IRS, U.S. Treasury Continue to Clamp Down on Cryptocurrency Reporting by Jonathan Menna, CPA
Posted on December 12, 2023
by
Jonathan Menna
It has been nearly 10 years since the IRS first announced in Notice 2014-21, 2014-16 I.R.B 938 it would treat cryptocurrency as a capital asset for federal tax purposes, subject to the same general tax principles as other forms of property, including stocks and bonds. Two recent developments are significant in helping the agency crackdown on noncompliance.
IRS Revenue Ruling 2023-14 requires taxpayers using the cash-basis of accounting to report as taxable income the fair market value of the financial rewards they receive from staking cryptocurrency. Proof of staking (PoS) occurs when cryptocurrency holders participate in the validation process, lock in their wallets and agree to temporarily give up their right to sell, transfer or exchange any of their tokens for a set period. In return, they may earn additional units of cryptocurrency or a high percentage yield, similar to what you might receive from a high-yield savings account or bank CD. Under this ruling, taxpayers must report the fair market value of their staking reward as taxable income in the year they “gain dominion and control over those rewards.”
Separately, the IRS and Treasury Department recently released proposed regulations requiring “digital asset brokers,” including crypto exchanges, to report customers’ cryptocurrency sales and exchanges in the same way brokerage firms currently report taxpayers’ sales of securities and other financial instruments. The reporting on IRS Form 1099-DA, which is scheduled to begin in 2026 for the 2025 tax year, would include:
- sales of digital assets for fiat;
- exchanges of a digital asset for property, goods or services;
- exchanges or trades of one digital asset for another;
- receipts of digital assets as payment for goods or services;
- receipts of digital assets as a result of a hard fork and airdrops;
- receipts of new digital assets from mining or staking activities; and
- any other dispositions of financial interest in digital assets.
Under current law, sales and exchanges of digital assets are subject to capital gain tax, whereas cryptocurrency received as a form of payment for goods and services is reportable as taxable income. While the new reporting requirements are intended to prevent tax evasion, they will also help individual taxpayers more easily understand their tax basis in cryptocurrency and calculate any tax liabilities they may have resulting from the sale or other disposition of those assets.
About the Author: Jonathan Menna, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax and consulting services to high-net-worth individuals, operating entities and real estate partnerships. He can be reached at the CPA firm’s New York, N.Y. office at (646) 213-7600 or info@bpbcpa.com.
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