The cryptocurrency industry continues to innovate at a breakneck speed, from modernizing Ethereum with a proof-of-stake consensus mechanism to bringing transparency to the stablecoin market with proof-of-reserves. While regulators have been slow to catch up, 2024 could bring several meaningful changes to how the IRS taxes cryptocurrencies.
In this guide, we’ll delve into prospective tax changes and decipher their implications for everyone from the average crypto enthusiast to the wealthy crypto investor.
A Brief Review
The IRS treats cryptocurrencies as “property” subject to income and capital gains tax. While these rules sound straightforward, the innovative nature of cryptocurrencies creates some confusion. For instance, when using a bridge, it’s unclear whether locking one cryptocurrency to use another on a different blockchain is a “taxable event.”
The IRS will likely continue addressing these questions piecemeal with periodic notices and rulings, as it did with IRS 2023-12 and IRS 2023-50 in 2023. However, the agency could also see new lawsuits arise from the ambiguities, such as the SEC v. Jarrett case that resulted in a Revenue Ruling 2023-14, formalizing its stance on staked crypto.
Not surprisingly, the IRS has been much more ambitious in collecting unpaid taxes. In 2018, it launched a virtual currency compliance campaign, sending letters to taxpayers suspected of non-compliance. And more recently, data from crypto exchanges suggest a potential 75% non-compliance rate among taxpayers, creating a $500 billion annual “tax gap.”
The agency plans to continue its virtual currency compliance campaign to educate taxpayers about the need to report crypto income and taxable events. In addition, the IRS made it clear that it intends to increase scrutiny on high-income taxpayers using foreign bank accounts and millionaires owing at least $250,000 in recognized tax debt.
Broker Reporting Requirements
The 2021 Infrastructure Investment and Jobs Act aims to close the tax gap by requiring brokers to report cryptocurrency transactions and other digital assets to the IRS via Form 1099. In particular, they must report your cost basis and any sale proceeds to the IRS, as well as the transfer details and original cost basis of any cryptocurrencies moving out of your accounts.
The most controversial provision in the new regulation is the definition of a “broker,” which includes “digital asset middlemen.” The new term describes those who provide services directly to indirectly facilitating digital asset sales, which could cover large swaths of the industry and sparked concerns that reporting requirements could bog down the industry moving forward.
In addition, the IRS plans on rolling out a Form 1099-DA (digital asset) at some point to make it easier to track tax dodgers. This form could require brokers to furnish transaction hash IDs, customer IDs, or other transactional information for digital assets. That way, IRS agents could track and verify everything on the blockchain itself.
According to the bill’s original language, the Treasury Department and IRS had until the end of 2023 to finalize the rules and collect more revenue as soon as 2024. But thanks to a series of delays, the IRS won’t require brokers to submit forms until 2026 for transactions made in 2025, meaning taxpayers don’t have to worry about this for another year.
Anti-Money Laundering Rules
The Bank Secrecy Act (BSA) requires financial institutions, businesses, and individuals to report cash transactions of $10,000 or more to the Financial Crimes Enforcement Network Division (FinCen) of the U.S. Treasury (except for gifts and other exceptions). The goal is to prevent money laundering and tax evasion by gaining visibility into large cash transfers.
Beginning in 2024, those involved in “trade or business” in the U.S. will need to collect information about cryptocurrency purchases over $10,000 and report these transactions to the Treasury Department like they report cash transactions. The move comes amid concerns that some people use cryptocurrencies for money laundering and tax evasion.
The Treasury Department is also exploring ways to implement the OECD’s Crypto Asset Reporting Framework to receive information regarding U.S. taxpayers’ transactions on international exchanges. These efforts would make it much more difficult for taxpayers to evade paying U.S. taxes by using international exchanges.
Wash Sale Rule Changes
President Biden’s proposed fiscal year 2024 budget included a provision that would make cryptocurrencies subject to the Wash Sale Rule, eliminating tax deductions on losses incurred on selling and quickly rebuying the same or a similar cryptocurrency. These rules would align cryptocurrencies with those already affecting stocks and bonds.
If the proposal becomes law, you should take steps to avoid violating the Wash Sale Rule. When tax-loss harvesting, this means repurchasing a correlated cryptocurrency rather than the same or a “substantially identical” cryptocurrency. Alternatively, you can wait until over 30 days after the sale to repurchase the same cryptocurrency and still claim the tax loss.
New Accounting Rules
The U.S. Financial Accounting Standards Board (FASB) finalized mark-to-market rules for businesses holding cryptocurrencies in September 2023. Before these new rules, companies had to file digital assets as “intangible assets” like goodwill and intellectual property. These rules had some strange conditions that were not necessarily suitable for crypto assets.
In particular, the existing rules would require companies to report a loss if the crypto they hold is worth less than the purchase price, even if they haven’t sold the asset.
The existing rules penalized companies for holding digital assets since they risked hurting quarterly performance. However, under the new regulations going into effect in 2025 (but can optionally be used in 2024), the FASB created a separate digital asset category where crypto users would declare gains or losses (based on the acquisition price) in a mark-to-market fashion.
In other words, companies would report the fair value, cost-basis, and types of assets they’re holding to reflect their actual value at the reporting time – including potential gains. Among other things, that would make it easier for companies to adopt cryptocurrencies as treasury assets in lieu of cash or cash-equivalent securities.
The Bottom Line
Cryptocurrency tax rules could see some big changes in 2024 and over the ensuing few years. While preparing for these changes is always necessary, it’s equally important to remember that Congress could change these rules, too. For instance, the Keep Innovation in America Act and the RFIA could create a narrower scope for defining a crypto “broker.”
While the IRS and SEC are keen on collecting taxes and regulating the market, the focus of many legislators is ensuring the U.S. remains a competitive market for crypto entrepreneurs, investors, and other participants. And, of course, crypto companies continue to break new records regarding the amount they spend on lobbying efforts.
If you trade cryptocurrencies, ZenLedger can help you stay on top of these changes and ensure you accurately file your taxes. Our platform automatically aggregates transactions across wallets and exchanges, computes your capital gain or loss, and generates the necessary tax forms. You can also use our tax-loss harvesting tool to find opportunities to save year-round and protect yourself during an audit with our grand unified accounting spreadsheets.
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.