Experts offer tax advice to investors who are buying bitcoin, the leading virtual currency, as its price surged this week. On Wednesday, the price of bitcoin reached a new high of $73,000, driven by the demand for recently authorized spot exchange-traded funds. Despite the early Friday drop to $67,000 in the price of bitcoin, it was still up more than 50% year to date.
As the IRS strengthens its programs for digital asset servicing, reporting, compliance, and enforcement, some tax experts are preparing for a surge of crypto scrutiny.
Here are some essential tips from professionals in cryptocurrency taxation, regardless of whether you’ve been investing in cryptocurrencies for a long time or just recently.
How to answer Form 1040 ‘digital assets’ question
The IRS has made cryptocurrency a top focus and released guidelines in January on the reporting of digital currency during tax season.
The IRS has been gathering crypto data on tax returns with several iterations of a yes-or-no question since the 2019 tax year. A “digital assets” question for 2023 appears on the top page of Form 1040, along with returns for companies, partnerships, estates and trusts, and S corporations.
Nevertheless, according to enrolled agent Matt Metras, owner of MDM Financial Services, a lot of cryptocurrency investors are unaware that they hold “digital assets,” which encompass stablecoins, nonfungible tokens, cryptocurrencies, and more.
According to Form 1040 instructions, you must select “yes” for 2023 if you sold cryptocurrency, exchanged one coin for another, or got digital currency as payment, reward, or award. “No” might be your response if you still own the cryptocurrency that you purchased with US dollars.
According to Andrew Gordon, a tax lawyer, certified public accountant, and owner of Gordon Law Group, “yes-or-no questions are quite powerful.”
The IRS may claim “willfulness” in purposeful breaking of the law if you have cryptocurrency profits or income and answer “no” to the digital assets question, according to Gordon. But according to him, neither spot nor futures bitcoin ETFs are covered by the 2023 digital assets question.
How to compute taxes on cryptocurrency
Depending on the “holding period”—the length of time you owned the asset—you may be required to pay capital gains taxes or ordinary income taxes when you trade or sell digital currency at a profit.
According to Gordon, “they’re treated the same as stocks or other property,” and the gain is the difference between the asset’s acquisition price, or “basis,” and its market value upon sale or exchange.
You may be eligible for long-term capital gains of 0%, 15%, or 20% if you hold cryptocurrency for more than a year, depending on your taxable income. In contrast, assets that have been owned for less than a year are subject to normal income taxes or short-term capital gains.
When determining “taxable income,” which is used in both brackets, you deduct the higher of the standard or itemized deductions from your adjusted gross income. Tracking your purchase date is crucial since, according to Gordon, selling cryptocurrency after a year might “cut your rate in half” for higher incomes.
How cryptocurrency tax reporting operates
A lot of investors use tax forms to file their annual returns. However, analysts claim that in the absence of trustworthy information, it becomes more difficult for crypto investors.
Form 1099-MISC for income or awards, Form 1099-B for transactions, or no forms at all for 2023, depending on the exchange, could be sent to you.
Furthermore, if you move money from one exchange to another, you may receive crypto tax forms with basis reporting mistakes.
For transactions on or after January 1, 2025, the U.S. Department of the Treasury and IRS have announced proposed regulations, which include a standardized Form 1099-DA for digital asset reporting.
According to Metras, cryptocurrency investors should report their activities in the interim based on their own record-keeping, which can be difficult in cases of excessive activity. He claimed that attempting to handle transactions on your own in an Excel spreadsheet gets too difficult when there are more than five.
