A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology. Common digital assets include virtual currency and cryptocurrency, stablecoins and non-fungible tokens (NFTs)
As digital assets grow in popularity, the IRS is taking significant steps to ensure that these types of transactions are properly tracked and reported for tax purposes. These new regulations are designed to align digital asset reporting with the existing standards applied to traditional financial services. By requiring detailed reporting of digital asset transactions, these regulations aim to close tax gaps and provide greater visibility into taxable activities, reducing the risk of non-compliance.
Broker Reporting
Starting in 2024, people engaged in “trade or business” in the United States will need to collect information about purchases over $10,000 using digital assets and to report these transactions to the U.S. Treasury, similarly to how they currently must report cash transactions over $10,000.
The regulations require brokers who deal with digital assets to file Form 1099-DA (Digital Asset Proceeds from Broker Transactions) and furnish payee statements reporting gross proceeds from sales of digital assets.
Brokers will be required to report gross proceeds from digital asset sales starting in 2026 for transactions occurring in 2025; and report tax basis information for certain digital asset sales made in 2026, beginning in 2027.
Taxpayer Reporting
For several years, taxpayers filing tax returns have been required check a box indicating whether they received digital assets as a reward, award or payment for property or services or disposed of any digital asset that was held as a capital asset through a sale, exchange or transfer. This is required regardless of the amount or whether the taxpayer receives a 1099-DA, payee statement or information return.
The Infrastructure Investment and Jobs Act of 2021 revised the rules that require taxpayers that are engaged in a trade or business to report receiving cash of more than $10,000 by considering digital assets to be cash.
Tax Returns
Capital gains or losses of digital assets are reported on Schedule D (Form 1040), Capital Gains and Losses.
If individuals received any digital assets as compensation for services or disposed of any digital assets they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type, such as W-2 wages
Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C. Anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business must also report these transactions.
The rules for tracking and reporting digital assets and transactions are complicated. Your accountant or tax professional is your best source of guidance to assure you are in compliance with them.
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