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If you have invested in cryptocurrency (for example, Bitcoin or
Ether), nonfungible tokens (NFTs) or certain other digital assets,
it is important to familiarize yourself with the new tax reporting
requirements that take effect in 2023. The new rules will not
increase your taxes. Instead, they are designed to help the IRS
identify unreported digital transactions.
Related Read: Got Crypto? Beware of Tax Surprises When Dealing
NO NEW TAXES
As with other capital asset transactions, transactions involving
digital assets are already taxable. For example, if you sell
cryptocurrency in exchange for traditional currency, you must
report capital gains or losses. These might be short- or long-term,
depending on how long you have held the cryptocurrency. In
addition, because the IRS views cryptocurrency as property for tax
purposes, using it to purchase or sell goods or services is
considered a taxable exchange.
The new reporting rules, which were added by 2021’s
Infrastructure Investment and Jobs Act, apply to digital asset
transactions occurring on or after January 1, 2023. Under the
rules, digital assets will be treated as securities for tax
Crypto exchanges (essentially, any platform on which investors
can buy or sell cryptocurrency or other digital assets) must begin
reporting transactions to investors and the IRS in early 2024. They
will use Form 1099-B, which is currently used by brokers to report
details on sales of stock and other securities, including sale
proceeds, relevant dates, cost basis and the character (short- or
long-term) of gains and losses.
The new rules are expected to affect investors in a couple of
significant ways. For one thing, the privacy of cryptocurrency
transactions — part of their appeal for many current
investors — will become a thing of the past. Also, digital
assets will be treated as cash for purposes of the
anti-money-laundering law that requires businesses to report cash
transactions of $10,000 or more to the IRS.
That said, many crypto exchanges lack access to certain
information they need to determine an investor’s cost basis. So
it is likely that 1099-Bs provided to you and the IRS will
overstate gains or understate losses associated with these
transactions. You will need to document your digital asset
transactions carefully to ensure your gains and losses are reported
JUST THE BEGINNING
Keeping accurate records of your transactions will also put you
in a good position for future regulatory developments.
Cryptocurrency has historically been lightly regulated. Given that
historical context and its presence in the news, you should expect
additional rules and reporting obligations in the future.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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