Crypto investors and individuals who have been paid in bitcoin or other cryptocurrencies for their services must report taxable transactions on their 2023 tax return due on April 15. This includes paying taxes on any income or gains received from crypto assets in the previous year. However, there are still uncertainties regarding tax reporting rules and calculations needed for reporting. The IRS has temporarily halted enforcing third-party reporting requirements for crypto brokerage platforms until the Treasury issues final regulations. Despite this, individuals are still responsible for accurately reporting their crypto transactions to the IRS.
Individuals must answer a question on the first page of the federal 1040 tax form regarding digital asset transactions during 2023. If an individual was paid in cryptocurrency by an employer or client, income tax is owed based on the cryptocurrency’s value on the day of payment. If an individual sold crypto in 2023, they need to calculate whether they had a capital gain or loss based on the difference in value from when they bought and sold the asset. Capital losses can be used to offset capital gains and ordinary income taxes, with remaining losses carried forward to future tax years for deductions.
Individuals who used cryptocurrency to purchase goods or services, such as a car, may need to report a capital gain or loss on the transaction. If a donation of cryptocurrency is made to charity, the value is based on the price of the crypto on the day of the transaction, and if the value exceeds $5,000, a qualified appraiser must calculate the donation value for tax deduction purposes. The Securities and Exchange Commission recently approved the listing and trading of 11 bitcoin exchange-traded funds (ETFs) in January, which could impact how cryptocurrency investments are taxed as SEC-regulated financial products.
Ownership of cryptocurrency directly is treated as personal property for tax purposes, while ownership of bitcoin through an ETF is taxed differently. Individuals who invest in a bitcoin ETF will receive a tax form from the broker-dealer where their account is held, reporting on their transactions during 2024. It is uncertain whether owning a bitcoin ETF will affect how individuals answer the question regarding digital assets on their 1040 form. More clarification on the tax implications of investing in a bitcoin ETF may become available as the filing season for tax year 2024 approaches in January.
