Steven J. Rosenthal, CPA, CFP, JD
Cryptocurrency Tax Reporting Issues
Cryptocurrency transaction tax reporting has created confusion for some taxpayers eager to invest in this asset class. While recent volatility in the cryptocurrency markets has dampened some enthusiasm for these assets, governments are struggling with ways to regulate the cryptocurrency market and tax the income generated from the market. The IRS has issued regulations that treat cryptocurrency as property, meaning that the sale or exchange of cryptocurrency will generate gains or losses equivalent to the gains and losses for the sale of stock. Learn more with this IRS pdf.
In addition, the 2021 Infrastructure Investment and Jobs Act has mandated that cryptocurrency exchanges must begin issuing Forms 1099-B to customers starting in the tax year 2024. These are the same tax forms issued to customers by brokerage firms for the sale of securities. However, unlike reports for the sale of securities, the gains and losses from the sales of cryptocurrency are not easily tracked.
This occurs because cryptocurrency exchanges cannot acquire all the information needed to prepare accurate capital gain and loss tax reports. Many cryptocurrency traders transfer cryptocurrencies out of their personal crypto wallets into the exchanges, but the exchanges have no way of knowing how, when, where, or at what cost basis traders originally acquired their cryptocurrencies. Without that information, the forms issued by the exchanges will be missing the tax data necessary to completely report taxable transactions. This places a significant burden on cryptocurrency traders to maintain their own tax records to avoid a protentional audit liability. If individual traders are unable to establish a cost basis for their cryptocurrency, the IRS might assert that there is no tax basis and will tax the entire proceeds of a sale.
Though Fulcrum Wealth Advisors, LLC does not research or recommend cryptocurrency for its clients, we have many clients who have questions about its veracity as an investment.
Fulcrum Advisors recommend that cryptocurrency traders utilize software to track their tax bases and holding periods going forward. For additional information on tracking methodologies, read this article.
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