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IRS cryptocurrency reporting requirements

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While consumers and businesses are increasingly adopting cryptocurrencies, government regulators are working to add clarity and guardrails to this emerging technology. The IRS released its first guidance (Notice 2014-21) in 2014 when Bitcoin was already in existence for five years. Prior to 2014, the IRS had no rules regarding the tax treatment of Bitcoin or other cryptos.

IRS perspective on crypto

The IRS issued Notice 2014-21 in March 2014, stating that cryptocurrency must be treated as property, not currency, for U.S. federal income tax purposes. The Notice further mentioned that the taxpayers must compute their gross income in U.S. dollars, including the fair market value of the virtual currency, to be measured when receiving it. Following the Notice, anyone exchanging or spending cryptocurrency was treated as if they were selling an asset, requiring them to report the resulting gains or losses on their return for U.S. federal income tax purposes.

As the cryptocurrency landscape changes, so does the taxation related to it. In Oct. 2019, five years after it published Notice 2014-21, the IRS issued Rev. Rul. 2019-24 and a list of FAQs on Virtual Currency Transactions for additional guidance.

Transactions that require reporting to the IRS

Since the IRS classifies cryptocurrencies as property, accounting professionals are likely to rely on industry standards to determine how to report transactions involving virtual currencies on tax returns appropriately.

  • According to the IRS, general tax principles applied to property transactions apply to virtual currency transactions.
  • The rules applied to foreign currency transactions (subpart J) do not apply to virtual currencies.
  • A person cannot use virtual currencies to generate foreign currency profit or loss for U.S. federal income tax purposes.
  • Receiving cryptocurrency as an exchange for services or products, or exchanging virtual currency in a transaction involving the receipt of services or products, falls under the gross income definition.

Infrastructure Investment and Jobs Act

In Nov. 2021, Congress passed the Infrastructure Investment and Jobs Act that includes various provisions to bring cryptocurrencies and digital assets into existing codes’ scope (Sections 6045 and 60501, in particular). The new law includes significant changes such as “digital assets” and redefining “brokers,” which now include those providing client-facing transfer services for various digital assets. Furthermore, it redefines “specified security,” which now includes digital assets, thus including cryptocurrency in the scope for Form 1099-B reporting.

Other highlights of the new law include the following:

  • The brokers must furnish transfer statements when transferring digital assets.
  • It extends transfer reporting to encompass transfers to non-brokers, thus attempting to tighten gaps.
  • The law includes a few changes to Form 8300, Report of Cash Payments over $10,000 Received in a Trade of Business, including reporting to include digital assets in the “cash” definition, and requiring organizations to report digital asset receipts exceeding $10,000 in digital asset value.

What’s important to note is that the IRS has clearly defined that “virtual currency transactions are taxable by law just like transactions in any other property.” As a result, taxpayers transacting in virtual currency may have to report those transactions on their tax returns. In the future, non-fungible tokens may get the same tax treatment as virtual currencies. You will want to follow this topic closely because it’s necessary to understand how the IRS will respond to further innovations.

Editor’s note: This is an excerpt from Sonia Dumas’ Cryptocurrency Guide. Download the guide here.

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