April 6, 2023
Despite the recent drop in cryptocurrency trading, it remains a popular investment option for those seeking diversification from traditional investments. The decentralized structure allows assets to be transferred relatively quickly, anonymously, and across borders without involving banks, regulators or incurring fees. The unusual format has caught the attention of the IRS which continues to introduce new regulations to identify and tax certain transactions. Currently, taxpayers are only required to answer one question about cryptocurrency on the federal return. On the 2023 tax return, there will be new reporting requirements for those who exchanged or sold crypto. In addition, there are additional proposed regulations currently under consideration. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
Whether they purchased virtual currency or not, all taxpayers are required to answer a question on the 2022 tax returns about activity. The IRS revised the question for clarity: “At any time during 2022, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
If any of these conditions apply, the answer to the question is “yes”:
Taxpayers who don’t own digital assets can check “no,” but they can also check “no” if they’ve bought digital assets with real currency, if they’re holding digital assets in an account or wallet, and if they’ve made a transfer of digital assets from one wallet to another.
Before tax year 2023, Form 1099-B has been used to report on stock brokerage accounts. Taxpayers who sell stocks or securities will receive a report on their sales at the end of the year through a 1099-B. Brokers are responsible for including information on transactions – when the stock was purchased and sold, the nature of the gains or losses (short-term or long-term), proceeds that came from the sale, and the tax basis for the sale. In the event securities get transferred to a new broker, the previous broker needs to pass along this information.
In tax year 2023, the category for brokers is widening. Platforms like Coinbase, cryptocurrency exchanges, custodians, and digital assets will be included as brokers and will need to report transactions to both the investor and the IRS. As of now, this will be done on a 1099-B, but there is also a form that’s being developed which may be used in the future – 1099-DA. Information coming from brokers should be reported on Schedule D and Form 8949.
The updated reporting may also change some of the information these new brokers collect on investors, including names, addresses, phone numbers, nature of gains and losses, holding period, buy and sell prices, and gross proceeds of the digital assets.
Cash reporting will also include cryptocurrency. If a business accepts cryptocurrency in amounts of $10,000 or more, they will have to report it with Form 8300.
As technology continues to change, definitions for digital assets may evolve. The IRS presently defines digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology.” Cryptocurrency, stablecoins, NFTs, and convertible virtual currency all fall under this classification.
The activity of people who have purchased crypto but have not sold any would not qualify as a taxable event. Instead, this occurs when the digital assets are “disposed of” in some way, which can include sales, exchanges, or spending of the currency.
Earned or mined cryptocurrency should be reported similarly to other earned income, through either Form 1099-MISC or 1099-NEC. Independent contractors, gig workers, or other freelancers who get paid with cryptocurrency may need to file a Schedule C.
Most recently, the IRS published Notice 2023-27, which outlines the intention to treat nonfungible tokens (NFTs) as collectibles under Section 408(m). Collectibles currently include works of art and gems. Due to the unique form of ownership offered by the blockchain, the IRS is evaluating whether this categorization would be appropriate.
As defined by the IRS, an NFT is “a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset.” Until the IRs has issued guidance, the organization is using this as a working definition for NFTs and is planning on using look through analyses to determine what might be included under the collectibles umbrella:
Through June 19, the IRS and the Treasury Department are taking comments around questions about:
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Cryptocurrency reporting can be confusing, and it will get more complex as guidance falls into place. For this reason, it is important to consult with a qualified tax advisor to determine the impact on your situation. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.