The U.S. Department of the Treasury and IRS have recently released final tax reporting rules for digital asset brokers, bringing about significant changes in the crypto landscape. These rules will require mandatory yearly reporting, which is set to phase in starting in 2026. Digital currency brokers will be mandated to cover gross proceeds from sales in 2025 via Form 1099-DA. In 2027, brokers must go a step further and include the cost basis or purchase price for certain digital asset sales for 2026.
IRS Commissioner Danny Werfel emphasized the importance of these regulations in ensuring high-income individual tax compliance. The goal is to prevent the use of digital assets to hide taxable income and improve the detection of noncompliance in the high-risk space of digital assets. This initiative is part of a larger effort to enhance tax compliance among those involved in the crypto market.
Enacted in 2021 via the Inflation Reduction Act, yearly digital asset reporting was projected to raise nearly $28 billion over a decade, according to the Joint Committee on Taxation. The new regulations come on the heels of the IRS’s recruitment of two former crypto executives to bolster digital currency service, reporting, compliance, and enforcement programs. There is anticipation around increased enforcement activity in the crypto space following the implementation of these regulations.
With limited time to prepare, crypto investors need to take action before the regulations come into full effect. Investors have until Jan 1, 2025, to establish a “reasonable allocation” for their digital currency holdings, assigning basis for each digital currency wallet by the end of 2024. This is crucial because failing to prove your basis could result in the IRS considering it zero, leading to a higher tax liability.
2024 is poised to be a pivotal year for crypto investors, as it marks a significant milestone before the full implementation of the new reporting rules. It is essential for investors to focus on reporting accurately in 2024 to avoid potential discrepancies and penalties in the future. By establishing a clear basis for each digital asset, investors can mitigate risks and ensure compliance with the upcoming regulations.
While the new crypto tax reporting rules will not directly impact the upcoming tax season, they signal a fundamental shift in how digital assets are regulated and taxed. Starting in 2025, the IRS will have access to a wealth of information to verify past reporting accuracy and enforce compliance. This “firehose of information” will necessitate careful planning and documentation on the part of crypto investors to avoid potential pitfalls in the future.
The new IRS reporting rules present a significant challenge for crypto investors, requiring proactive measures to ensure compliance and accurate reporting. By understanding the implications of these regulations and taking timely action, investors can navigate the evolving landscape of digital asset taxation successfully.