Digital assets, including cryptocurrencies, have become a mainstay in our modern marketplace. Even if you do not currently own any bitcoin or other cryptocurrencies, chances are you may sometime in the future.

Putting headlines like the debacle of Sam Bankman-Fried’s FTX aside, the rapid growth of digital assets has led to increased scrutiny from regulatory bodies, particularly in the United States. The IRS and other regulatory agencies have established specific reporting and tax requirements to ensure proper compliance and revenue collection from digital asset transactions.

Understanding these requirements is crucial for individuals and businesses involved in the digital asset market. Here’s a summary of what you need to know.

IRS Guidelines and Reporting Requirements

The IRS classifies digital assets as “property” for federal tax purposes. That’s important, because the classification means that digital assets are subject to capital gains tax rules similar to those applied to stocks and bonds. Taxpayers must report transactions involving digital assets on their tax returns, including the sale, exchange, and other dispositions of digital assets. These go on Form 1040, Schedule D. In addition, taxpayers must report each taxable digital asset transaction on Form 8949, Sales and Other Dispositions of Capital Assets. If you need help figuring out any of the following forms or reporting, contact Certum Solutions for assistance.

Tax Implications of Digital Asset Transactions

The tax treatment of digital asset transactions depends on their nature and how they are used. The key tax implications include:

1. Capital Gains and Losses: When a digital asset is sold or exchanged, the difference between the asset’s cost basis—original purchase price plus any associated costs—and the sale price is a capital gain or loss. Short-term capital gains for assets held less than a year are taxed at ordinary income rates, while long-term capital gains for assets held more than a year benefit from reduced tax rates.

2. Mining and Staking: Income derived from mining or staking digital assets is taxable as ordinary income. The fair market value of the mined or staked assets at the time of receipt is included in the taxpayer’s gross income.

3. Airdrops and Hard Forks: Airdrops, or free distributions of digital assets, and hard forks the splitting of a blockchain into two separate chains, also result in taxable income. The value of the digital assets received from an airdrop or hard fork must be included in gross income at the fair market value on the date of receipt.

4. Cryptocurrency Payments: When digital assets are used to pay for goods or services, the transaction must be reported. The payer must report any gain or loss on the transfer of the digital asset, and the recipient must include the fair market value of the digital asset received as income.

Penalties and Enforcement

Failure to comply with digital asset reporting and tax requirements can result in significant penalties and interest charges. The IRS may send warning letters to taxpayers who may have failed to report digital asset transactions properly. In addition, the IRS can impose accuracy-related penalties, failure-to-file penalties, and even criminal charges in cases of willful non-compliance.

The IRS also employs data analytics and collaborates with other agencies and international partners to identify and track digital asset transactions. This increased enforcement activity underscores the importance of accurate reporting and compliance with tax obligations.

The Future of Crypto

As the digital asset market continues to evolve, regulatory laws and enforcement are expected to become even more prevalent. Proposed legislation and new IRS guidance aim to close reporting gaps and improve tax compliance.

U.S. digital asset reporting and tax requirements are complex and continuously evolving. Individuals and businesses involved in digital asset transactions must stay informed and seek professional advice to ensure compliance and avoid potential penalties.

Check out our library of blog articles related to tax and reporting, and Reach out to Certum Solutions for assistance; we can help you scale gracefully!