Cryptocurrency investors and individuals who received payments in bitcoin or other cryptocurrencies have an obligation to report their taxable transactions on their 2023 tax return by April 15. This includes paying taxes on any income or gains received from crypto assets in the previous year. However, there are still uncertainties surrounding the rules for tax reporting and required calculations, as third-party reporting requirements have been delayed until final regulations are issued by the Treasury.
Despite the temporary enforcement reprieve, individuals may have received tax forms from third-parties for their crypto transactions. It is important to be honest and accurate when reporting these transactions to the IRS. Taxpayers are required to answer a question on their federal 1040 tax form regarding any receipt of digital assets or cryptocurrency exchanges. Transactions such as buying or holding digital assets, or transferring assets between accounts, are not considered taxable events.
If an employer or client paid with cryptocurrency, the taxpayer will owe income tax based on the value of the cryptocurrency at the time of payment. Individuals may receive a W2 form from an employer or a 1099 form from a client or contractor. Selling crypto requires calculating capital gains or losses, which can be used to offset other gains or income. Capital losses can be used to offset ordinary income and can be carried forward to future tax years.
When using cryptocurrency to purchase goods or services, reports may be filed with the IRS for transactions over $10,000. Capital gains or losses may need to be reported for these transactions. Donating cryptocurrency to charity requires valuing the donation based on the price of the crypto at the time of the transaction. Appraisals may be required for donations over $5,000 in value. The Securities and Exchange Commission recently approved the listing and trading of 11 bitcoin exchange-traded funds, treating them as SEC-regulated financial products for tax purposes.
Ownership of cryptocurrency directly is treated as personal property for tax purposes, while owning a bitcoin ETF is treated as a financial product. Individuals who purchase a bitcoin ETF may receive forms from their broker-dealer reporting on their transactions. The requirement to report digital assets on tax forms for individuals who own a bitcoin ETF is still unclear. Future guidance from the IRS may provide more clarity on this issue. Ultimately, taxpayers should stay informed and consult with tax professionals to ensure compliance with crypto tax reporting requirements.
