New IRS Rules to Make Crypto Tax Evasion Riskier This Year

As year-end approaches, it’s paramount for investors, particularly those in the digital asset space, to ensure their tax strategies are well-aligned. A looming IRS brokerage reporting mandate, set to encompass transactions post-January 1, 2025, adds urgency to this year-end review. The implications extend beyond mere compliance; they touch upon portfolio optimization and risk management in a rapidly evolving regulatory landscape.

The IRS categorizes cryptocurrency as property, akin to stocks or real estate. Consequently, selling digital assets can trigger capital gains or losses, necessitating diligent record-keeping. While responsible crypto investors have maintained meticulous records, the incoming reporting obligation provides a compelling incentive for bolstering those efforts. Brokers will now issue Form 1099-DA, mandating the reporting of gross proceeds for each digital asset sale processed, starting in the 2025 tax year. By 2026, the mandate expands to include reporting of both gross proceeds and cost basis for covered securities, ushering in a new era of transparency and accountability within the crypto market.

Ric Edelman, founder of the Digital Assets Council of Financial Professionals, notes that the absence of prior 1099 reporting for crypto transactions created opportunities for non-compliance. “Many mistakenly believed there was no reporting obligation,” he highlights. This perceived ambiguity is now being addressed, compelling investors to adapt their strategies and proactively manage their tax liabilities.

Amidst Bitcoin’s roller-coaster year – reaching unprecedented highs followed by a significant correction of over $40,000 – understanding these stringent record-keeping requirements is crucial. This isn’t merely about avoiding penalties; it’s about leveraging the tax code to optimize investment returns and mitigate risk exposure.

Consider an example: Purchasing Ethereum for $1,500 with a $50 transaction fee establishes a cost basis of $1,550. Selling that ETH for $2,000 results in a taxable gain of $450 ($2,000 – $1,550). Precise calculation of the cost basis is therefore vital for accurate tax reporting and strategic decision-making.

Get Your Crypto Recordkeeping in Order Now

While brokers shoulder the responsibility of reporting cost basis by the 2026 tax year, investors must prioritize meticulous record-keeping. Daniel Hauffe of the American Institute of Certified Public Accountants emphasizes, “It’s a taxpayer’s responsibility to track and substantiate whatever cost basis they’re providing.” Failure to do so can lead to discrepancies, audits, and potentially, penalties.

The complexity is compounded for investors who’ve transferred tokens to different brokers without maintaining a clear audit trail. In such cases, the receiving broker lacks the historical purchase data, relying solely on the transfer price. Rectifying these discrepancies now, before the brokers are required to report the basis, is highly recommended, potentially involving consultation with a qualified tax professional.

For investors with haphazard record-keeping, engaging a dedicated crypto tax recordkeeping provider is advisable. These services – ProfitStance, Taxbit, TokenTax, and ZenLedger, among others – offer specialized tools and expertise to navigate the intricacies of crypto taxation.

Edelman reiterates the value of utilizing a recordkeeping provider, stating, “If you try to do this manually, it is complicated and you’re likely to make errors.” This is particularly relevant as decentralized finance (DeFi) and other complex crypto applications become more commonplace, generating increasingly intricate tax scenarios.

Crypto Staking, and Staking ETFs, to be a Major Tax Focus

The rapid evolution of the crypto market has outpaced existing IRS guidance, necessitating updated regulations across various domains. The IRS acknowledged this in Notice 2024-57, noting continued study of diverse crypto transactions to determine appropriate taxation. This regulatory uncertainty introduces ambiguity but also potential opportunities for sophisticated tax planning.

Staking transactions are an area awaiting clarity. While the IRS has granted temporary penalty waivers for certain transactions under review, meticulous record-keeping remains essential. The core debate revolves around the timing of taxation: should staking rewards be taxed upon receipt, as the IRS has indicated, or only when spent, sold, or otherwise disposed of, as some advocates argue? This distinction has significant implications for investors’ cash flow and tax liabilities.

Zach Pandl, head of research at Grayscale, underscores the growing importance of staking guidance due to the approval of exchange-traded funds (ETFs) that provide staking rewards to investors. “Staking rewards are increasingly common for investors because they’ve now been activated in ETFs,” Pandl explains. This broadens access to crypto investments for retail investors, highlighting the need for clear and accessible tax guidance applicable to staking rewards generated within ETF structures.

Bitcoin’s Big Drop Could Be a Tax-Loss Advantage

The volatility inherent in crypto markets presents occasional opportunities for tax-loss harvesting. This strategy entails selling investments at a loss to offset gains in other investments, potentially reducing overall tax liabilities. Bitcoin’s recent price correction from its October highs provides a prime example.

Depending on individual purchase prices and holding periods, investors may be able to strategically realize losses to offset previous gains. Conversely, tax-gain harvesting, which involves intentionally realizing gains during periods of lower tax rates, could also be a viable strategy.

Stuart Alderoty, president of the National Cryptocurrency Association, encourages investors to proactively assess these opportunities. “This is the time to be thinking about that and planning for it,” he states. By strategically managing gains and losses, investors can potentially optimize their after-tax returns.

Many Accountants Don’t Understand Digital Assets

Crypto taxation is complex, hinging on factors such as tax bracket and holding periods. Short-term gains (assets held for less than a year) are taxed at ordinary income rates (10% to 37%), while long-term gains (assets held for over a year) are subject to capital gains rates (0%, 15%, or 20%).

Compounding the complexity are the IRS’s evolving rules and the nuances of digital asset transactions. Reporting transactions on the correct forms, such as Form 8949 for capital assets or Form 1040 for income from services paid in digital assets, is critical.

Furthermore, many taxpayers misunderstand the IRS’s question regarding digital assets on Form 1040. IRS guidance clarify this pertains to digital assets “received” for payment for property or services provided, a reward or award, mining, staking and similar activities or an airdrop as it relates to a hard fork, it does not simply mean the purchase of the asset.

Given these challenges, engaging a tax advisor with specialized knowledge of cryptocurrency is paramount. Edelman concludes, “Most accountants are not because they haven’t had any training in this area.” Seeking expert guidance ensures accurate reporting and strategic tax planning within the dynamic and complex world of digital assets.