We wanted to bring to your attention an essential development in the realm of cryptocurrency taxation that may affect some of you.
According to a recent CPA Practice Advisor article, there has been a noticeable increase in individuals buying and selling digital assets like Bitcoin and Ethereum. As a result, the IRS has intensified its efforts to ensure compliance with tax regulations related to cryptocurrency transactions.
Here are some key points to be aware of:
- Taxation of Digital Assets: For federal tax purposes, the IRS treats digital assets as “property.” Therefore, transactions involving virtual currency are subject to the same general tax rules that apply to property transactions involving stock or real estate.
- IRS Enforcement Actions: The IRS launched Operation Hidden Treasure in 2021 to identify taxpayers who fail to report income from cryptocurrency transactions on their federal tax returns. Plus, the Inflation Reduction Act, enacted in 2022, allocated significant funds to the IRS for enforcement activities, including monitoring cryptocurrency transactions.
- Reporting Requirements: Taxpayers must now report any “digital assets” received, sold, exchanged, or gifted during the year on their federal income tax returns. The terminology used by the IRS to ask these questions has evolved over the years to encompass various forms of digital assets, including NFTs.
- Stricter Reporting for Crypto Brokers: The Infrastructure Investment and Jobs Act (IIJA), passed in late 2021, established new reporting requirements for digital transactions. This will provide the IRS with more information to monitor taxpayers engaging in virtual currency transactions. Operators of cryptocurrency exchanges are subject to similar reporting requirements as traditional securities brokers.
- Court Rulings: Recent court decisions have reaffirmed the IRS’s authority to pursue unpaid taxes related to cryptocurrency transactions, signaling a clear intention to enforce compliance in this area.
We are here to provide guidance and support as you manage your financial matters, including those related to digital assets. Your compliance with tax regulations is of utmost importance, and we are committed to helping you navigate this evolving landscape. If you have any questions or require assistance navigating cryptocurrency taxation’s complexities, please contact us.
