The U.S. Department of the Treasury and IRS recently unveiled final tax reporting rules for digital asset brokers, marking a significant development in the world of cryptocurrency taxation. With mandatory reporting scheduled to be phased in starting in 2026, crypto investors are facing a limited timeframe to prepare for these changes.
Under the new regulations, digital currency brokers will be required to cover gross proceeds from sales in 2025 via Form 1099-DA. In 2027, brokers must include cost basis for certain digital asset sales for 2026. The aim of these regulations is to ensure that digital assets are not being utilized as means to conceal taxable income, thereby enhancing compliance in the high-risk space of digital assets.
Enacted in 2021 through the Inflation Reduction Act, yearly digital asset reporting was projected to generate close to $28 billion over a decade, according to the Joint Committee on Taxation. Despite the original start date being postponed, the IRS has now introduced these new regulations. This move comes after the agency hired former crypto executives to bolster digital currency service, reporting, compliance, and enforcement programs.
With limited reporting on basis, crypto investors have the opportunity to establish a “reasonable allocation” before January 1, 2025. Taxpayers are advised to assign basis for each digital currency wallet by the end of 2024 to ensure compliance. This process is crucial as it determines the profit calculation, with the IRS considering a basis of zero if it cannot be proven.
While the new crypto tax reporting rules will not affect the upcoming tax season, experts emphasize that 2024 will be a pivotal year for crypto investors to focus on reporting. Starting in 2025, the IRS will have access to a wealth of information to verify the accuracy of past reporting. This highlights the importance of ensuring compliance and accuracy in tax filings related to digital asset transactions.
The introduction of the new IRS regulations on digital asset reporting signifies a significant shift in the taxation landscape for cryptocurrency investors. It is essential for investors to be proactive in understanding and adhering to these regulations to avoid potential compliance issues and penalties in the future. By staying informed and taking the necessary steps to comply with the new requirements, investors can navigate the evolving regulatory environment and ensure their tax obligations are met effectively.