Bitcoin’s price has surged to new highs this week, fueled by excitement surrounding the launch of spot bitcoin exchange-traded funds (ETFs). As of Wednesday, it reached a record of $73,000, and despite a dip, it remains up over 50% year-to-date.
This surge coincides with the IRS ramping up efforts to scrutinize cryptocurrency transactions. Tax professionals anticipate an increase in IRS audits focused on digital assets.
Here are some key tax tips for crypto investors, both new and experienced:
- Understanding the “Digital Assets” Question on Form 1040:
The IRS has made cryptocurrency a priority and recently issued guidance on reporting digital assets for tax purposes. Since 2019, tax returns have included a yes-or-no question about crypto ownership. For tax year 2023, a “digital assets” question appears prominently on the front page of Form 1040, applicable to various tax returns.
- Who Needs to Answer “Yes”
Many crypto investors misunderstand the scope of “digital assets,” which encompasses cryptocurrencies, stablecoins, non-fungible tokens (NFTs), and more, according to Matt Metras, an enrolled agent. You must answer “yes” if you have engaged in any of the following activities in 2023:
* Sold cryptocurrency
* Traded one cryptocurrency for another
* Received crypto as payment, reward, or award
If you simply purchased crypto with US dollars and haven’t sold or traded it, you can answer “no.”
- The Importance of Answering “Yes” Accurately
Andrew Gordon, a tax attorney and CPA, emphasizes the importance of answering the “digital assets” question truthfully. Selecting “no” when you have crypto income or profits could be interpreted by the IRS as intentional disregard for tax laws.
- Bitcoin ETFs and the Digital Assets Question
It’s important to note that the 2023 “digital assets” question does not apply to Bitcoin futures ETFs or spot Bitcoin ETFs.
By understanding these key points, crypto investors can ensure they are properly reporting their digital asset holdings and minimize the risk of IRS scrutiny during tax season.