As cryptocurrency continues to grow in popularity, the Internal Revenue Service (IRS) has sharpened its focus on digital assets. The IRS’s specialized team—often referred to informally as the “Crypto Unit”—is dedicated to clarifying and enforcing tax obligations related to cryptocurrencies. Below are seven critical insights drawn from the latest verified information and guidelines, helping you confidently handle your crypto taxes for the 2023–2024 filing season.
1. Crypto Is Still Classified as Property
Since the IRS’s initial 2014 guidance, virtual currencies (such as Bitcoin, Ethereum, and other tokens) have been classified as property for federal tax purposes. This classification remains unchanged. As property:
- Capital Gains and Losses: Buying, selling, trading, or otherwise disposing of crypto typically creates a capital gain or loss, just like stock transactions.
- Holding Periods Matter: Gains from assets held over one year are subject to long-term capital gains tax rates, while assets sold within a year are taxed at short-term rates (which align with ordinary income rates).
Key Takeaway: Treat crypto transactions similarly to stock or real estate transactions: track purchase dates, sale dates, cost basis, and proceeds.
2. Not All Transactions Are Treated the Same
The IRS views different crypto events uniquely, which can affect how they’re taxed:
- Buying Crypto with Fiat: Purchasing crypto with dollars is not, by itself, a taxable event.
- Trading One Crypto for Another: This is a taxable event because you’re effectively disposing of one asset and acquiring a new one.
- Using Crypto to Pay for Goods or Services: This also counts as disposing of the crypto, triggering potential capital gains or losses.
- Receiving Crypto from Mining or Staking: Mining and staking rewards are generally considered ordinary income, and you must report the fair market value when you receive them.
Key Takeaway: Evaluate each crypto use case to determine whether and how it triggers a taxable event. The nature of the transaction (capital gain or ordinary income) depends on what you did and how you acquired the crypto.
3. Greater Scrutiny on Reporting Requirements
Over the last few years, the IRS has stepped up its enforcement of crypto tax compliance:
- 1040 Check Box: The question on Form 1040 about digital assets is more explicit now, requiring you to declare whether you received, sold, exchanged, or otherwise disposed of any financial interest in virtual currency.
- Third-Party Reporting: Exchanges and brokerages increasingly provide user data to the IRS, aiming to minimize underreporting. Be aware that missing data sources, transfers and incorrect calculations based on cost bases and holding periods could exaggerate you tax liability. Your best approach is to contact us to handle these and many other errors on your automated reports and get the most optimal tax calculations based on your unique portfolio.
Key Takeaway: Omitting or misrepresenting cryptocurrency activity on your tax return can lead to penalties. The IRS Crypto Unit is actively pursuing taxpayers who fail to accurately report.
4. Cost Basis Tracking Is Critical
Calculating gains and losses requires a clear understanding of your cost basis (the amount you originally spent, including fees). For crypto:
- First-In, First-Out (FIFO): In the absence of specific identification, the IRS typically defaults to FIFO.
- Specific Identification: With us maintaining your records meticulously, we may opt to identify which exact coins/tokens you’re selling to optimize your tax outcome. The CountDeFi team can optimize your reports using specific identification to further reduce your tax liability.
- Aggregated Accounts: If you keep crypto across multiple wallets and exchanges, consolidating your records is crucial to avoid confusion or misreporting.
Key Takeaway: Good record-keeping (dates, transaction amounts, fees, wallet addresses) makes filing easier and helps ensure you accurately calculate gains or losses. Or let us do it and use that time for more important things in your life.
5. How Airdrops and Forks Are Taxed
One of the more complex areas of crypto taxation involves airdrops (tokens distributed typically for promotional or community reasons) and hard forks (when a blockchain splits into two).
- Airdrops: Usually taxable as ordinary income based on the fair market value at the time you have control of the tokens.
- Hard Forks: If a new token is received due to a fork, it’s generally considered taxable income at its fair market value when you can exercise control over it.
Key Takeaway: Keep a close watch on announcements and changes to your holdings, especially if you hold your crypto on-chain. You are responsible for reporting airdrops and forked coins even if you didn’t request them. Alternatively, CountDeFi can handle all your taxable on-chain events on your behalf to optimize your activity at transaction level.
6. DeFi Transactions Demand Extra Care
Decentralized finance (DeFi) platforms enable activities like lending, borrowing, yield farming, and liquidity mining, each potentially triggering specific tax consequences:
- Earning Interest or Rewards: Typically treated as ordinary income.
- Liquidity Pool Tokens (LP tokens): When you deposit crypto into a liquidity pool, you might be disposing of your asset (a taxable event). When you withdraw, you might realize gains or losses as well.
- Token Swaps Within DeFi: Even if you’re staying within a decentralized protocol, exchanging one token for another is a taxable event.
Key Takeaway: DeFi offers exciting possibilities but demands meticulous tracking. If you’re active in this space, consider using the CountDeFi crypto tax reporting team who integrate with DeFi protocols to keep your tracking in place and liabilities to the minimum.
7. Best Practices for Staying Compliant and Prepared
The IRS Crypto Unit encourages robust recordkeeping and transparency. Here are their top recommendations:
- Use Crypto Tax Tools: Multiple reputable software platforms can sync with wallets and exchanges to track your transactions automatically.
- Keep Detailed Records: Maintain information about transaction dates, amounts, counterparties (if applicable), and wallet addresses.
- Stay Current on Guidance: The IRS continues to release updates and FAQs on virtual currency taxation. Bookmark IRS.gov and check periodically for changes.
- Seek Professional Advice: Crypto reporting professionals like CountDeFi specialize in cryptocurrency reporting and can provide personalized guidance.
Key Takeaway: Adequate preparation and professional advice are vital. Attempting to “go it alone” without the right team, tools and guidance can result in mistakes—leading to costly penalties or audits.
Final Thoughts
Cryptocurrency taxation is still evolving, and the IRS Crypto Unit’s mission is to ensure taxpayers understand and fulfill their responsibilities. By staying updated on the latest IRS guidelines, maintaining strong documentation, and seeking professional help where needed, you’ll be well-prepared for the 2023–2024 tax seasons and beyond.
Remember: When in doubt, consult CountDeFi, the qualified crypto tax reporting specialists who stay on top of the regulatory landscape. Proper reporting not only keeps you in good standing with the IRS but also provides peace of mind as you continue to explore the world of digital assets.