You may have reveled in the Wild West days of cryptocurrency and other digital assets, but we’re entering an era of meticulous record keeping and thoughtful tax strategies, thanks to recently added IRS requirements.
Cryptocurrency trading and investing gained mainstream attention with Bitcoin’s launch in 2009, which still makes it a capricious teenager of sorts. (Its erratic, unpredictable behavior certainly makes the comparison appropriate.) So, like any other teen, it seems only natural that as it matures, it faces the adult realities of increasing IRS scrutiny.
It has been several years since the IRS introduced its initial reporting requirement on Form 1040 (and other forms, including 1040-SR, 1040-NR, 1041, 1065, 1120 and 1120S), prompting taxpayers to answer “Yes” or “No” to whether they have received, sold, exchanged, or otherwise disposed of a digital asset or financial interest in a digital asset during the tax year. “Digital asset” is an updated term that broadens the definition beyond crypto or virtual currencies to other assets such as exchange-traded funds (EFTs), stablecoins, and non-fungible tokens (NFTs).
This question is broad (and the language evolves) for a reason. It’s designed to minimize loopholes and misjudgments regarding the types of crypto transactions that may be taxable. If you have any dealings in digital assets, it’s hard to say no to that question. If you are in the “Yes” category, you’ll need to get more granular on Form 8949 (which deals with capital assets).
The IRS recently released Revenue Procedure 2024-28 and Notice 2025-7 to further outline digital asset reporting and taxpayer obligations. CPA Practice Advisor offers a summary of the requirements here.
But before you assume these guidelines make things less confusing, they do not. There are now basis allocation rules that are quite complicated. The basis of crypto must be determined wallet-by-wallet or account-by-account so that gains can be recognized. Fail to do this, and the first-in, first-out (FIFO) method (which assumes the earliest acquired units are sold first) will be the default, which may or may not be beneficial.
Many brokers are now required to provide Form 1099-DA to report proceeds from cryptocurrency sales to help ensure consistency between taxpayer records and broker-reported amounts. Some brokers aren’t ready to comply due to inadequate record-keeping technology, so, for those accounts, taxpayers may rely on their own records through 2025.
What it all comes down to is meticulous recordkeeping (tracking acquisition dates, costs, fair market values, and transaction details) and transparent reporting. Without those practices, you may soon be facing hefty penalties, interest, or even criminal accusations. Even swapping one form of crypto for another can trigger taxes. Crypto-unique events such as “hard forks” and “airdrops” deserve attention. Gone are the days of assuming that any digital asset activity or ownership is exempt from disclosure. Didn’t receive a tax form from a broker? You may still owe taxes. Still using multi-wallet or universal basis tracking? You may be in for a rude awakening.
Understanding the current digital asset landscape can help you identify tax opportunities as well. The IRS currently considers digital assets property, not currency (except in a few circumstances, such as digital assets in exchange for goods or services in a business context). That means most digital assets are subject to capital gains rules for tax purposes. Therefore, certain losses might be used to offset gains and perhaps even income, with an excess potentially eligible to be carried forward to future tax years.
These opportunities may be particularly important to consider for those owning notoriously volatile assets, as Forbes points out, including altcoins that have plummeted in value, NFTs that have become illiquid or worthless, or DeFi (decentralized finance) tokens or projects that have failed.
More than ever, if you’ve dipped your toe into cryptocurrencies or other digital assets, be sure to find out from a tax professional what that might mean for your requirements and strategies. Feel free to contact us with questions.
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