Beginning January 1, 2025, US taxpayers will no longer be able to utilize the universal method for determining tax basis for digital assets held in virtual wallets and accounts. Previously, the IRS permitted taxpayers to use the universal method for tracking tax basis in digital assets. FYI, the majority of information in this blog was taken directly from the IRS website in order to ensure its accuracy. We've also highlighted an informative video from the founder of Crypto Capital Venture Dan Gambardello and David Kemmerer, the co-founder and CEO of CoinLedger. Here is a link to the video if you missed it:
https://www.youtube.com/watch?v=f0QS-71iBD8
Join us today as we discuss the following topics related to the latest IRS tax rules being implemented...
- What is the definition of a digital asset?
- How to report digital asset transactions
- Documentation of digital assets transactions
- Calculating your capital gains or losses
- Short Term vs. Long Term Capital Gains
- Reporting digital asset transactions on the correct forms
*PLEASE NOTE* As of January 1st, 2025 the IRS has has delayed the enforcement of new cryptocurrency cost-basis reporting requirements to next year, allowing brokers additional time to adapt to the new reporting rules...
So what is defined as a digital asset? For U.S. tax purposes, digital assets are considered property, not currency. A digital asset is stored electronically and can be bought, sold, owned, transferred or traded.
The tax definition of a digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology (Infrastructure Investment and Jobs Act).
Examples of digital assets include:
- Convertible virtual currencies and cryptocurrencies such as Bitcoin,
- Stablecoins
- Non fungible tokens (NFTs)
>>> How to report digital asset transactions...
If you have digital asset transactions, you must report them whether or not they result in a taxable gain or loss.
Things you should do:
- Keep records
- Calculate your capital gain or loss
- Determine your basis
- Report the income on the correct form
>>> When keeping records, if you had digital asset transactions, keep records that document:
- Your purchase, receipt, sale, exchange or any other disposition of the digital assets
- The fair market value as measured in U.S. dollars of all digital assets received as income or as a payment in the ordinary course of a trade or business
The Internal Revenue Code and regulations require taxpayers to maintain sufficient records to establish the positions taken on federal income tax returns.
>>> Calculating your capital gains or losses…
To calculate the capital gain or loss of a digital asset that you sold or disposed of in a transaction, you'll need this information:
- Type of digital asset
- Date and time of transaction
- Number of units
- Fair market value at time of transaction (as measured in U.S. dollars)
- Basis of digital asset sold or disposed of
>>> Figuring out how to calculate gains or losses, identify the units sold or disposed, and determine fair market value for your situation...
If you own and use a digital asset for personal or investment purposes…
- The income would be taxed as a capital gain or loss when you sell or dispose it.
If you receive a digital asset in exchange for goods or services in a business context...
- The income would be taxed as ordinary income or a loss.
>>> How to determine if your capital gain or loss is short-term or long-term?
- Short-term capital gain: If you held the digital asset as a capital asset for one year or less before selling, exchanging, or otherwise disposing of the digital asset.
- Long-term capital gain: If you held the digital asset as a capital asset for more than one year before selling, exchanging, or otherwise disposing of it.
>>> Reporting digital asset transactions on the correct forms...
Please note the appropriate form used depends on the type of transaction!
- If you sold, exchanged or otherwise disposed of a digital asset you held as a capital asset use Form 8949, Sales and Other Dispositions of Capital Assets:
https://www.irs.gov/forms-pubs/about-form-8949
- If you have other ordinary income related to digital assets, report income from forks, staking, mining, etc., use Form 1040 (Schedule 1), Additional Income and Adjustments to Income:
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
- If you gave a gift in the form of digital assets, use Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return:
https://www.irs.gov/forms-pubs/about-form-709
- If you were paid as an employee or independent contractor with digital assets, wages you receive as an employee must be reported on the digital asset income Form 1040, U.S. Individual Income Tax Return:
https://www.irs.gov/forms-pubs/about-form-1040
- For payments you receive as an independent contractor, report the digital asset income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship):
https://www.irs.gov/forms-pubs/about-schedule-c-form-1040
- If you sold, exchanged or otherwise disposed of digital assets to customers you must report these transactions on Form 1040 (Schedule C), Profit or Loss from Business (Sole Proprietorship) PDF:
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
For details, see tax year 2023 1040 (and 1040-SR) instructions via this hyperlink:
https://www.irs.gov/instructions/i1040gi
Disclaimer: This is not financial advice, please do your own research and confirm that all of this information is accurate as it may change prior to tax season.