The IRS and the U.S. Treasury Department released the final broker reporting regulations on June 28, 2024. These IRS New Crypto Tax Rules, 2024 give comprehensive guidelines for reporting transactions using digital assets and require broker reporting for hosted wallet providers and centralized exchanges.
IRS New Crypto Tax Rules 2024
The IRS and the U.S. Department of Treasury announced the IRS New Crypto Tax Rules 2024 and reporting guidelines for digital asset brokers on Friday. According to experts, investors in cryptocurrencies need more time to be ready.
Starting in 2026, digital currency brokers must submit Form 1099-DAs covering gross revenues from sales in 2025 as part of a phase-in of mandatory annual reporting. Brokers are required to report the purchase price or cost basis, for specific 2026 transactions of digital assets in 2027.
The new regulations, which are a result of the $1 trillion bipartisan 2021 Infrastructure Investment and Jobs Act, are intended to clamp down on cryptocurrency users who could be neglecting their taxes. It was projected that the new regulations may generate around $28 billion in revenue over ten years at the time the measure was approved.
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IRS finalizes new regulations for Crypto Tax Reporting
According to the Treasury, the regulation would gradually phase in beginning with the 2026 tax filing season, aligning the tax obligations for cryptocurrencies with the current tax reporting rules for brokers of other financial assets like bonds and equities.
The Joint Committee on Taxation anticipated that annual digital asset reporting, which was implemented in 2021 under the Inflation Reduction Act, would generate about $28 billion in revenue over ten years. However, the initial commencement date was moved forward.
After the Treasury proposed the regulation last year, the cryptocurrency sector launched a campaign of comment letters, claiming that the rules infringed on the privacy of bitcoin owners and that the proposal’s definition of a broker was too wide.
Treasury said that it had gone over more than 44,000 comments on the plan. Additionally, it said that it plans to release more regulations later this year that would impose tax reporting obligations on non-custodial brokers, such as decentralized cryptocurrency exchanges.
Key Changes in the 2024 Crypto Tax Rules
- Expanded Reporting Requirements: Now include payment processors, wallet providers, and other digital asset service providers, in addition to exchanges and brokers.
- Definition of Taxable Events: Clarified to include buying goods/services with cryptocurrency, trading one cryptocurrency for another, selling cryptocurrency for fiat currency, receiving cryptocurrency as payment, and staking/yielding farming rewards.
- Cost Basis and Holding Period Calculations: Guidelines provided for specific identification methods (FIFO, LIFO) to determine cost basis and holding periods, affecting short-term and long-term capital gains tax rates.
- Foreign Account Reporting: Cryptocurrency holders with foreign accounts must comply with FATCA and FBAR requirements, disclosing holdings in foreign exchanges and wallets if they exceed certain thresholds.
2024 IRS Tax Reporting Rule on Crypto Transactions Above $10K
Anyone who gets $10,000 or more in cryptocurrency must immediately disclose transaction details to the Internal Revenue Service (IRS). This contains the sender’s name, address, and Social Security number (SSN), in addition to the transaction’s value, date, and type.
This is a component of the additional tax reporting requirements that followed the infrastructure package signed into law by US President Joe Biden in November 2021 and went into effect on January 1, 2024.
If a report is not filed within 15 days after a transaction, there may be criminal charges. The rule is self-executing, which means that it may be put into effect right away and enforced without further intervention.
Blockchain miners and validators who get block rewards of more than $10,000, according to CoinCenter, do not have a sender to identify for their reports. In a similar vein, users of decentralized exchanges that trade cryptocurrency for cryptocurrency have no sender to identify and may complain.
IRS Crypto Tax Rules Implications for Investors and Traders
- Increased Compliance Burden: The expanded reporting requirements and detailed tracking of transactions impose a higher compliance burden on investors and traders. They must maintain meticulous records of all transactions, including dates, amounts, and counterparty information. This could necessitate the use of specialized software or professional tax services.
- Potential for Higher Tax Liabilities: With a broader definition of taxable events, more transactions may be subject to taxation. For instance, using cryptocurrency to buy everyday items could trigger a taxable event, leading to increased tax liabilities for frequent users.
- Impact on Decentralized Finance (DeFi) Participants: Participants in the DeFi space, including those involved in staking, yield farming, and liquidity mining, will face new challenges. These activities generate various forms of income that must be reported and taxed accordingly. The rules provide guidelines on how to value and report these income streams, but the complexity may deter some from participating in DeFi activities.
- Strategic Tax Planning: Investors and traders may need to adopt new tax planning strategies to optimize their tax positions. This could include timing transactions to benefit from favorable tax treatment or using specific identification methods to minimize taxable gains.
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