Cryptocurrency Investors Face Looming Tax Deadline
As the price of bitcoin continues to soar, cryptocurrency investors are facing a critical deadline that could significantly impact their future taxes. The U.S. Department of the Treasury and IRS have introduced new tax reporting rules for digital asset brokers, which will come into effect in 2025.
Understanding the New Reporting Rules
Starting in 2026, brokers will be required to report gross proceeds from 2025 sales using Form 1099-DA. In 2027, they will also need to include “cost basis,” or the original purchase price, for sales made in 2026. This change is significant, as it will affect how investors calculate their profits.
The Importance of Basis
Basis is crucial in determining an investor’s profit, as it is the original purchase price of the asset. Without a clear basis, the IRS may consider it to be zero, resulting in inflated gains. Investors must be able to prove their basis to avoid this scenario.
Impact on Cryptocurrency Investors
The new reporting rules will require investors to establish a “reasonable allocation” of basis by January 1, 2025. This means that investors must provide their broker with detailed information about their digital assets, including the original purchase price and any subsequent transactions.
Consequences of Non-Compliance
Failure to comply with the new reporting rules could result in a “reporting nightmare” for investors, according to Sulolit Mukherjee, executive director of compliance and implementation for the IRS’ Office of Digital Asset Initiative. Investors who do not provide accurate information may face difficulties in calculating their profits and could be subject to penalties and fines.
IRS Focus on Digital Asset Enforcement
The new reporting requirements are part of a broader effort by the IRS to improve detection of noncompliance in the digital asset space. The agency is focusing on high-income individual tax compliance and aims to prevent the use of digital assets to hide taxable income.
Action Required
Cryptocurrency investors must take action before January 1, 2025, to ensure compliance with the new reporting rules. This includes establishing a reasonable allocation of basis and providing accurate information to their broker. By doing so, investors can avoid potential penalties and ensure a smoother tax filing process in the future.
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