. "We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets."
More from Personal Finance:
Is the U.S. stock market too 'concentrated'? Here's what to know
Federal appeals court lets Biden's student loan repayment plan resume
Here's what a Supreme Court ruling could mean for Biden's 'billionaire tax'
Enacted in 2021 via the Inflation Reduction Act, yearly digital asset reporting was estimated to raise nearly $28 billion over a decade, according to the Joint Committee on Taxation. However, the original start date was postponed.
The new IRS regulations come roughly four months after the agency hired two former crypto executives to improve digital currency service, reporting, compliance and enforcement programs.
"Everybody's been waiting for the tidal wave of this enforcement activity," James Creech, an attorney and senior manager at accounting firm Baker Tilly, previously told CNBC.
VIDEO10:2110:21
Trump and Biden shift strategies to compete for crypto voters: CNBC Crypto World
Basis will be 'specific to the wallet'
With limited reporting on basis, crypto investors have the chance to establish a "reasonable allocation" before Jan. 1, 2025, according to an IRS revenue procedure released Friday.
Taxpayers need to assign basis for each digital currency wallet by the end of 2024, said Matt Metras, a Rochester, New York-based enrolled agent and owner of MDM Financial Services.
If you bought digital currency over several years across multiple wallets, you currently have "different basis lots," he said.
Crypto tax software often uses the best basis from your combined accounts to calculate gains. But going forward, each asset's basis must be "specific to the wallet," Metras said.
It's important to establish digital currency basis because, generally, if you can't prove your basis, the IRS considers it zero, which calculates a bigger profit.
'The most important tax year' for reporting
The new crypto tax reporting rules won't apply to the upcoming tax season.
However, "2024 is the most important tax year for crypto investors to be reporting," said Andrew Gordon, tax attorney, certified public accountant and president of Gordon Law Group.
2024 is the most important tax year for crypto investors to be reporting.
Andrew Gordon
President of Gordon Law Group
For 2024, you still need to collect crypto data and properly report activity, including your cost basis. Starting in 2025, the IRS will have a "firehose of information" to verify whether past reporting was accurate, Gordon said.
FAQs
Mandatory yearly reporting will phase in starting in 2026, which will cover gross sales from 2025. However, investors need to assign basis, or original purchase prices, for each crypto wallet before 2025, experts say.
Do I have to answer IRS crypto question? ›
Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120 and 1120S must check one box answering either "Yes" or "No" to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.
How does the IRS know if you sell crypto? ›
More recently crypto exchanges must issue 1099-K and 1099-B forms if you have more than $20,000 in proceeds and 200 or more transactions on an exchange the exchange needs to submit that information to the IRS.
Can the IRS see my crypto wallet? ›
Cryptocurrencies are traceable, with transactions recorded on a public ledger accessible to the IRS. The IRS uses advanced methods to track crypto transactions and enforce tax compliance. Centralized exchanges provide user data to the IRS. Use crypto tax tools like Blockpit for accurate reporting and compliance.
What is the new crypto tax rule? ›
June 28 (Reuters) - The U.S. Treasury Department finalized a rule on Friday requiring cryptocurrency brokers, including exchanges and payment processors, to report new information on users' sales and exchanges of digital assets to the Internal Revenue Service.
How can I avoid IRS with crypto? ›
9 Ways to Legally Avoid Paying Crypto Taxes
- Buy Items on BitDials.
- Invest Using an IRA.
- Have a Long-Term Investment Horizon.
- Gift Crypto to Family Members.
- Relocate to a Different Country.
- Donate Crypto to Charity.
- Offset Gains with Appropriate Losses.
- Sell Crypto During Low-Income Periods.
US taxpayers who fail to report crypto on their taxes can face serious consequences, including fines and penalties as high as $100,000 and up to five years in prison.
What is the new question the IRS is asking? ›
For the 2022 tax year it asks: "At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
What triggers IRS audit crypto? ›
Crypto-specific activity that might trigger an audit includes: Failure to accurately report crypto transactions and income. Large transactions or significant gains. Inconsistencies or discrepancies.
Do I have to report every crypto transaction? ›
You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
The Top Anonymous Bitcoin Wallets Ranked
Zengo Wallet – Secure and anonymous crypto wallet using MPC cryptography instead of seed phrases. Ellipal Wallet – High-security, air-gapped wallet supporting 10,000+ digital assets. Ledger Nano X – Hardware wallet with multi-currency support and extreme security measures.
Does the IRS track Bitcoin ATMs? ›
The short answer is, yes, the IRS can track crypto transactions. In recent years, the agency has sent tens of thousands of letters to taxpayers who may have failed to report their crypto transactions.
Which crypto does not report to the IRS? ›
Some cryptocurrency exchanges do not report user transactions to the IRS, including: Decentralized crypto exchanges (DEXs) like Uniswap and SushiSwap. Some peer-to-peer (P2P) platforms. Exchanges based outside the US that do not have a reporting obligation under US tax law.
Which crypto can not be tracked? ›
More privacy-oriented coins do exist, such as Dash, ZCash, or Monero, which are far more difficult to trace. While it is possible to see the flow of currency, bitcoins themselves are impossible to track.
Has anyone been audited for crypto? ›
Can you get audited for cryptocurrency? Yes. If the IRS has reason to believe that you are underreporting your crypto taxes, it is likely that they will initiate an audit.
Do you have to report buying crypto on tax return? ›
The IRS treats cryptocurrency as property, meaning that when you buy, sell or exchange it, this counts as a taxable event and typically results in either a capital gain or loss. When you earn income from cryptocurrency activities, this is taxed as ordinary income.
What is the IRS minimum for reporting crypto? ›
If you earn $600 or more in a year paid by an exchange, including Coinbase, the exchange is required to report these payments to the IRS as “other income” via IRS Form 1099-MISC (you'll also receive a copy for your tax return).
Do you have to report crypto on taxes if you don't sell? ›
Crypto is generally not subject to immediate taxation, assuming you purchased the crypto as an investment and didn't acquire it as a form of income or by other means. This means that when you US taxpayers purchase crypto, there is no immediate reporting requirement until you sell.
