HOW THE CRYPTOCURRENCY WORLD INTERSECTS WITH THE TAX WORLD
As cryptocurrency investing and transactions become more mainstream, taxpayers need to be aware of potential taxable events that must be reported on their tax returns. Keeping thorough and accurate records is essential to ensuring compliance and proper reporting to the IRS.
Taxable cryptocurrency transactions generally include selling cryptocurrency for fiat currency, trading one cryptocurrency for another, or using crypto to purchase goods and services if the currency has appreciated in value. Other taxable events include receiving payments in cryptocurrency, earning airdrops, staking rewards, earning interest from decentralized finance (DeFi) platforms, mining rewards, and receiving referral or other bonuses paid in crypto.
Conversely, certain cryptocurrency activities are not taxable. These nontaxable events include purchasing cryptocurrency with fiat currency, holding crypto without transacting, transferring crypto between wallets you own, gifting cryptocurrency under the IRS annual gift limit, and donating crypto to charity (although charitable donations are reported separately on Schedule A).
For tax purposes, the IRS treats cryptocurrency as property. This means capital gains or losses from selling or trading crypto must be reported on Schedule D, with different tax rates applying depending on whether the holding period was short-term or long-term. Income earned from staking or airdrops is treated as ordinary income, while mining income is reported on Schedule C and is subject to self-employment tax.
Regarding reporting, the IRS requested cryptocurrency exchanges to issue Form 1099-B for the 2023 tax year. While most U.S.-based exchanges complied, many foreign exchanges did not. Starting with the 2025 tax year, exchanges will be required to report cryptocurrency transaction activity to the IRS using Form 1099-DA, which captures gross proceeds from sales. Reporting cost basis will be optional for 2025. By the 2026 tax year, exchanges must report both gross proceeds and cost basis for covered transactions, improving transparency for both taxpayers and the IRS.
To assist your CPA with accurate tax filing, it is important to provide any 1099-DA forms received from exchanges. However, because cost basis information may not always be included, maintaining your own records is critical. Decentralized transactions and peer-to-peer transfers often will not be reported on these forms, so tracking them yourself is necessary to identify taxable events. Using portfolio tracking software can be very helpful in keeping detailed records of your transactions and calculating your cost basis. Given the complexity of cryptocurrency taxation and evolving reporting requirements, careful documentation will help you and your CPA ensure your crypto activities are reported correctly and avoid potential issues with the IRS.
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