For tax purposes, the IRS treats virtual currency as property rather than currency. Sales or exchanges of property create capital gains and losses. This can lead to complex tax reporting for those who transact in cryptocurrencies. For example, making a purchase using Bitcoin is a disposition of property for tax purposes. This requires the taxpayer to report the gross proceeds and cost basis of the property. Similarly, the exchange of one cryptocurrency for another is treated as a disposition of property; there is likely a capital gain or loss on such a transaction.
Beginning with tax year 2023, cryptocurrency brokers and exchanges will be required to report transactions on a Form 1099-B. This will provide the taxpayer with an easy-to-use summary of the acquisition and disposition dates, gross proceeds, and cost basis required for tax reporting.
For tax year 2022, however, Form 1099-B is not required, but may still be provided. If the broker does not issue a Form 1099-B, the taxpayer is still responsible for reporting the correct information on the tax return. Depending on the number of transactions, compiling and tracking this information may be extremely time-consuming, especially when tracking cost basis. Most taxpayers are unaware of the heavy compliance burden of trading or transacting in cryptocurrencies.
Key Takeaway: For tax year 2022, when sending us your tax documents, please include Form 1099-B for your cryptocurrency transactions. If no Form 1099-B is provided by your broker, please create a summary that includes the following information:
- name of the cryptocurrency
- date(s) acquired
- date(s) sold or exchanged
- gross proceeds (this will generally be the US dollar fair market value of what you received in exchange for the cryptocurrency you disposed)
- cost basis (this will generally be the US Dollar value of what you paid for your cryptocurrency)
For our clients, please only send us Form 1099-B or your own self-created summary. Do NOT send any other statements or transaction histories. If you send a self-created summary, make sure it clearly and concisely includes the information listed above.
The information contained within this blog and website are provided for informational purposes only and is not intended to substitute obtaining accounting, tax, or financial advice from a professional accountant. Please consult a professional regarding your specific situations. Contact our team for more information.