Tax Season 2024: Cryptocurrency and the IRS | MTRS Insight

But the number of folks buying and selling cryptocurrencies—digital money that can be used in online transactions and theoretically cannot be governed by any centralized authority, such as a government.

For starters, in crypto mining, you're creating new digital coins, but the rules don't make it clear if you're being taxed as an investor or a business owner.

There's no doubt about it: More people are buying and selling digital assets like Bitcoin and Ethereum, which means the IRS is trying harder to collect taxes.

It is a challenge since crypto's appeal is that it is decentralized, making it hard to track and tax.

In spite of that, the IRS is now going after crypto users with new strategies to make sure they're paying their taxes.

For federal tax purposes, digital assets are treated as "property," so transactions involving virtual currency follow the same rules as stock or real estate transactions.

The 2022 Inflation Reduction Act, allocated $80 billion to the IRS, with much of it designated for enforcement activities, including cryptocurrency monitoring. More importantly, the IRS's strategic operating plan for 2023 to 2031 lays out how it's going to ramp up digital asset enforcement.

Digital money that's anonymous

There's a new line on your individual federal income tax return. As of 2022, taxpayers are asked if they sold, exchanged, or gifted any digital assets during the year.

Over the years, the IRS's terminology for asking the question has also evolved.

Crypto was originally referred to on tax returns as 'virtual currency'. In the wake of NFTs, the IRS included them in the definition of property. Digital assets also include NFTs on IRS tax forms.

NFTs are non-fungible tokens that represent real-world assets on the blockchain, like artwork and real estate. In contrast, cryptocurrencies like Bitcoin don't have individuality and can be replaced by tokens.

The idea behind Bitcoin and other cryptocurrencies is to transfer digital money anonymously, kind of like cash.

Courts and the IRS send a clear message

A tighter reporting requirement for crypto brokers will make it easier for the IRS to monitor digital assets.

The Infrastructure Investment and Jobs Act (IIJA), enacted in late 2021, created new reporting requirements for digital transactions that will give the IRS more information about virtual currency users.

The IIJA expanded the definition of brokers who have to report their customers' gains and losses on the sale of securities during the tax year-which includes a description of each sale, the cost basis, the acquisition and sale dates, prices, and a loss or gain. Operators of digital asset exchanges, such as cryptocurrency exchanges, must report just like traditional securities brokers.

Since the IRS hasn't yet issued final regulations with instructions, we don't know when the new reporting requirements will take effect.

In addition, the IIJA amended existing anti-money laundering laws to treat digital assets like cash. Businesses that receive more than $10,000 in digital assets in one transaction or multiple related transactions have to report to the IRS from earlier this 2023.

Cryptocurrency transactions are supposed to be hard to track.

To find digital assets, the IRS has a powerful tool; It's now pursuing it as unpaid capital gains taxes, as ruled by a U.S. District Court judge earlier this year.

With that decision—and other recent IRS moves—the message was clear: The IRS is coming for crypto.