Cryptocurrency is gaining popularity in the U.S. as both an investment and a transaction method, prompting the IRS to impose complex reporting requirements. Recent updates from the IRS, specifically Revenue Procedure 2024-28 and Notice 2025-7, have clarified the reporting obligations for cryptocurrency owners. Cryptocurrencies are considered property, meaning that capital gains, income from sales, and mining rewards are taxable. Taxpayers need to track their transactions accurately using specific forms during annual tax returns. Maintaining detailed records is crucial to comply with these regulations. For navigating these complexities, it’s advisable to consult with a cryptocurrency tax attorney or CPA.
By David W. Klasing, Esq.
Cryptocurrency has rapidly gained traction among Americans, transforming into a popular investment option and a favored method for transactions. As its appeal grows, the Internal Revenue Service (IRS) has rolled out intricate reporting requirements to guarantee compliance with U.S. tax laws. Recent guidance, specifically Revenue Procedure 2024-28 and Notice 2025-7, has shed more light on the obligations facing cryptocurrency holders. This blog delves into these reporting duties and the taxation of cryptocurrencies in the U.S.
Overview of U.S. Taxation of Cryptocurrency
In the U.S., cryptocurrencies are categorized as digital assets and regarded as property for tax purposes. This classification means that the standard tax rules for property transactions apply to cryptocurrency dealings.
1. Capital Gains and Losses
– When you sell or swap cryptocurrencies, calculating your capital gain or loss is essential.
– This involves determining the asset’s basis, the holding period, and its fair Market value at the time of the transaction.
2. Ordinary Income
– Cryptocurrencies acquired as payment for services or goods fall under ordinary income, and self-employment tax may apply for services rendered.
3. Mining and Staking Rewards
– Income from mining or staking these digital assets is also classified as ordinary income subject to tax when received and must be disclosed to the IRS.
4. Airdrops and Forks
– Revenue received from airdrops and hard forks is treated as ordinary income and must be reported in the year obtained, even if you haven’t sold or transferred the crypto.
How Cryptocurrency Transactions Are Reported
When individuals sell or trade cryptocurrencies, they must document these transactions during their annual tax return. Here’s how:
1. Initial Reporting on Form 1040
– Taxpayers need to indicate “Yes” or “No” regarding cryptocurrency transactions on Form 1040, which covers a variety of cryptocurrency activities.
2. Detailing Transactions on Form 8949
– Specific transactions related to cryptocurrencies are recorded on Form 8949, where you classify them as short-term or long-term based on the holding period.
3. Reconciling with Form 1099-DA
– Beginning January 1, 2025, brokers will be required to offer Form 1099-DA for digital asset transactions, summarizing cryptocurrency sales.
4. Accounting for Basis
– Accurate basis determination—how much you paid for the asset—is crucial for precise tax reporting. The recently released guidance offers clarity on how to track and determine basis.
The Impact of Recent IRS Guidance
Revenue Procedure 2024-28 introduces a system for coordinating from past basis determination methods to a more detailed account-specific tracking approach. This requires individuals to manage their crypto holdings in different wallets or accounts, which adds complexity but enhances precision.
Notice 2025-7 allows temporary relief for taxpayers in 2025, permitting reliance on personal records when brokers can’t provide detailed tracking.
Practical Steps for Taxpayers
To ensure proper reporting and compliance, it is crucial for cryptocurrency holders to maintain meticulous records of all transactions. This includes tracking acquisition dates, costs, Market values, and transaction specifics. It is advisable to consult with a tax attorney or CPA experienced in cryptocurrency taxation to navigate these evolving regulations effectively.
ABOUT THE AUTHOR:
David W. Klasing, Esq., is the founder and managing attorney of the Tax Law Offices of David W. Klasing PC, a recognized tax firm comprising seasoned tax attorneys and CPAs.
Tags: Cryptocurrency, U.S. Taxation, Tax Reporting, IRS Guidance, Digital Assets, Capital Gains, Tax Compliance
What is the new IRS guidance on cryptocurrency?
The latest IRS guidance updates the rules for reporting cryptocurrency transactions. It aims to clarify how taxpayers should report their crypto earnings and losses, making it simpler for people to understand their tax obligations.
How does the temporary safe harbor work?
The temporary safe harbor allows taxpayers to avoid penalties for certain errors in their reporting if they follow specific guidelines. This means as long as you report your cryptocurrency gains and losses within the safe harbor guidelines, you won’t face penalties.
What does this mean for cryptocurrency investors?
For cryptocurrency investors, this guidance means it’s important to keep good records of all transactions. With the safe harbor, you have some reassurance that you won’t be penalized as long as you try to do things right according to the new rules.
Do I need to report small crypto transactions?
Yes, even small transactions may need to be reported. The IRS wants all crypto earnings, no matter how small, to be reported. Keeping track of small transactions can help avoid any issues when filing your taxes.
How can I stay compliant with the new rules?
To stay compliant, make sure to document all your cryptocurrency trades, including dates, amounts, and prices. Additionally, familiarize yourself with the new IRS guidelines and consider consulting a tax professional if you have questions. This will help ensure you follow the rules correctly.
