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Tax tips for cryptocurrency

A money-related trend to watch in 2022 is cryptocurrency. The IRS will be watching it, too, given the new reporting requirements for individuals trading and using cryptocurrency, which the agency has put in place effective January 1, 2023.

The passage of the Infrastructure Investments and Jobs Act (IIJA) shows that the IRS is serious about enforcing, strengthening and standardizing requirements related to virtual currency. Here are some important tax-related facts to be aware of:

  • All cryptocurrency exchanges are now considered “brokers,” similar to traditional investment brokers.

  • The term digital asset is defined by the law as “any digital representation of value which is recorded on a cryptographically secure distributed ledger or any similar technology.”

  • For tax purposes, digital assets are considered the same as securities, similar to stocks, bonds and certain types of commodities in the eyes of the IRS. Keep in mind that securities are also subject to the Securities and Exchange Commission (SEC), and this legislation does not address the SEC. 

  • Reporting for cryptocurrency exchanges has also changed. These platforms are now required to report information to both the IRS and to their customers. This is in contrast to the fact that historically there have not been standardized requirements for cryptocurrency exchanges. Starting in 2023, the following information is required to be reported by cryptocurrency exchanges to the IRS: (1) name, address and phone number of each customer; (2) the gross proceeds from any sale of digital assets; and (3) capital gains or losses and whether such capital gains or losses were short-term (held for one year or less) or long-term (held for more than one year).

  • Penalties will be applied to exchanges that fail to report the information detailed above. These penalties could be as high as $250 per customer, up to a maximum $3 million penalty.

  • Digital assets valued at $10,000 or more are now treated as cash received for any person engaging in a trade or business. This means that if you receive more than $10,000 in cash, you are required to file IRS Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). 

Although there are significant changes related to tax reporting and cryptocurrency, as long as you keep well-documented records of any virtual currency trading, buying or selling activity and report it on your tax return, you should be in good standing with the IRS. Remember, these new reporting requirements are effective January 1, 2023, giving you ample time to prepare and make necessary adjustments. 

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