IRS Taking a Tougher Stance on Cryptocurrencies

Written by Jeffrey S. Gold, CPA LMC Tax Director

Cryptocurrencies such as Bitcoin are digital representations of value that function as a unit of account and are considered virtual currency. The use of virtual currencies has proven to be challenging for the IRS from both a guidance and an enforcement perspective. Despite its label as a “currency,” the IRS regards virtual currency as property – an investment, like stock or bonds. This property can generate taxable gain or loss when sold or used to purchase goods and services.

Since 2019, every personal, business, and fiduciary income tax return has required taxpayers to state whether they received, sold, or exchanged digital assets. When left on their own to report, taxpayers may not properly report their cryptocurrency transactions. The Treasury Department has found that compliance rates increase from 55% to 90% when information is reported by third parties. The IRS has spent the last few years attempting to increase reporting compliance in the cryptocurrency and digital assets arena.

This summer the agency issued final regulations that require brokers to report sales and exchanges of virtual currency transactions on a newly created tax form, Form 1099-DA. This will require the reporting of most sales and exchanges that take place beginning in calendar year 2025. The new regulations require reporting for virtual currency transactions using brokers of digital asset trading platforms, wallets, kiosks, payment processors, and stablecoin issuers, which together cover most virtual currency transactions. The IRS will address other brokers (non-custodial and decentralized brokers that do not take possession of the assets) in later guidance.

The use of cryptocurrencies for the direct purchase of goods and services between taxpayers not using brokers as intermediaries is not subject to reporting under the new regulations. However, a transaction will be subject to the new regulations if it is processed by an intermediary or is already subject to other reporting requirements, such as securities, real estate, or wage or independent contractor compensation. Real estate professionals will be required to report real estate transactions paid for with digital assets beginning with 2026 closings.

In addition to the broker reporting rules, the regulations provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions and provide backup withholding rules. The IRS is aware of the challenges that implementing new reporting requirements can pose and is providing phase-in transitional and penalty relief on certain transactions. There is also a de minimis reporting exception that applies to certain small transactions.

It is important to note that these regulations do not create any new reporting transactions, but rather provide guidance and enforcement mechanisms to ensure proper reporting of transactions already subject to tax under current law.

LMC is dedicated to staying updated on these developments and advising clients effectively. For more information or questions regarding reporting of transactions involving virtual currencies, please reach out to your LMC professional.