#Cryptocurrency #United States #Irvine #David Klasing #IRS Taxation

Introduction

Cryptocurrency has gained immense traction as a popular investment and transaction tool in the United States. However, with its rise, the IRS has introduced complex reporting requirements aimed at ensuring compliance with federal tax laws. This article delves into the IRS's recent guidance, specifically focusing on Revenue Procedure 2024-28 and Notice 2025-7, which outlines how taxes on cryptocurrencies are assessed and reported.

Understanding Cryptocurrency Taxation in the U.S.

The IRS treats cryptocurrencies as property for taxation purposes, as established in IRS Notice 2014-21. This classification means that transactions involving cryptocurrencies are subject to general tax principles that apply to property transactions. The primary taxation considerations include:

• - Capital Gains and Losses: When a taxpayer sells or exchanges cryptocurrency, they are required to calculate the capital gain or loss associated with the transaction. This necessitates an understanding of the asset's basis, the length of possession, and the market value at the time of the trade.
• - Ordinary Income: Any cryptocurrency received as a payment for goods or services is categorized as ordinary income, making it subject to income tax and, if applicable, self-employment tax.
• - Mining and Staking Rewards: Income derived from mining or staking cryptocurrencies is also classified as ordinary income, which must be reported and is liable for self-employment taxes.
• - Airdrops and Forks: Airdrop events and hard forks can generate ordinary income that must be reported in the year they are received, regardless of whether there is a transfer or sale.

Reporting Requirements for Cryptocurrency Transactions

Taxpayers involved in cryptocurrency must adhere to specific reporting protocols when they sell or exchange digital assets. The IRS mandates several forms and procedural steps to streamline tracking and documenting ownership significantly:

1. Form 1040 Reporting: Taxpayers are required to answer a straightforward question on Form 1040 that asks if they engaged in any cryptocurrency transactions during the tax year. This inquiry covers all activities related to cryptocurrency.
2. Form 8949 Details: Transactions involving cryptocurrencies must be reported on Form 8949, necessitating the categorization of each transaction as either short-term or long-term. This involves providing detailed information such as acquisition dates, basis, sale dates, and exchange amounts.
3. Form 1099-DA Reconciliation: Starting from January 1, 2025, brokers are expected to issue Form 1099-DA for digital asset transactions, which will outline proceeds from cryptocurrency sales.
4. Basis Accounting: Accurate tax reporting relies heavily on an understanding of how to determine the basis of cryptocurrency, a framework recently clarified by IRS Revenue Procedure 2024-28 and Notice 2025-7.

Implications of the New IRS Guidance

Revenue Procedure 2024-28

This recently published procedure guides taxpayers on transitioning from older basis determination methods to a more detailed account-specific or wallet-specific basis. Here are the significant implications:

• - Basis Allocation: Taxpayers will need to allocate the basis of their cryptocurrencies across different wallets or accounts, which is vital for determining gains upon sale.
• - Record-Keeping: Taxpayers are encouraged to maintain meticulous records that verify the basis of each digital asset, including acquisition dates, costs, and market values during transactions.
• - Form 8949 Preparation Compliance: This shift aims to ensure consistency among taxpayer records and amounts reported by brokers on Form 1099-DA.

Notice 2025-7

This notice aims to ease some burdens associated with record-keeping technologies used by brokers by providing temporary relief for the 2025 tax year. Key points include:

• - Temporary Relief Period: Taxpayers can utilize their own records for proper identification of sold or transferred cryptocurrency, provided brokers are unable to track these details.
• - Fallback to FIFO Rule: If a taxpayer cannot accurately identify units sold, the FIFO (first-in, first-out) rule will be applied, which assumes the earliest acquired units were sold first.
• - Coordination with Revenue Procedure 2024-28: Taxpayers relying on the safe harbor provided in this earlier procedure can also take advantage of the temporary relief outlined in this notice, facilitating a more straightforward transition.

Practical Recommendations for Taxpayers

To ensure compliance with the new regulations and maintain accurate income tax reporting, it is crucial for taxpayers to:

• - Track all cryptocurrency transactions meticulously.
• - Record acquisition dates, costs, fair market values, and other pertinent transaction details in a systematic manner.
• - Consult with a tax attorney or CPA specializing in cryptocurrency taxation to navigate complex scenarios and keep updated with the changing regulations.

In conclusion, while the IRS's recent guidance adds layers of complexity to cryptocurrency reporting and taxation, understanding these regulations will be key for compliance and avoiding potential pitfalls in taxation.