New Developments in IRS Enforcement and Reporting Procedures for Cryptocurrency

What is cryptocurrency? Cryptocurrency is a form of virtual currency that can be used as an alternative fonn of payment using encryption technology, making digital money designed to be used over the internet. The most commonly known and most influential cryptocurrency is Bitcoin, which was the first cryptocurrency to launch in 2008. Cryptocurrency functions both as a currency and a virtual accounting system. Cryptocurrency is a type of digital asset that can often be traded on major trading platforms, such as Robinhood. There are also trading platforms that are specifically designed just for trading cryptocurrency, such as Crypto.com.

How do I report cryptocurrency on my tax return? For tax purposes, cryptocurrency is treated as property. This means that cryptocurrency, when sold, is treated like any other asset sale and is reported on your Schedule D to report capital gains/losses. Recording keeping is key! Not all trading platforms track your basis in cryptocurrency transactions. They typically only report proceeds to the IRS. To help offset proceeds, it is your responsibility, as the taxpayer, to keep records of your basis for all transactions. For example, you purchase Bitcoin on March 1, 2023 for $1,000. The $1,000 paid for Bitcoin becomes your basis in the cryptocurrency. You sell/convert your Bitcoin to cash on August 1, 2023 for $2,000. The $2,000 becomes your proceeds and is the amount of income reported to the IRS. You may offset the $2,000 by the

$1,000 that you originally purchased the cryptocurrency for. This will result in a short-term (held less than a year) capital gain of $1,000 ($2,000 proceed- $1,000 basis) reported on your Schedule D.

What are new developments in cryptocurrency? There are a couple of new developments regarding cryptocurrency that all taxpayers should be aware of. Adjustments have been made to Form 1040. There is a question on the 1040 that will ask if you held “digital assets” any time during the year. This is a question that must be answered for all taxpayers. Digital assets include (but are not limited to): convertible virtual currency, cryptocurrency, and Non-fungible tokens (NFTs). There have also been many changes internally, within the IRS, to crack down on enforcement with reporting of digital assets. They created the National Cryptocurrency Enforcement Team (“NCET”) and appointed their first director on February 21, 2022. The purpose of this new department is to set the standards for virtual currency tax compliance issues. Penalties for non-compliance could apply as follows: fraud penalties may result in being liable for penalties that amount to 75% of the unpaid tax and accuracy-related penalties may result in being liable for 20% to 40% penalty. In most extreme cases, if you are found guilty of criminal charges in tax evasion or conspiracy, prison term is up to 5 years and a fine. Filing a false return may subject a taxpayer to a prison term up to 3 years and a fine.

For more information, please visit: IRS Notice 2014-21, as modified by Notice 2023-34.