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Whether you’re a longtime crypto investor or recently purchased digital assets, here are some key things to know from crypto tax experts.
How to answer Form 1040 ‘digital assets’ question
Cryptocurrency has become a priority area for the IRS, and the agency shared guidance in January about reporting digital currency this tax season.
Since tax year 2019, the IRS has collected crypto data on tax returns with different versions of a yes-or-no question. For 2023, there’s a “digital assets” question on the front page of Form 1040, along with returns for estates and trusts, partnerships, corporations and S corporations.
However, many crypto investors don’t realize the term “digital assets,” which includes cryptocurrency, stablecoins, nonfungible tokens and more, applies to them, said enrolled agent Matt Metras, owner of MDM Financial Services.
For 2023, you must answer “yes” if you sold crypto; traded one coin for another; or received digital currency as a payment, reward or award, according to Form 1040 instructions. You could answer “no” if you bought crypto with U.S. dollars and still hold the asset.
Yes-or-no questions are quite powerful.
Andrew Gordon
President of Gordon Law Group
“Yes-or-no questions are quite powerful,” said Andrew Gordon, tax attorney, certified public accountant and president of Gordon Law Group.
If you have crypto profits or income and select “no” for the digital assets question, the IRS could argue there’s “willfulness” in intentionally violating the law, Gordon said.
However, the 2023 digital assets question does not apply to bitcoin futures ETFs or spot bitcoin ETFs, he said.
How to calculate crypto taxes
When you trade digital currency or sell it at a profit, it may be subject to capital gains or regular income taxes, depending on the “holding period” or how long you owned the asset.
“They’re treated the same as stocks or other property,” and the gain is the difference between your “basis” or purchase price and the value when you sell or exchange the asset, Gordon said.
If you hold crypto for more than one year, you’ll qualify for long-term capital gains of 0%, 15% or 20%, depending on your taxable income. By contrast, short-term capital gains or regular income taxes apply to assets owned for one year or less.
Both brackets use “taxable income,” which you calculate by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
For higher earners, selling crypto after one year could “cut your rate in half,” which is why tracking your purchase date is so important, Gordon said.
How crypto tax reporting works
Many investors rely on tax forms to file returns every year. But it’s harder for crypto investors without reliable reporting, experts say.
For 2023, you may receive Form 1099-MISC for rewards or income, Form 1099-B for transactions or no forms at all, depending on the exchange.
Plus, if you receive crypto tax forms, there can be basis reporting errors if you’ve moved currency from one exchange to another.
The U.S. Department of the Treasury and IRS released proposed regulations, including a standardized Form 1099-DA for digital asset reporting, for transactions on or after Jan. 1, 2025.
In the meantime, crypto investors should report activity based on personal record-keeping, which can be challenging with a high volume of activity, Metras said.
“Once you have more than five transactions, trying to do it yourself in an Excel spreadsheet becomes overwhelming,” he said.
