Today we are going to talk about the IRS cryptocurrency tax regulations in the United States. The latest regulations were released in July 2024, have been in the works for some time, and will take effect in 2025, with a one-year transition period.
The IRS treats cryptocurrency as property, not currency. Therefore, any transactions involving cryptocurrency (such as buying, selling, or exchanging) may result in capital gains or losses.
Reporting requirements: Starting in 2023, all taxpayers must answer whether they engaged in any activities related to digital assets on their federal income tax returns, including receiving, selling, exchanging, etc.
New reporting regulations: The IRS released final regulations on July 9, 2024, requiring digital asset custodial brokers to report transactions involving the sale and exchange of digital assets starting in 2025, with actual reporting beginning in 2026. These regulations apply to custodial digital asset trading platforms, certain digital asset custodial wallet providers, digital asset ATMs, and certain digital asset payment processors. They cover a variety of centralized and decentralized projects, including CEX, DEX, and others.
Specific transaction events: Hard forks and airdrops: If cryptocurrency undergoes a hard fork resulting in the distribution of new cryptocurrency, and the taxpayer actually or constructively receives the new currency, taxable income may be generated. Mining, staking, and trading: Cryptocurrency obtained from mining or staking is treated as ordinary income and should be taxed based on its fair market value at the time of receipt.
Tax-free scenario: If cryptocurrency undergoes a hard fork but the taxpayer does not receive the new currency, then no taxable income is generated.
Tax enforcement: The IRS has been increasing tax compliance by enhancing the scrutiny of cryptocurrency transactions, including issuing John Doe subpoenas to cryptocurrency exchanges for user data.
Cost basis allocation: The IRS provides a method allowing taxpayers to reasonably allocate the cost basis of digital assets before 2025 to comply with the new reporting requirements. The implementation of these regulations aims to reduce the tax gap, particularly by increasing tax compliance among high-income individuals.
It is particularly important to note that these policies may be adjusted or updated over time, such as the repeal initiated by Trump when he took office.