If you have invested in cryptocurrency (for example, Bitcoin or Ether), nonfungible tokens (NFTs) or certain other digital assets, it is important to familiarize yourself with the new tax reporting requirements that take effect in 2023. The new rules will not increase your taxes. Instead, they are designed to help the IRS identify unreported digital transactions.
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NO NEW TAXES
As with other capital asset transactions, transactions involving digital assets are already taxable. For example, if you sell cryptocurrency in exchange for traditional currency, you must report capital gains or losses. These might be short- or long-term, depending on how long you have held the cryptocurrency. In addition, because the IRS views cryptocurrency as property for tax purposes, using it to purchase or sell goods or services is considered a taxable exchange.
The new reporting rules, which were added by 2021's Infrastructure Investment and Jobs Act, apply to digital asset transactions occurring on or after January 1, 2023. Under the rules, digital assets will be treated as securities for tax purposes.
Crypto exchanges (essentially, any platform on which investors can buy or sell cryptocurrency or other digital assets) must begin reporting transactions to investors and the IRS in early 2024. They will use Form 1099-B, which is currently used by brokers to report details on sales of stock and other securities, including sale proceeds, relevant dates, cost basis and the character (short- or long-term) of gains and losses.
BYE-BYE PRIVACY
The new rules are expected to affect investors in a couple of significant ways. For one thing, the privacy of cryptocurrency transactions — part of their appeal for many current investors — will become a thing of the past. Also, digital assets will be treated as cash for purposes of the anti-money-laundering law that requires businesses to report cash transactions of $10,000 or more to the IRS.
That said, many crypto exchanges lack access to certain information they need to determine an investor's cost basis. So it is likely that 1099-Bs provided to you and the IRS will overstate gains or understate losses associated with these transactions. You will need to document your digital asset transactions carefully to ensure your gains and losses are reported accurately.
JUST THE BEGINNING
Keeping accurate records of your transactions will also put you in a good position for future regulatory developments. Cryptocurrency has historically been lightly regulated. Given that historical context and its presence in the news, you should expect additional rules and reporting obligations in the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.