If you have invested in cryptocurrency (e.g. Bitcoin or Ether), non-fungible tokens (NFTs), or certain other digital assets, it is important to familiarize yourself with the new tax reporting requirements that will come into effect in 2023 The new rules will not increase your taxes. Instead, they’re designed to help the IRS identify unreported digital transactions.
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NO NEW TAXES
As with other capital transactions, transactions involving digital assets are already taxable. For example, if you sell cryptocurrency in exchange for traditional currency, you must report capital gains or losses. These can be short or long term, depending on how long you have held the cryptocurrency. Additionally, because the IRS considers cryptocurrency property for tax purposes, using it to buy or sell goods or services is considered a taxable exchange.
The new reporting rules, which were added by the Infrastructure Investment and Jobs Act 2021, apply to digital asset transactions made on or after January 1, 2023. Under these rules, digital assets will be treated as securities for tax purposes.
Crypto exchanges (essentially, any platform where investors can buy or sell cryptocurrency or other digital assets) must begin reporting transactions to investors and the IRS in early 2024. They will use Form 1099-B, which is currently used by brokers to report details. on sales of stocks and other securities, including sale proceeds, relevant dates, cost basis and the character (short or long term) of gains and losses.
The new rules are expected to affect investors in several important ways. For one, the privacy of cryptocurrency transactions — part of their appeal for many current investors — will become a thing of the past. Additionally, digital assets will be treated as cash for the purposes of the Anti-Money Laundering Act which requires businesses to report cash transactions of $10,000 or more to the IRS.
That said, many crypto exchanges lack access to certain information they need to determine an investor’s cost basis. It is therefore likely that the 1099-B forms provided to you and the IRS will either overstate the gains or understate the losses associated with these transactions. You will need to carefully document your digital asset transactions to ensure that your gains and losses are reported accurately.
JUST THE BEGINNING
Keeping accurate records of your transactions will also put you in a good position for future regulatory developments. Cryptocurrency has always been lightly regulated. Given this historical background and its presence in the news, you should expect additional rules and reporting obligations in the future.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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Preparing for New Cryptocurrency Reporting Rules – Fin Tech
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