What is cryptocurrency and how does it impact your taxes?
As more people are investing in cryptocurrency, how complex can this get if they do their own taxes? What are some factors they need to keep in mind?
While cryptocurrency (crypto) investors were expected to meet the same reporting standards when it came to paying tax and reporting profits and losses to the Internal Revenue Service, the passage of the Infrastructure Investments and Jobs Act (IIJA) shows that the IRS is serious about enforcing, strengthening, and standardizing these requirements.
You can find the reporting requirements stated in section 80603 of the Infrastructure Investments and Jobs Act (IIJA). Here is a synopsis:
Summary of the New Reporting Requirements for Cryptocurrency Exchanges
- All cryptocurrency exchanges are now considered “brokers” like traditional investment brokers.
- The term “digital asset” is defined by the law as “any digital representation of value which is recorded on a cryptographically secure distributed ledger or any similar technology as specified by the Secretary” (H.R. 3684, p. 2421).
- Digital assets are considered the same as securities, like stocks, bonds, and certain types of commodities in the eyes of the IRS. Therefore, the tax treatment of digital assets is the same as before: you must pay taxes on capital gains.
- Keep in mind that securities are also subject to the Securities and Exchange Commission (SEC) and this legislation does not address the SEC.
- Reporting requirements are now more stringent for cryptocurrency exchanges which must now report information to both the IRS and to their customers. Currently, there are no reporting requirements for cryptocurrency exchanges, although some exchanges may send you tax forms such as Form 1099-MISC, which only covers the payouts received, not capital gains related to your crypto activity.
- The new law states that the following information is now required to be reported to the IRS and to customers: (1) name, address, and phone number of each customer; (2) the gross proceeds from any sale of digital assets; and (3) capital gains or losses and whether such capital gains or losses were short-term (held for one year or less) or long-term (held for more than one year).
- The legislation does not state what IRS forms cryptocurrency exchanges must send to their customers, but Form 1099-B (“Proceeds from Broker”), would seem reasonable.
- Penalties for failure to report cryptocurrency activity will cost you. The law lays out that exchanges which fail to report the information above will be subject to a $250 penalty per customer, up to a maximum $3 million penalty.
- How the new cryptocurrency tax law may affect your freelance business
- Another important development in the IIJA is that digital assets valued at $10,000 or more are now treated as “cash” received for any person engaging in a trade or business
- The law states that, “Any person engaging in a trade or business that receives more than $10,000 in cash must file IRS Form 8300 (''Report of Cash Payments Over $10,000 Received in a Trade or Business”).” With this form you are required to report: (1) the name, address, and TIN of the person from whom “cash” was received; (2) the amount of “cash” received; and (3) the date and nature of the transaction.
- This new reporting requirement takes effect January 1, 2023. This means that exchanges are not required to send you Form 1099-B until 2024 (for 2023 taxes).
What advice can you give people as they search for the right software or accountant?
Think about your specific needs and make sure that if you are looking for a tax professional you choose one with experience that is specific to your situation. For example, if you are self-employed, deal with a lot of foreign transactions, or have complex investments or businesses then your accountant or tax professional should be well-versed in the tax code related to these areas.
Jonathan Medows is a NYC-based CPA who specializes in taxes for consultants across the country. His website has a resource section with how-to articles and information for freelancers. https://www.cpaforfreelancers.com/