Authored by Sam Heroux | Financial Advisor, SC&H Financial Advisors, Inc.
In an effort to ease the record-keeping burden for individuals engaging in cryptocurrency transactions, the Infrastructure Investment and Jobs Act was slated to require that cryptocurrency brokers provide the IRS with the relevant tax information of their users. The new Form 1099 detailing the user’s name, address, gross proceeds, and other pertinent information was to be rolled out by each broker beginning January 1, 2023.
However, the IRS has since announced that brokers will not be required to report or furnish additional information concerning dispositions of digital assets until they issue final regulations, as the Treasury Department works to refine the definition of what constitutes a broker.
What This Delay Means for Investors
The lack of a new Form 1099 means that investors of cryptocurrency will again be responsible for maintaining accurate records and providing pertinent tax information to both the IRS and their accountants for 2022 and 2023.
When selling digital cryptocurrency, it must be reported as either a short-term or long-term capital gain or loss; however, purchasing cryptocurrency is not taxable. Exchanging one currency for another is a taxable event, and for those individuals transacting frequently or those involved in staking their currency, the tax reporting can quickly become cumbersome.
Cryptocurrency Reporting Recommendations
As the rules for crypto-related 1099s are developed, we continue to recommend that investors keep detailed records of all transactions. Many cryptocurrency exchanges, such as Coinbase, offer reports that contain information about your transaction history, which can be easily compiled by your accountant or tax reporting software.
For those individuals who do not want to manually calculate their cryptocurrency activity, those with several transactions, or those who are involved in staking, mining, decentralized finance (DeFi), initial coin offerings (ICOs), and airdrops, should consider simplifying record keeping and reporting through the use of a reputable cryptocurrency tax reporting software such as Koinly or Coin Ledger.
These tax calculators help summarize transaction activity and effortlessly create the reports needed to file with the IRS. Importing transaction history is simple and, for a small fee, much cheaper than paying an accountant to reconcile the information. With a couple of clicks, you will produce the reports needed for your tax filings.
The tax reporting for your cryptocurrency activity is a retroactive exercise; and requires a lot of tax planning. If you have any questions about your cryptocurrency tax reporting obligations or would like to speak with an advisor, please reach out to our team.
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