Cryptocurrency transactions have historically been underreported, leading to a significant loss in potential tax revenue. A report from the U.S. Government Accountability Office highlighted that tax compliance rates improve dramatically with third-party reporting, but until recently crypto lacked such stringent reporting requirements.
The IRS treats cryptocurrency as property, meaning it is subject to capital gains and income tax reporting. Key scenarios include:
Buying and Selling Cryptocurrency:
When you sell or exchange cryptocurrency for fiat currency (e.g., USD) or another cryptocurrency, you must report the transaction. Report capital gains or losses on IRS Form 8949 and Schedule D.
Using Cryptocurrency for Purchases:
If you use cryptocurrency to buy goods or services, you must report the transaction as a sale of property. The difference between the cryptocurrency’s fair market value at the time of purchase and its original cost basis is taxable.
Receiving Cryptocurrency as Income:
If you receive crypto as payment for services or as mining rewards, it is considered ordinary income and must be reported on Form 1040, Schedule 1, or Schedule C if you are self-employed.
Recordkeeping Requirements
You are required to maintain detailed records of all your cryptocurrency transactions, including:
- Purchase prices (cost basis).
- Dates of acquisition, sale, or exchange.
- Amounts received or spent in transactions.
- Fair market value at the time of the transaction.
Reporting Specific Events
- Gifting Cryptocurrency – gifts are generally not taxable for the giver, but recipients may owe taxes if they later sell the cryptocurrency.
- Transfers Between Wallets – moving cryptocurrency between personal wallets is not taxable but should still be documented.
- Hard Forks and Airdrops these events are treated as taxable income if you gain control of new cryptocurrency.
- Staking Rewards – staking income is taxable when received.
IRS Reporting
For tax year 2024, Cryptocurrency exchanges (e.g., Coinbase, Binance) may issue Form 1099 B to report sales of cryptocurrencies, similar to how stock transactions are reported. The form will include details like gross proceeds, cost basis, and the dates of acquisition and sale. If you received more than $600 in payments through third-party payment networks (like PayPal or Venmo) or cryptocurrency payment platforms, you may receive Form 1099 K. This applies if the platform facilitated the transfer, even for cryptocurrency payments.
Form 1099-DA is a new tax reporting form introduced by the IRS specifically for digital asset transactions. This form aims to streamline and enhance the reporting of cryptocurrency and other digital asset activity to ensure compliance with tax laws and inform both taxpayers and the IRS about taxable events related to digital assets.
Cryptocurrency exchanges, brokers, and other platforms facilitating digital asset transactions are responsible for issuing Form 1099-DA to users and filing it with the IRS. The form reports taxable events such as:
- Sales or exchanges of digital assets.
- Conversions of cryptocurrencies into fiat (e.g., USD).
- Payments received in digital assets.
- Other digital asset activities deemed reportable.
It will include details like:
- The gross proceeds from digital asset transactions.
- Dates of transactions.
- Identification of the digital asset.
Taxpayers must reconcile the information on Form 1099-DA with their own records to accurately report gains or losses on their tax returns. This information is reported on Schedule D (Capital Gains and Losses) and, if necessary, Form 8949 (Sales and Other Dispositions of Capital Assets).
The implementation of Form 1099-DA was originally intended to begin in 2024, but the collection of required data will now start on January 1, 2025, with the forms filed in early 2026. This delay allows brokers and businesses in the digital asset ecosystem additional time to set up systems for compliance. The delay was necessary as the final regulations were issued only recently in mid-2024, leaving insufficient time for implementation
Penalties for Non-Compliance
Failure to report cryptocurrency transactions accurately can result in penalties, interest, or even criminal charges in cases of willful non-compliance. You should discuss this area with your tax professional if are using Cryptocurrency.