Investors in cryptocurrencies need to be aware of new IRS rules and enforcement actions by the IRS as the tax collector is cracking down on previously unreported transactions, The Wall Street Journal reported.
Recent events affecting these assets, such as the bankruptcy of the exchange FTX and the 60 percent drop in the value of Bitcoin, may benefit these investors, as they might be able to use these losses as a tax-saving device.
Investors whose crypto holdings are in taxable accounts rather than tax sheltered accounts such as IRAs, can sell the crypto and book a capital loss, using that loss to offset future capital gains on winners. That includes not just digital assets, but stocks, real estate, or other investments. If there are no capital gains on such losses, those losses—which don’t expire—an offset up to $3,000 of ordinary income such as wages per tax return, per year.
“Wash sale” rules — in which the tax code postpones the use of losses if an investor purchases a “substantially identical” security within 30 days before or after selling the loser—do not apply to cryptocurrencies.
Crypto brokers will have to report customers’ sale proceeds to the IRS on a 1099 form, if it’s held in a taxable account, according to a provision of the 2021 Infrastructure Investment and Jobs Act that goes into effect on Jan. 1, 2023. As of 2019, the IRS reported that about 100,000 tax returns reported crypto transactions. Research suggests that one in five Americans have bought, traded, or used cryptocurrencies.
The IRS is also employing a strategy called a John Doe summons to pursue crypto tax cheats. This strategy entails providing examples of unnamed people who did not declare taxable income from transactions conducted through a broker. It was used successfully earlier this year to force dealer sFox and its bank, M.Y. Safra Bank, to turn over information on sFox customers who had $20,000 or more in crypto transactions in any one year from Jan. 1, 2016, to Dec. 31, 2021.
As a result of these and other investigations, the IRS has assessed more than $110 million in taxes due on unreported crypto income, with penalties and interest possibly doubling that figure.
“With these summonses and other actions, the IRS is mounting a full-court press to show taxpayers how seriously it takes cryptocurrency compliance,” Don Fort, a former chief of IRS criminal investigation now with Kostelanetz & Fink, told the Journal last year. “Taxpayers should take it seriously too.”