As crypto continues to evolve rapidly, so does the U.S. taxation of cryptocurrency, with the IRS and other federal agencies taking an increasingly active role in regulating and enforcing compliance with tax and all other applicable laws.
For U.S. taxpayers who own or transact in digital assets such as Bitcoin, Ethereum, Tao or NFTs, understanding these changes is essential to avoiding unexpected (and, of course, unwanted) tax liabilities and penalties. This article provides a comprehensive overview of the latest developments affecting U.S. taxpayers, drawing on insights from a top U.S. tax lawyer.
In recent years, the IRS has gained more technical knowledge regarding cryptocurrency and has significantly expanded both its guidance and enforcement efforts in the cryptocurrency space. Digital assets are classified as property for federal tax purposes, meaning that transactions such as sales (including coin-to-coin exchanges), spending cryptocurrency and even certain transfers, trigger capital gains or losses.
This treatment applies whether you are using cryptocurrency to purchase goods and services, exchanging one digital asset for another, or converting crypto into U.S. dollars or foreign exchange. Each taxable event must be reported, and accurate record-keeping is critical.
One major development is the IRS’s updated Form 1040 question, which now asks whether you have received, sold, exchanged, or otherwise disposed of any digital asset during the tax year. This signals the IRS’s focus on unreported cryptocurrency transactions and its intent to identify noncompliant taxpayers and underscores the importance of full disclosure. Answering this question incorrectly can have serious legal consequences. Failure to comply can result in tax evasion prosecution.
The Infrastructure Investment and Jobs Act introduced new reporting requirements for “brokers,” which may include cryptocurrency exchanges and certain wallet providers. Beginning in 2025 for the 2024 tax year, these brokers will be required to issue Form 1099-DA to customers and the IRS, detailing their cryptocurrency transactions. This change is expected to significantly increase IRS visibility into taxpayer activities involving digital assets.
The IRS has also been leveraging blockchain analytics to track cryptocurrency transactions, even those thought to be anonymous. Taxpayers should not assume that transactions conducted through decentralized exchanges or privacy coins are beyond the IRS’s reach. Several enforcement actions in recent years have demonstrated the agency’s ability to trace and identify unreported transactions.
Hard forks and airdrops present additional tax complexities. In Revenue Ruling 2019-24, the IRS clarified that cryptocurrency received through a hard fork or airdrop is taxable as ordinary income at its fair market value when the taxpayer gains control over the asset. This can result in taxable income even if the taxpayer does not sell the cryptocurrency. If the value of the airdropped coin subsequently goes down, a future loss may be incurred, but that does not reduce the current IRS tax liability.
Taxpayers who mine cryptocurrency or stake their holdings also face unique tax considerations. Mining rewards are generally treated as ordinary income upon receipt, based on their fair market value, and may also be subject to self-employment tax. Staking rewards follow similar principles, although ongoing tax litigation may further refine the applicable rules.
International considerations are increasingly relevant. U.S. taxpayers who hold cryptocurrency on foreign exchanges may have reporting obligations under the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA). Failure to comply with these requirements can lead to severe penalties, and the IRS is expected to expand foreign reporting rules to explicitly cover digital assets.
Given these developments, it is crucial for taxpayers to work with a knowledgeable U.S. tax attorney who understands the nuances of cryptocurrency taxation. Mistakes in reporting can be costly, but proactive planning can significantly reduce risk.
Pro Tax Tips
- Keep meticulous records of all cryptocurrency transactions, including dates, amounts, wallet addresses, and fair market values in U.S. dollars. Download your transactions on a monthly basis. Remember, exchanges do go bankrupt.
- Use reputable tax software or professional services to track cost basis and capital gains.
- If you have unreported cryptocurrency transactions from prior years, consider the IRS’s Voluntary Disclosure Program to mitigate potential penalties.
- Stay informed about changes in U.S. tax law, particularly regarding reporting requirements and enforcement priorities.
- Consult an expert U.S. tax lawyer early if you engage in complex transactions such as staking, lending, or NFT trading.
Frequently Asked Questions
If I only bought cryptocurrency and did not sell it, do I still owe taxes?
No, simply purchasing cryptocurrency does not trigger a taxable event. However, you must still accurately answer the Form 1040 digital asset question.
Are cryptocurrency-to-cryptocurrency trades taxable?
Yes. Exchanging one cryptocurrency for another is considered a taxable event and must be reported. The fair market value of the cryptocurrency received is used to calculate gain or loss.
Do I need to report cryptocurrency held on a foreign exchange?
Potentially. While current FBAR rules do not explicitly mention cryptocurrency, the IRS may apply them to foreign exchange accounts. It is advisable to consult a knowledgeable U.S. tax attorney for guidance.
How is spending cryptocurrency taxed compared to selling it?
From a tax perspective, spending cryptocurrency is treated the same as selling it because you are disposing of the asset. If you buy goods or services with crypto, you must calculate the gain or loss based on the difference between the crypto’s fair market value at the time you acquired it and its value when you spent it. For example, if you purchased 1 BTC for $90,000 and later used it as a down payment for a house when its value was $115,000, you would have a $60,000 capital gain—taxable just as if you had sold it for cash.
Disclaimer: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a top U.S. tax lawyer.