The growing popularity of cryptocurrency has created challenges for the Internal Revenue Service and taxpayers. Tracking and reporting cryptocurrency income, as well as other digital assets like nonfungible tokens, isn’t easy for taxpayers and can lead to errors on tax returns. These innocuous mistakes can result in unwarranted collections notices, underpayments or overpayments.
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Legislation requiring brokers to report crypto purchases and sales to the IRS could generate an additional $28 billion over 10 years, The Wall Street Journal reported. But so far, no rules are in place.
While the IRS outlines the proper action to take when declaring earnings or losses from cryptocurrency, which is taxed at the capital gains rate, tracking profits and losses from crypto and other digital assets isn’t always easy for taxpayers. New legislation aims to fix that, but not until early 2026 when it goes into effect, according to The Wall Street Journal. And that’s pending approval.
So far, the legislation stands as a proposed rule that has not been adopted.
What the New Regulations Say
Under the new regulations, as reported by The Wall Street Journal, crypto trading platforms will be mandated to issue Form 1099 to investors and the IRS showing gross proceeds from crypto transactions.
Brokers who manage stock and mutual fund portfolios are already mandated to share this information with clients and the IRS. Payment platforms like Venmo and PayPal also issue 1099-K forms when users receive payments for goods and services. PayPal is one of the platforms already issuing crypto gains and loss statements to make it easier for traders to track their crypto income.
Beginning in 2027, under the new legislation, crypto platforms will also need to report the cost basis for assets purchased as far back as 2023. The cost basis is the price paid for a digital asset minus any transaction costs.
How Does the IRS Define Digital Assets?
As we explore the changing world of crypto tax, you might wonder what constitutes a digital asset. The IRS defines digital assets as “a digital representation of value recorded on a cryptographically secured distributed ledger or similar technology.”
In plain language, this includes cryptocurrency, stablecoins and NFTs. Digital assets can be traded, used to pay for goods or services, and converted into other assets, such as other digital assets or fiat money.
How To Declare Digital Asset Profits and Losses
If you bought and sold digital assets during the tax year, you’ll need to declare the income as capital gains. Likewise, losses can be used to reduce your tax liability. Keep careful records of your crypto transactions to ensure you aren’t paying more taxes than you should.
How Is Crypto Taxed?
In January 2024, the IRS and U.S. Treasury Department issued a notice stating that businesses do not have to report the receipt of digital assets exceeding $10,000 within 15 days of receipt. In other words, crypto payments and other digital payments are no longer treated as cash in the eyes of the IRS.
However, taxpayers should still report the receipt of digital assets as income on their tax returns, factoring in the cost basis and any losses. Keep in mind that digital assets received as payment for goods or services are taxed at your normal income tax rate, based on federal income tax brackets. Income tax rates range from 10% up to 37%, depending on your adjusted gross income.
If you buy crypto or NFTs, you don’t pay taxes on the purchase until you sell it.
If you sell crypto or NFTs at a profit, however, your crypto taxes are the same as capital gains tax rates. Short-term capital gains tax equals your marginal tax rate based on your income level. In other words, profits from the sale of investments held less than a year are taxed at your highest rate based on your adjusted gross income.
If you hold your digital assets for more than a year, you’ll pay taxes based on long-term capital gains tax. These rates range from 0% up to 20%, based on your taxable income. If you earn less than $44,625 as an individual or less than $89,250 as a couple, you aren’t subject to long-term capital gains tax on your investments.
Earn between $44,626 and $492,300 as an individual or $89,251 to $553,850 as a couple, and you’ll pay 15% on your earnings. Individuals earning $492,301 or more and couples earning more than $553,851 get taxed at the highest long-term capital gains rate, which is 20%.
Will the New IRS Regulations Affect Your Crypto Investments?
If you are already reporting your income, profit and losses from cryptocurrency, the new IRS regulations, if approved, won’t affect your tax returns or investments. In fact, it might make it easier to track your profit, loss and cost basis for your crypto investments.
However, the potential for errors exists. You’ll need to keep your own records instead of relying solely on the 1099 forms issued by your crypto platform. If you notice a discrepancy, you’ll need to report it immediately to your crypto broker and request an updated, accurate form.
Take care to ensure you report your crypto earnings as reflected on any 1099 forms; otherwise, it could result in an IRS audit. At best, you’ll receive a CP2000 notice, also known as an underreporter inquiry. You may owe additional taxes and possible penalties. You will need to reply to the notice within 30 days, either agreeing to the additional income reported or sending documentation that shows it is incorrect.
If you find the information is correct, you should pay the additional taxes by the due date on the notice to stop interest and penalties from accruing.
Bottom Line
As of now, and for those filing their taxes by the April 15, 2025, deadline, the new crypto tax regulations should have no effect on how you report crypto transactions on your tax returns.
If the new regulations go into effect, tracking your crypto earnings, losses and cost basis should be easier, although you’ll need to reconcile your own records with the 1099 forms you receive from your crypto broker or trading platforms.
This article originally appeared on GOBankingRates.com: How Will New Crypto Tax Regulations Affect Your Investments?
