IRS May Change Reporting Requirements for Digital Asset Transactions

 Posted on November 22, 2023 in Taxation Law

Digital assets such as cryptocurrency and NFTs have gained significant popularity in recent years. As more people and businesses engage in digital asset transactions, it is important to understand the tax law implications and the reporting requirements set forth by the Internal Revenue Service (IRS). The IRS has issued notice that it may be implementing new rules affecting digital asset transactions. Owners of virtual currency or other digital assets may want to consider consulting with an attorney who has experience in this area to ensure that they meet all requirements put in place by the IRS and are taking the correct steps to avoid potential tax penalties.

What Are Digital Assets?

Digital assets are virtual or electronic representations of value that can be digitally traded or transferred. Some of the most well-known types of digital assets are cryptocurrencies such as Bitcoin, Ethereum, and Litecoin. These decentralized forms of currency operate using blockchain technology. Non-fungible tokens (NFTs), which use the blockchain to recognize ownership of assets such as images, videos, or music, are also considered digital assets.

Tax Treatment of Digital Assets

The IRS treats digital assets as property rather than currency for federal tax purposes. This means that general tax principles applicable to property transactions also apply to digital asset transactions. Taxable gains or losses may occur when digital assets are exchanged for U.S. currency or currency issued by other countries, when digital assets are exchanged for other goods or services, when cryptocurrency is received as income or payments, or when digital assets are received through mining, hard forks, airdrops, or other related methods. 

Digital asset transactions must be reported to the IRS, and taxes may apply to the gains realized. Capital gains taxes will be assessed on the difference between the taxpayer’s adjusted basis in the digital assets and the amount they received in exchange. If digital assets were received as income, a taxpayer will be required to pay income taxes based on the value of the assets at the time they were received. Gift taxes may also apply if digital assets were received as gifts.

Potential Updates to Digital Asset Reporting Requirements

On August 29, 2023, the IRS released a proposed new rule that may affect reporting for certain types of digital asset transactions. Currently, taxpayers are required to notify the IRS on their annual tax returns if they have engaged in any transactions involving digital assets. Under the new rule, other entities would also be required to report digital asset transactions. Brokers and services that facilitate digital asset transactions, including online cryptocurrency trading platforms, payment processors, and services that provide digital wallets, would be required to file information returns and furnish payee statements for certain types of transactions involving the sale or exchange of digital assets. Real estate brokers would also be required to report transactions in which digital assets are received by real estate sellers or used by buyers to acquire real estate property. These reporting requirements would help the IRS monitor digital asset transactions and ensure that the applicable taxes will be assessed correctly.

Contact Our San Jose, CA Tax Lawyer

If you have questions about IRS reporting requirements for digital asset transactions, or if you are unsure about whether taxes may be assessed following the purchase, sale, exchange, or acquisition of cryptocurrency, John D. Teter Law Offices can provide you with experienced legal guidance to ensure that tax-related concerns will be addressed correctly. Our San Jose tax law attorney can help you determine how to avoid potential penalties related to digital asset transactions, and we can provide representation during tax audits or other interactions with the IRS related to cryptocurrency. Contact us at 408-866-1810 to schedule a consultation and learn more about how we can assist you in addressing complex tax law concerns.